U.S.
SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
  (Mark
One)
  x
                ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
  o
                TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  Commission
file number 000-52361
 
  BLUEFIRE
ETHANOL FUELS, INC.
 (Name of
small business issuer in its charter)
 
 NEVADA
                  
                  20-4590982(State
      or other jurisdiction of
                    incorporation
      or organization)
                  
                  (I.R.S.
      Employer
                    Identification
      No.)31
      MUSICK, IRVINE, CALIFORNIA
                  
                  92618(Address
      of principal executive offices)
                  
                  (Zip
      Code)
  (949)
588-3767
 (Issuer’s
telephone number,
including area code)
  Securities
registered under Section 12(b) of the Exchange Act:
  Securities
registered under Section 12(g) of the Exchange Act:
  Common
Stock, $.001 par value
 (Title of
Class)
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 the Securities Act.
 Yes o   No x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes o   No x
  Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the last 90 days. Yes x 
 No o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 Large
      Accelerated Filer   o
              Accelerated
      Filer     oNon-Accelerated
      Filer     o
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company x
   
   Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o  No x .
  Issuers
revenues for its most recent fiscal year was approximately
$1,076,000.
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on February 28, 2009 based on a closing price
of $0.72 was approximately $4,500,000. As of February 28, 2009, the registrant
had 28,133,053 shares of its common stock, par value $.001 per share,
outstanding.
  Documents
Incorporated By Reference: None.
 
  
 
  
 TABLE
OF CONTENTS
  PART
      IITEM
      1.
                            
                            Business
                            
                            2ITEM
      1A.
                            
                            Risk Factors
                            
                            9ITEM
      1B.
                            
                            Unresolved Staff Comments
                            
                            13ITEM
      2.
                            
                            Properties
                            
                            13ITEM
      3.
                            
                            Legal Proceedings
                            
                            13ITEM
      4.
                            
                            Submission Of Matters To a Vote Of Securities
      Holders
                            
                            13PART
      IIITEM
      5.
                            
                            Market For Registrant's Common Equity, Related Stockholder
      Matters And Issuer Purchases Of Equity Securities
                            
                            13ITEM
      6.
                            
                            Selected Financial Data
                            
                            15ITEM
      7.
                            
                            Management’s Discussion And Analysis Of Financial Condition And
      Results Of Operation
                            
                            15ITEM
      7A
                            
                            Quantitative And Qualitative Disclosures About Market
      Risk
                            
                            20ITEM
      8.
                            
                            Financial Statements
                            
                            20ITEM
      9.
                            
                            Changes In And Disagreements With Accountants On Accounting And
      Financial Disclosure
                            
                            20ITEM
      9A.
                            
                            Controls And Procedures (ITEM 9A(T))
                            
                            20ITEM
      9B.
                            
                            Other Information
                            
                            20PART
      IIIITEM
      10.
                            
                            Directors, Executive Officers And Corporate
      Governance
                            
                            21ITEM
      11.
                            
                            Executive Compensation
                            
                            24ITEM
      12.
                            
                            Security Ownership Of Certain Beneficial Owners And Management
      And Related Stockholder Matters
                            
                            29ITEM
      13.
                            
                            Certain Relationships And Related Transactions, And Director
      Independence
                            
                            31ITEM
      14.
                            
                            Principal Accounting Fees And Services
                            
                            32PART
      IVITEM
      15.
                            
                            Exhibits, Financial Statements Schedules
                            
                            33
 
 SIGNATURES
 
 CERTIFICATION
PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002
  CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
 i
 
  
 SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Included
in this Form 10-K are “forward-looking” statements, as well as historical
information. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that the
expectations reflected in these forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated in
forward-looking statements as a result of certain factors, including matters
described in the section titled “Risk Factors.” Forward-looking statements
include those that use forward-looking terminology, such as the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,”
“plan,” “will,” “shall,” “should,” and similar expressions, including when used
in the negative. Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and we cannot assure you that actual results
will be consistent with these forward-looking statements. Important factors that
could cause our actual results, performance or achievements to differ from these
forward-looking statements include the following:
  ·
                                  the
      availability and adequacy of our cash flow to meet our
      requirements,·
                                  economic,
      competitive, demographic, business and other conditions in our local and
      regional markets,·
                                  changes
      or developments in laws, regulations or taxes in the ethanol or energy
      industries,·
                                  actions
      taken or not taken by third-parties, including our suppliers and
      competitors, as well as legislative, regulatory, judicial and other
      governmental authorities,·
                                  competition
      in the ethanol industry,·
                                  the
      failure to obtain or loss of any license or permit,·
                                  success
      of the Arkenol Technology,·
                                  changes
      in our business and growth strategy (including our plant building strategy
      and co-location strategy), capital improvements or development
      plans,·
                                  the
      availability of additional capital to support capital improvements and
      development, and·
                                  other
      factors discussed under the section entitled “Risk Factors” or elsewhere
      in this registration statement.
  All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. We undertake no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
  
 -1-
 
  
 PART
I
  ITEM 1. DESCRIPTION OF BUSINESS
  As used
in this annual report, “we”, “us”, “our”, “Bluefire”, “Company” or “our company”
refers to Bluefire Ethanol Fuels, Inc.
  COMPANY
HISTORY
  Our
Company
  We are
BlueFire Ethanol Fuels, Inc., a Nevada corporation. Our goal is to develop, own
and operate high-value carbohydrate-based transportation fuel plants, or
biorefineries, to produce ethanol, a viable alternative to fossil fuels, and to
provide professional services to biorefineries worldwide. Our biorefineries will
convert widely available, inexpensive, organic materials such as agricultural
residues, high-content biomass crops, wood residues and cellulose from municipal
solid wastes into ethanol. This versatility enables us to consider a wide
variety of feedstocks and locations in which to develop facilities to become a
low cost producer of ethanol. We have licensed for use a patented process from
Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from
cellulose (the “Arkenol Technology”). We are the exclusive North America
licensee of the Arkenol Technology. We may also utilize certain biorefinery
related rights, assets, work-product, intellectual property and other know-how
related to 19 ethanol project opportunities originally developed by ARK Energy,
Inc, a Nevada corporation, to accelerate our deployment of the Arkenol
Technology.
  Company
History
  We are a
Nevada corporation that was initially organized as Atlanta Technology Group,
Inc., a Delaware corporation, on October 12, 1993. The Company was re-named
Docplus.net Corporation on December 31, 1998, and further re-named Sucre
Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on March
6, 2006.  Finally, on May 24, 2006, in anticipation of the reverse
merger by which it would acquire BlueFire Ethanol, Inc. (“BlueFire”), a
privately held Nevada corporation organized on March 28, 2006, as described
below, the Company was re-named to its current name BlueFire Ethanol Fuels,
Inc.
  On June
27, 2006, the Company completed a reverse merger (the “Reverse Merger”) with
BlueFire Ethanol, Inc. (“BlueFire Ethanol”).  At the time of Reverse
Merger, the Company was a blank-check company and had no operations, revenues or
liabilities. The only asset possessed by the Company was $690,000 in cash which
continued to be owned by the Company at the time of the Reverse Merger. In
connection with the Reverse Merger, the Company issued BlueFire Ethanol
17,000,000 shares of common stock, approximately 85% of all of the outstanding
common stock of the Company, for all the issued and outstanding BlueFire Ethanol
common stock. The Company stockholders retained 4,028,264 shares of Company
common stock.  As a result of the Reverse Merger, BlueFire Ethanol
became our wholly-owned subsidiary.  On June 21, 2006, prior to and in
anticipation of the Reverse Merger, Sucre sold 3,000,000 shares of common stock
to two related investors in a private offering of shares pursuant to Rule 504
for proceeds of $1,000,000.
  The
Company’s shares of common stock began trading under the symbol “BFRE.PK” on the
Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began
trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On March 24,
2009, the closing price of our Common Stock was $.60 per
share.
  Our
executive offices are located at 31 Musick, Irvine, California 92618 and
our telephone number at such office is (949) 588-3767.
  BUSINESS
OF ISSUER
  PRINCIPAL
PRODUCTS OR SERVICES AND THEIR MARKETS
  Our goal
is to develop, own and operate high-value carbohydrate-based transportation fuel
plants, or biorefineries, to produce ethanol, a viable alternative to fossil
fuels, and to provide professional services to biorefineries worldwide. Our
biorefineries will convert widely available, inexpensive, organic materials such
as agricultural residues, high-content biomass crops, wood residues and
cellulose from municipal solid wastes into ethanol. This versatility enables us
to consider a wide variety of feedstocks and locations in which to develop
facilities to become a low cost producer of ethanol.
 
 We have
licensed for use the Arkenol Technology, a patented process from Arkenol to
produce ethanol from cellulose for sale into the transportation fuel market. We
are the exclusive North America licensee of the Arkenol Technology.
  ARKENOL
TECHNOLOGY
  The
production of chemicals by fermenting various sugars is a well-accepted science.
Its use ranges from producing beverage alcohol and fuel-ethanol to making citric
acid and xantham gum for food uses. However, the high price of sugar and the
relatively low cost of competing petroleum based fuel has kept the production of
chemicals mainly confined to producing ethanol from corn sugar.
   -2-
  In the
Arkenol Technology process, incoming biomass feedstocks are cleaned and ground
to reduce the particle size for the process equipment. The pretreated material
is then dried to a moisture content consistent with the acid concentration
requirements for breaking down the biomass, then hydrolyzed (degrading the
chemical bonds of the cellulose) to produce hexose and pentose (C5 and C6)
sugars at the high concentrations necessary for commercial fermentation. The
insoluble materials left are separated by filtering and pressing into a cake and
further processed into fuel for other beneficial uses. The remaining acid-sugar
solution is separated into its acid and sugar components. The separated sulfuric
acid is recirculated and reconcentrated to the level required to breakdown the
incoming biomass. The small quantity of acid left in the sugar solution is
neutralized with lime to make hydrated gypsum which can be used as an
agricultural soil conditioner. At this point the process has produced a clean
stream of mixed sugars (both C6 and C5) for fermentation. In an ethanol
production plant, naturally-occurring yeast, which Arkenol has specifically
cultured by a proprietary method to ferment the mixed sugar stream, is mixed
with nutrients and added to the sugar solution where it efficiently converts
both the C6 and C5 sugars to fermentation beer (an ethanol, yeast and water
mixture) and carbon dioxide. The yeast culture is separated from the
fermentation beer by a centrifuge and returned to the fermentation tanks for
reuse. Ethanol is separated from the now clear fermentation beer by conventional
distillation technology, dehydrated to 200 proof and denatured with unleaded
gasoline to produce the final fuel-grade ethanol product. The still bottoms,
containing principally water and unfermented sugar, is returned to the process
for economic water use and for further conversion of the sugars.
  Simply
put, the process separates the biomass into two main constituents: cellulose and
hemicellulose (the main building blocks of plant life) and lignin (the “glue”
that holds the building blocks together), converts the cellulose and
hemicellulose to sugars, ferments them and purifies the fermentation liquids
into ethanol and other end-products.
  ARK
ENERGY
  BlueFire
may also utilize certain biorefinery related rights, assets, work-product,
intellectual property and other know-how related to nineteen (19) ethanol
project opportunities originally developed by ARK Energy, Inc., a Nevada
corporation to accelerate BlueFire’s deployment of the Arkenol Technology. The
opportunities consist of ARK Energy’s previous relationships, analysis, site
development, permitting experience and market research on various potential
project locations within North America. ARK Energy has transferred these assets
to us and we valued these business assets based on management’s best estimates
as to its actual costs of development. In the event we successfully finance the
construction of a project that utilizes any of the transferred assets from ARK
Energy, we are required to pay ARK Energy for the costs ARK Energy incurred in
the development of the assets pertaining to that particular project or location.
We did not incur the costs of a third party valuation but based our valuation of
the assets acquired by (i) an arms length review of the value assigned by ARK
Energy to the opportunities are based on the actual costs it incurred in
developing the project opportunities, and (ii) anticipated financial benefits to
us.
  PILOT
PLANTS
  From
1994-2000, a test pilot biorefinery plant was built and operated by Arkenol in
Orange, California to test the effectiveness of the Arkenol Technology using
several different types of raw materials containing cellulose. The types of
materials tested included: rice straw, wheat straw, green waste, wood wastes,
and municipal solid wastes. Various equipment for use in the process was also
tested and process conditions were verified leading to the issuance of the
certain patents in support of the Arkenol Technology.
  
  
 -3-
 
  
 In 2002,
using the results obtained from the Arkenol California test pilot plant, JGC
Corporation, based in Japan, built and operated a bench scale facility followed
by another test pilot biorefinery plant in Izumi, Japan. At the Izumi plant,
Arkenol retained the rights to the Arkenol Technology while the operations of
the facility were controlled by JGC Corporation.
  BIOREFINERY
PROJECTS
  WE
ARE CURRENTLY IN THE DEVELOPMENT STAGE OF BUILDING BIOREFINERIES IN NORTH
AMERICA.
  We plan
to use the Arkenol Technology and utilize JGC’s operations knowledge from the
Izumi test pilot plant to assist in the design and engineering of our facilities
in North America. MECS and Briderson Engineering, Inc. (“Brinderson”) will
provide the preliminary design package for our first facility and Brinderson
will complete the detailed engineering design of the plant. This completed
design should provide the blueprint for subsequent plant
constructions.
  We intend
to build a facility that will process approximately 190 tons of green waste
material per day to produce roughly 3.9 million gallons of ethanol annually. In
connection therewith, on November 9, 2007, we purchased the facility site which
is located in Lancaster, California.  Permit applications were filed
on June 24, 2007, to allow for construction of the Lancaster facility. The Los
Angeles County Planning Commission issued a Conditional Use Permit for the
Lancaster Project in July of 2008. However, a subsequent appeal of the county
decision, which BlueFire overcame, combined with the waiting period under the
California Environmental Quality Act, pushed the effective date of the now
non-appealable permit approval to December 12, 2008.  On February 12,
2009 we were issued our Authority to Construct permit by the Antelope Valley Air
Quality Management District.
 
 In 2008,
BlueFire continued to develop the engineering package for the Lancaster
Biorefinery, and finalized the Front-End Loading (FEL) 3 stage of
engineering for the Lancaster Biorefinery. FEL is the process for
conceptual development of processing industry projects. This process is
used in the petrochemical,
refining, and pharmaceutical industries. Front-End Loading is
also referred to as Front-End Engineering Design (FEED). There are three
stages in the FEL process:
 
 FEL-1
                *
      Material Balance
                *
      Energy Balance
                *
      Project Charter
              FEL-2
                *
      Preliminary Equipment Design
                *
      Preliminary Layout
                *
      Preliminary Schedule
                *
      Preliminary Estimate
              FEL-3
                *
      Purchase Ready Major Equipment Specifications
                *
      Definitive Estimate
                *
      Project Execution Plan
                *
      Preliminary 3D Model
                *
      Electrical Equipment List
                *
      Line List
                *
      Instrument Index
 
 We
estimate the total cost including contingencies to be in the range of
approximately $100 million to $120 million for this first plant. This amount is
significantly greater than our previous estimations communicated to the public.
This is due in part to a combination of significant increases in materials costs
on the world market from the last estimate till now, and the complexity of our
first commercial deployment. Recently, prices for materials have been declining,
and we expect, that throughout 2009, items like structural and specialty steel
will continue to decline significantly in price with other materials of
construction following suit. The cost approximations above do not reflect any
decrease in raw materials or any savings in construction cost.
 
 The
uncertainties of the world credit markets have also caused a delay in the
financing we needed to enable placement of equipment orders for the construction
of our Lancaster Project and which would allow us to achieve a sustainable
construction schedule after breaking ground. Hence, to insure a timely and
continuous construction of the project, BlueFire's board of directors determined
it is prudent to delay Lancaster's groundbreaking until all the necessary funds
are in place. Project activities have advanced to a point that once credit is
available, orders can be immediately placed and construction started. We remain
optimistic in being able to raise the additional capital necessary once the new
federal administration’s policies take hold and the capital markets
normalize. We are currently in discussions with potential sources of financing
for this facility, including opportunities for grants and loan guarantees, but
no definitive agreements are in place.
  We are
also developing a facility for construction in a joint effort with the
Department of Energy. This facility will use approximately 700 metric dry tons
of green waste per day and wood waste currently disposed in the landfill to
produce about 16.6 to 18 million gallons of ethanol annually. Preliminary
engineering design is in progress and permitting for this facility will commence
once all required preliminary engineering design is completed.  We
have received an Award from the DOE of up to $40 million for the Facility. On or
around October 4, 2007, we finalized Award 1 for a total approved budget of just
under $10,000,000 with the DOE. This award is a 60%/40% cost share, whereby 40%
of approve costs may be reimbursed by the DOE pursuant to the total $40 million
award announced in February 2007. As of December 31, 2008 BlueFire has been
reimbursed approximately $1,076,000 from the Department of Energy under this
award.  The remainder of financing for this project is yet to be
determined.
  The
Company is simultaneously researching and considering other suitable locations
for other similar biorefineries.
   -4-
  STATUS
OF PUBLICLY ANNOUNCED NEW PRODUCTS AND SERVICES
  On
December 11, 2008 BlueFire announced a Professional Services Agreement (“PSA”)
with Ubiex, Inc. a South Korean development company.  Under the PSA
BlueFire will provide the preliminary engineering design package and technical
support for Ubiex, Inc.
  DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES
  We will
utilize existing ethanol distribution channels to sell the ethanol that is
produced from our plants. For example, we will enter into an agreement with an
existing refiner or blender to purchase the ethanol and sell it into the
Southern California transportation fuels market. Ethanol is currently mandated
at a blend level of 5.7% in California which represents a  700+
million gallon per year market. We are also exploring the potential of onsite
blending of E85 (85% Ethanol, 15% gasoline) and direct marketing to fueling
stations. There are approximately 1900 E85 fueling stations in the United
States.
  COMPETITIVE
BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER’S COMPETITIVE POSITION IN THE
INDUSTRY AND METHODS OF COMPETITION
  COMPETITION
  Most of
the ethanol supply in the United States is derived from corn according to the
Renewable Fuels Association (“RFA”) website (HTTP://WWW.ETHANOLRFA.ORG/) and as
of February 28, 2009 is produced at approximately 190 facilities, ranging in
size from 300,000 to 115 million gallons per year, located predominately in the
corn belt in the Midwest.
  Traditional
corn-based production techniques are mature and well entrenched in the
marketplace, and the entire industry’s infrastructure is geared toward corn as
the principal feedstock.
  With the
Arkenol Technology the principle difference from traditional processes apart
from production technique is the acquisition and choice of feedstock. The use of
a non-commodity based non-food related biomass feedstock enables us to use
feedstock typically destined for disposal, i.e. wood waste, yard trimmings and
general green waste. All ethanol producers regardless of production technique
will fall subject to market fluctuation in the end product,
ethanol.
  Due to
the feedstock variety we are able to process, we are able to locate production
facilities in and around the markets where the ethanol will be consumed thereby
giving us a competitive advantage against much larger traditional producers who
must locate plants near their feedstock, i.e. the corn belt in the Midwest and
ship the ethanol to the end market.
  However,
in the area of biomass-to-ethanol production, there are few companies and no
commercial production infrastructure is built. As we continue to advance our
biomass technology platform, we are likely to encounter competition for the same
technologies from other companies that are also attempting to manufacture
ethanol from cellulosic biomass feedstocks.
  Ethanol
production is also expanding internationally. Ethanol produced or processed in
certain countries in Central American and the Caribbean region is eligible for
tariff reduction or elimination upon importation to the United States under a
program known as the Caribbean Basin Initiative. Large ethanol producers, such
as Cargill, have expressed interest in building dehydration plants in
participating Caribbean Basin countries, such as El Salvador, which would
convert ethanol into fuel-grade ethanol for shipment to the United States.
Ethanol imported from Caribbean Basin countries may be a less expensive
alternative to domestically produced ethanol and may affect our ability to sell
our ethanol profitably.
 
 There are
approximately twenty one next generation biofuel companies that have received
grants from the Department of Energy for development purposes.
  INDUSTRY
OVERVIEW
  On
December 19, 2007 President Bush signed into law the Energy Independence and
Security Act of 2007 (Energy Act of 2007).  The Energy Act of 2007
provides for an increase in the supply of alternative fuel sources by setting a
mandatory Renewable Fuel Standard (RFS) requiring fuel producers to use at least
36 billion gallons of biofuel by 2022, 16 billion gallon of which must come from
cellulosic derived fuel.  Additionally, the Energy Act of 2007 called
for reducing U.S. demand for oil by setting a national fuel economy standard of
35 miles per gallon by 2020 – which will increase fuel economy standards by 40
percent and save billions of gallons of fuel.
 
 In June
2008 the Food, Conservation and Energy Act of 2008 (Farm Bill) was signed into
law.  The 2008 Farm Bill also modified existing incentives, including
ethanol tax credits and import duties and established a new integrated tax
credit of $1.01/gallon for cellulosic biofuels. The Farm Bill also
authorized new biofuels loan and grant programs, which will be subject to
appropriations, likely starting with the FY2010 budget request.
   -5-
  
 Historically,
producers and blenders had a choice of fuel additives to increase the oxygen
content of fuels. MTBE (methyl tertiary butyl ether), a petroleum-based
additive, was the most popular additive, accounting for up to 75% of the fuel
oxygenate market. However, in the United States, ethanol is replacing MTBE as a
common fuel additive. While both increase octane and reduce air pollution, MTBE
is a presumed carcinogen which contaminates ground water. It has already been
banned in California, New York, Illinois and 16 other states. Major oil
companies have voluntarily abandoned MTBE and it is scheduled to be phased out
under the Energy Policy Act. As MTBE is phased out, we expect demand for ethanol
as a fuel additive and fuel extender to rise. A blend of 5.5% or more of
ethanol, which does not contaminate ground water like MTBE, effectively complies
with U.S. Environmental Protection Agency requirements for reformulated
gasoline, which is mandated in most urban areas.
  Ethanol
is a clean, high-octane, high-performance automotive fuel commonly blended in
gasoline to extend supplies and reduce emissions. In 2004, according to the
American Coalition for Ethanol, 3% of all United States gasoline was blended
with some percentage of ethanol. The most common blend is E10, which contains
10% ethanol and 90% gasoline. There is also growing federal government support
for E85, which is a blend of 85% ethanol and 15% gasoline.
  Ethanol
is a renewable fuel produced by the fermentation of starches and sugars such as
those found in grains and other crops. Ethanol contains 35% oxygen by weight
and, when combined with gasoline, it acts as an oxygenate, artificially
introducing oxygen into gasoline and raising oxygen concentration in the
combustion mixture with air. As a result, the gasoline burns more completely and
releases less unburnt hydrocarbons, carbon monoxide and other harmful exhaust
emissions into the atmosphere. The use of ethanol as an automotive fuel is
commonly viewed as a way to reduce harmful automobile exhaust emissions. Ethanol
can also be blended with regular unleaded gasoline as an octane booster to
provide a mid-grade octane product which is commonly distributed as a premium
unleaded gasoline.
  Studies
published by the Renewable Fuel Association indicate that approximately 8.1
billion gallons of ethanol was consumed in 2008 in the United States and every
automobile manufacturer approves and warrants the use of E10. Because the
ethanol molecule contains oxygen, it allows an automobile engine to more
completely combust fuel, resulting in fewer emissions and improved performance.
Fuel ethanol has an octane value of 113 compared to 87 for regular unleaded
gasoline. Domestic ethanol consumption has tripled in the last eight years, and
consumption increases in some foreign countries, such as Brazil, are even
greater in recent years. For instance, 40% of the automobiles in Brazil operate
on 100% ethanol, and others use a mixture of 22% ethanol and 78% gasoline. The
European Union and Japan also encourage and mandate the increased use of
ethanol.
  For every
barrel of ethanol produced, the American Coalition for Ethanol estimates that
1.2 barrels of petroleum are displaced at the refinery level, and that since
1978, U.S. ethanol production has replaced over 14.0 billion gallons of imported
gasoline or crude oil. According to a Mississippi State University Department of
Agricultural Economics Staff Report in August 2003, a 10% ethanol blend results
in a 25% to 30% reduction in carbon monoxide emissions by making combustion more
complete. The same 10% blend lowers carbon dioxide emissions by 6% to
10%.
  During
the last 20 years, ethanol production capacity in the United States has grown
from almost nothing to an estimated 7.6 billion gallons per year in 2008. In the
United States, ethanol is primarily made from starch crops, principally from the
starch fraction of corn. Consequently, the production plants are concentrated in
the grain belt of the Midwest, principally in Illinois, Iowa, Minnesota,
Nebraska and South Dakota.
  In the
United States, there are two principal commercial applications for ethanol. The
first is as an oxygenate additive to gasoline to comply with clean air
regulations. The second is as a voluntary substitute for gasoline - this is a
purely economic choice by gasoline retailers who may make higher margins on
selling ethanol-blended gasoline, provided ethanol is available in the local
market. The U.S. gasoline market is currently approximately 170 billion gallons
annually, so the potential market for ethanol (assuming only a 10% blend) is 17
billion gallons per year. Increasingly, motor manufacturers are producing
flexible fuel vehicles (particularly sports utility vehicle models) which can
run off ethanol blends of up to 85% (known as E85) in order to obtain exemptions
from fleet fuel economy quotas. There are now in excess of 5 million flexible
fuel vehicles on the road in the United States and automakers will produce
several millions per year, offering further potential for significant growth in
ethanol demand.
  CELLULOSE
TO ETHANOL PRODUCTION
  In a 2002
report, “Outlook For Biomass Ethanol Production Demand,” the U.S. Energy
Information Administration found that advancements in production technology of
ethanol from cellulose could reduce costs and result in production increases of
40% to 160% by 2010. Biomass (cellulosic feedstocks) includes agricultural
waste, woody fibrous materials, forestry residues, waste paper, municipal solid
waste and most plant material. Like waste starches and sugars, they are often
available for relatively low cost, or are even free. However, cellulosic
feedstocks are more abundant, global and renewable in nature. These waste
streams, which would otherwise be abandoned, land-filled or incinerated, exist
in populated metropolitan areas where ethanol prices are higher.
  SOURCES
AND AVAILABILITY OF RAW MATERIALS
  The U.S.
DOE and USDA in its April 2005 report “BIOMASS AS FEEDSTOCK FOR A BIOENERGY AND
BIOPRODUCTS INDUSTRY: THE TECHNICAL FEASIBILITY OF A BILLION-TON ANNUAL SUPPLY”
found that about one billion tons of cellulosic materials from agricultural and
forest residues are available to produce more than one-third of the current U.S.
demand for transportation fuels.
   -6-
   DEPENDENCE
ON ONE OR A FEW MAJOR CUSTOMERS
  Currently,
we have no dependence on one or a few major customers. We are negotiating
definitive agreements but no definitive agreements have been signed as of yet.
See “DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES.”
  PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS
  On March
1, 2006, we entered into a Technology License Agreement with Arkenol, for use of
the Arkenol Technology. Arkenol holds the following patents in relation to the
Arkenol Technology: 11 U.S. patents, 21 foreign patents, and one pending foreign
patent. According to the terms of the agreement, we were granted an exclusive,
non-transferable, North American license to use and to sub-license the Arkenol
technology. The Arkenol Technology, converts cellulose and waste materials into
ethanol and other high value chemicals. As consideration for the grant of the
license, we are required to make a onetime payment of $1,000,000 at first
project funding and for each plant make the following payments: (1) royalty
payment of 3% of the gross sales price for sales by us or our sublicensees of
all products produced from the use of the Arkenol Technology (2) and a onetime
license fee of $40.00 per 1,000 gallons of production capacity per plant.
According to the terms of the agreement, we made a onetime exclusivity fee
prepayment of $30,000 during the period ended December 31, 2006. As of December
31, 2008, we have accrued the remaining liability of $970,000 to Arkenol, and as
of March 11, 2009 we have paid Arkenol in full for the license. All sub-licenses
issued by us will provide for payments of any other license fees and royalties
due Arkenol.
  NEED
FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES
  We are
not subject to any government oversight for our current operations other than
for corporate governance and taxes. However, the production facilities that we
will be constructing will be subject to various federal, state and local
environmental laws and regulations, including those relating to the discharge of
materials into the air, water and ground, the generation, storage, handling,
use, transportation and disposal of hazardous materials, and the health and
safety of our employees. In addition, some of these laws and regulations will
require our facilities to operate under permits that are subject to renewal or
modification. These laws, regulations and permits can often require expensive
pollution control equipment or operational changes to limit actual or potential
impacts to the environment. A violation of these laws and regulations or permit
conditions can result in substantial fines, natural resource damages, criminal
sanctions, permit revocations and/or facility shutdowns.
  EFFECT
OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
  Currently,
the federal government encourages the use of ethanol as a component in
oxygenated gasoline. This is a measure to both protect the environment, and, to
utilize biofuels as a viable renewable domestic fuel to reduce U.S. dependence
on foreign oil.
 
 The
ethanol industry is heavily dependent on several economic incentives to produce
ethanol, including federal ethanol supports. Ethanol sales have been favorably
affected by the Clean Air Act amendments of 1990, particularly the Federal
Oxygen Program which became effective November 1, 1992. The Federal Oxygen
Program requires the sale of oxygenated motor fuels during the winter months in
certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol
use has increased due to a second Clean Air Act program, the Reformulated
Gasoline Program. This program became effective January 1, 1995, and requires
the sale of reformulated gasoline in nine major urban areas to reduce
pollutants, including those that contribute to ground level ozone, better known
as smog. Increasingly stricter EPA regulations are expected to increase the
number of metropolitan areas deemed in non-compliance with Clean Air Standards,
which could increase the demand for ethanol.
 
 On
October 22, 2004, President Bush signed H.R. 4520, which contained the
Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise
tax structure effective as of January 1, 2005. Before this, ethanol-blended fuel
was taxed at a lower rate than regular gasoline (13.2 cents on a 10% blend).
Under VEETC, the existing ethanol excise tax exemption is eliminated, thereby
allowing the full federal excise tax of 18.4 cents per gallon of gasoline to be
collected on all gasoline and allocated to the highway trust fund. The bill
created a new volumetric ethanol excise tax credit of 51 cents per gallon of
ethanol blended. Refiners and gasoline blenders would apply for this credit on
the same tax form as before only it would be a credit from general revenue, not
the highway trust fund. Based on volume, the VEETC is expected to allow much
greater refinery flexibility in blending ethanol. VEETC is scheduled to expire
in 2013. The 2008 Farm Bill amended this credit: Starting the year after
7.5 billion gallons of ethanol are produced and/or imported in the United
States, the value of the credit will be lowered to 45 cents per gallon—it is
expected that the United States passed this mark in 2008, leading to a reduction
in the credit starting in 2009.
 
 The
Energy Policy Act of 2005 established a renewable fuel standard (RFS) to
increase in the supply of alternative sources for automotive fuels. The RFS was
expanded by the Energy Independence and Security Act of 2007. The RFS requires
the blending of renewable fuels (including ethanol and biodiesel) in
transportation fuel. In 2008, fuel suppliers must blend 9.0 billion gallons of
renewable fuel into gasoline; this requirement increases annually to 36 billion
gallons in 2022. The expanded RFS also specifically mandates the use of
“advanced biofuels”—fuels produced from non-corn feedstocks and with 50% lower
lifecycle greenhouse gas emissions than petroleum fuel—starting in 2009. Of the
36 billion gallons required in 2022, at least 21 billion gallons must be
advanced biofuel. There are also specific quotas for cellulosic biofuels and for
biomass-based diesel fuel. On May 1, 2007, EPA issued a final rule on the RFS
program detailing compliance standards for fuel suppliers, as well as a system
to trade renewable fuel credits between suppliers.  EPA has not yet
initiated a rulemaking on the lifecycle analysis methods necessary to categorize
fuels as advanced biofuels. While this program is not a direct subsidy for the
construction of biofuels plants, the market created by the renewable fuel
standard is expected to stimulate growth of the biofuels industry.
   -7-
 
 The Food,
Conservation, and Energy Act of 2008 (2008 Farm Bill) provides for, among other
things, grants for demonstration scale Biorefineries, and loan guarantees for
commercial scale Biorefineries that produce advanced Biofuels (i.e., any fuel
that is not corn-based). Section 9003 includes a Loan Guarantee Program under
which the U.S.D.A. could provide loan guarantees up to $250 million to fund
development, construction, and retrofitting of commercial-scale refineries.
Section 9003 also includes a grant program to assist in paying the costs of the
development and construction of demonstration-scale biorefineries to demonstrate
the commercial viability which can potentially fund up to 50% of project
costs.
 
 Some
other noteworthy governmental actions regarding the production of biofuels are
as follows:
 
 Small
Ethanol Producer Credit:
 A tax
credit valued at 10 cents per gallon of ethanol produced. The credit may be
claimed on the first 15 million gallons of ethanol produced by a small producer
in a given year. Qualified applicants are any ethanol producer with
production capacity below 60 million gallons per year. This credit is scheduled
to terminate on December 31, 2010, unless ortherwise extended by
law.
 
 Credit
for Production of Cellulosic Biofuel:
 An
integrated tax credit whereby Producers of cellulosic biofuel can claim up to
$1.01 per gallon tax credit. The credit for cellulosic ethanol varies with other
ethanol credits such that the total combined value of all credits is $1.01 per
gallon. As the VEETC and/or the Small Ethanol Producer Credits (outlined above)
decrease, the per-gallon credit for cellulosic ethanol production increases by
the same amount (ie the value of the credit is reduced by the amount of the
VEETC and the Small Ethanol Producer Credit—currently, the value would be 40
cents per gallon). The credit applies to fuel produced after December 31,
2008. This credit is scheduled to terminate on December 31,
2012.
 
 Special
Depreciation Allowance for Cellulosic Biofuel Plant Property:
 A taxpayer may take a depreciation
deduction of 50% of theadjusted basis of a new
cellulosic biofuel plant in the year it is put in service. Anyportion of the cost financed through
tax-exempt bonds is exempted from thedepreciation allowance. Before
amendment by P.L. 110-343, the accelerateddepreciation applied only to cellulosic
ethanol plants that break down cellulosethrough enzymatic processes—the amended
provision applies to all cellulosicbiofuel plantsacquired after December 20, 2006, and
placed in service before January 1, 2013.This accelerated depreciation
allowance is scheduledtoterminate onDecember 31, 2012.
 
 ESTIMATE
OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON RESEARCH AND
DEVELOPMENT ACTIVITIES
  For the
fiscal year ending December 31, 2007 and 2008, we spent roughly $4,930,739 and
$10,535,278 on project development costs, respectively.
  To date,
project development costs include the research and development expenses related
to our future cellulose-to-ethanol production facilities including site
development, and engineering activities.
  COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS (FEDERAL, STATE AND
LOCAL)
  We will
be subject to extensive air, water and other environmental regulations and we
will have to obtain a number of environmental permits to construct and operate
our plants, including, air pollution construction permits, a pollutant discharge
elimination system general permit, storm water discharge permits, a water
withdrawal permit, and an alcohol fuel producer’s permit. In addition, we may
have to complete spill prevention control and countermeasures
plans.
  The
production facilities that we will build are subject to oversight activities by
the federal, state, and local regulatory agencies. There is always a risk that
the federal agencies may enforce certain rules and regulations differently than
state environmental administrators. State or federal rules are subject to
change, and any such changes could result in greater regulatory burdens on plant
operations. We could also be subject to environmental or nuisance claims from
adjacent property owners or residents in the area arising from possible foul
smells or other air or water discharges from the plant.
  NUMBER
OF TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES
  We had 11
full time employees as of December 31, 2008 and 1 part time employee. None of
our employees are subject to a collective bargaining agreement, and we believe
that our relationship with our employees is good.
  WHERE YOU CAN FIND MORE
INFORMATION
 
 You are
advised to read this Form 10-K in conjunction with other reports and documents
that we file from time to time with the SEC. In particular, please read our
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from
time to time. You may obtain copies of these reports directly from us or from
the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington,
D.C. 20549, and you may obtain information about obtaining access to the
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains information for electronic filers at its website
http://www.sec.gov.
   -8-
 
 ITEM 1A. RISK FACTORS
  This
registration statement contains forward-looking statements that involve risks
and uncertainties. These statements can be identified by the use of
forward-looking terminology such as “believes,” “expects,” “intends,” “plans,”
“may,” “will,” “should,” or “anticipation” or the negative thereof or other
variations thereon or comparable terminology. Actual results could differ
materially from those discussed in the forward-looking statements as a result of
certain factors, including those set forth below and elsewhere in this
Registration Statement. The following risk factors should be considered
carefully in addition to the other information in this Registration Statement,
before purchasing any of the Company’s securities.
  RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
  We have
had limited operations and have incurred net losses of $30,202,509 for the
period from March 28, 2006 (Inception) through December 31, 2008, of which
$14,326,447
was cash used in our operating activities. We have generated minimal revenues
from consulting, approximately $1,076,000 in grant revenue from the Department
of Energy, and no revenues from operations. We have yet to begin ethanol
production or construction of ethanol producing plants. Since the Reverse
Merger, we have been engaged in organizational activities, including developing
a strategic operating plan, plant engineering and development activities,
entering into contracts, hiring personnel, developing processing technology, and
raising private capital. Our continued existence is dependent upon our ability
to obtain additional debt and/or equity financing. We are uncertain given the
economic landscape when to anticipate the beginning construction of a plant
given the availability of capital. We estimate the total cost including
contingencies to be in the range of approximately $100 million to $120 million
for our first plant.  We plan to raise additional funds through
project financings, grants and/or loan guarantees, or through future sales of
our common stock, until such time as our revenues are sufficient to meet our
cost structure, and ultimately achieve profitable operations. There is no
assurance we will be successful in raising additional capital or achieving
profitable operations. Wherever possible, our Board of Directors will attempt to
use non-cash consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of restricted shares of our common
stock. These actions will result in dilution of the ownership interests of
existing shareholders may further dilute common stock book value, and that
dilution may be material.
  OUR
CELLULOSE-TO-ETHANOL TECHNOLOGIES ARE UNPROVEN ON A LARGE-SCALE COMMERCIAL BASIS
AND PERFORMANCE COULD FAIL TO MEET PROJECTIONS, WHICH COULD HAVE A DETRIMENTAL
EFFECT ON THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.
  While
production of ethanol from corn, sugars and starches is a mature technology,
newer technologies for production of ethanol from cellulose biomass have not
been built at large commercial scales. The technologies being utilized by us for
ethanol production from biomass have not been demonstrated on a commercial
scale. All of the tests conducted to date by us with respect to the Arkenol
Technology have been performed on limited quantities of feedstocks, and we
cannot assure you that the same or similar results could be obtained at
competitive costs on a large-scale commercial basis. We have never utilized
these technologies under the conditions or in the volumes that will be required
to be profitable and cannot predict all of the difficulties that may arise. It
is possible that the technologies, when used, may require further research,
development, design and testing prior to larger-scale commercialization.
Accordingly, we cannot assure you that these technologies will perform
successfully on a large-scale commercial basis or at all.
  OUR
BUSINESS EMPLOYS LICENSED ARKENOL TECHNOLOGY WHICH MAY BE DIFFICULT TO PROTECT
AND MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES.
  We
currently license our technology from Arkenol.  Arkenol owns 11 U.S.
patents, 21 foreign patents, and has one foreign patent pending and may file
more patent applications in the future. Our success depends, in part, on our
ability to use the Arkenol Technology, and for Arkenol to obtain patents,
maintain trade secrecy and not infringe the proprietary rights of third parties.
We cannot assure you that the patents of others will not have an adverse effect
on our ability to conduct our business, that we will develop additional
proprietary technology that is patentable or that any patents issued to us or
Arkenol will provide us with competitive advantages or will not be challenged by
third parties. Further, we cannot assure you that others will not independently
develop similar or superior technologies, duplicate elements of the Arkenol
Technology or design around it.
  It is
possible that we may need to acquire other licenses to, or to contest the
validity of, issued or pending patents or claims of third parties. We cannot
assure you that any license would be made available to us on acceptable terms,
if at all, or that we would prevail in any such contest. In addition, we could
incur substantial costs in defending ourselves in suits brought against us for
alleged infringement of another party’s patents in bringing patent infringement
suits against other parties based on our licensed patents.
  In
addition to licensed patent protection, we also rely on trade secrets,
proprietary know-how and technology that we seek to protect, in part, by
confidentiality agreements with our prospective joint venture partners,
employees and consultants. We cannot assure you that these agreements will not
be breached, that we will have adequate remedies for any breach, or that our
trade secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.
     -9-
   OUR SUCCESS DEPENDS UPON ARNOLD
KLANN, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AND JOHN CUZENS, OUR CHIEF
TECHNOLOGY OFFICER AND SENIOR VICE PRESIDENT.
  We
believe that our success will depend to a significant extent upon the efforts
and abilities of (i) Arnold Klann, our Chairman and Chief Executive Officer, due
to his contacts in the ethanol and cellulose industries and his overall insight
into our business, and (ii) John Cuzens, our Chief Technology Officer and Senior
Vice President for his technical and engineering expertise, including his
familiarity with the Arkenol Technology. Our failure to retain Mr. Klann or Mr.
Cuzens, or to attract and retain additional qualified personnel, could adversely
affect our operations. We do not currently carry key-man life insurance on any
of our officers. See Part III Item 9 for more details on
Management.
  COMPETITION
FROM LARGE PRODUCERS OF PETROLEUM-BASED GASOLINE ADDITIVES AND OTHER COMPETITIVE
PRODUCTS MAY IMPACT OUR PROFITABILITY.
  Our
proposed ethanol plants will also compete with producers of other gasoline
additives made from other raw materials having similar octane and oxygenate
values as ethanol. The major oil companies have significantly greater resources
than we have to develop alternative products and to influence legislation and
public perception of ethanol. These other companies also have significant
resources to begin production of ethanol should they choose to do
so.
  We will
also compete with producers of other gasoline additives having similar octane
and oxygenate values as ethanol. An example of such other additives is MTBE, a
petrochemical derived from methanol. MTBE costs less to produce than ethanol.
Many major oil companies produce MTBE and because it is petroleum-based, its use
is strongly supported by major oil companies. Alternative fuels, gasoline
oxygenates and alternative ethanol production methods are also continually under
development. The major oil companies have significantly greater resources than
we have to market MTBE, to develop alternative products, and to influence
legislation and public perception of MTBE and ethanol.
  OUR
BUSINESS PROSPECTS WILL BE IMPACTED BY CORN SUPPLY.
  Our
ethanol will be produced from cellulose, however currently most ethanol is
produced from corn, which is affected by weather, governmental policy, disease
and other conditions. A significant increase in the availability of corn and
resulting reduction in the price of corn may decrease the price of ethanol and
harm our business.
  IF
ETHANOL AND GASOLINE PRICES DROP SIGNIFICANTLY, WE WILL ALSO BE FORCED TO REDUCE
OUR PRICES, WHICH POTENTIALLY MAY LEAD TO FURTHER LOSSES.
  Prices
for ethanol products can vary significantly over time and decreases in price
levels could adversely affect our profitability and viability. The price of
ethanol has some relation to the price of gasoline. The price of ethanol tends
to increase as the price of gasoline increases, and the price of ethanol tends
to decrease as the price of gasoline decreases. Any lowering of gasoline prices
will likely also lead to lower prices for ethanol and adversely affect our
operating results. We cannot assure you that we will be able to sell our ethanol
profitably, or at all.
  INCREASED
ETHANOL PRODUCTION FROM CELLULOSE IN THE UNITED STATES COULD INCREASE THE DEMAND
AND PRICE OF FEEDSTOCKS, REDUCING OUR PROFITABILITY.
  New
ethanol plants that utilize cellulose as their feedstock may be under
construction or in the planning stages throughout the United States. This
increased ethanol production could increase cellulose demand and prices,
resulting in higher production costs and lower profits.
  PRICE
INCREASES OR INTERRUPTIONS IN NEEDED ENERGY SUPPLIES COULD CAUSE LOSS OF
CUSTOMERS AND IMPAIR OUR PROFITABILITY.
  Ethanol
production requires a constant and consistent supply of energy. If there is any
interruption in our supply of energy for whatever reason, such as availability,
delivery or mechanical problems, we may be required to halt production. If we
halt production for any extended period of time, it will have a material adverse
effect on our business. Natural gas and electricity prices have historically
fluctuated significantly. We purchase significant amounts of these resources as
part of our ethanol production. Increases in the price of natural gas or
electricity would harm our business and financial results by increasing our
energy costs.
  OUR
BUSINESS PLAN CALLS FOR EXTENSIVE AMOUNTS OF FUNDING TO CONSTRUCT AND OPERATE
OUR BIOREFINERY PROJECTS AND WE MAY NOT BE ABLE TO OBTAIN SUCH FUNDING WHICH
COULD ADVERSELY AFFECT OUR BUSINESS, OPERATIONS AND FINANCIAL
CONDITION.
  Our
business plan depends on the completion of up to 19 numerous biorefinery
projects. Although each facility will have specific funding requirements, our
proposed facility in Lancaster, CA will require approximately $100-$120 million
to fund. We will be relying on additional financing, and funding from such
sources as Federal and State grants and loan guarantee programs.  We
are currently in discussions with potential sources of financing but no
definitive agreements are in place. If we cannot achieve the requisite financing
or complete the projects as anticipated, this could adversely affect our
business, the results of our operations, prospects and financial
condition.
   -10-
  RISKS
RELATED TO GOVERNMENT REGULATION AND SUBSIDIZATION
  FEDERAL
REGULATIONS CONCERNING TAX INCENTIVES COULD EXPIRE OR CHANGE, WHICH COULD CAUSE
AN EROSION OF THE CURRENT COMPETITIVE STRENGTH OF THE ETHANOL
INDUSTRY.
  Congress
currently provides certain federal tax credits for ethanol producers and
marketers. The current ethanol industry and our business initially depend on the
continuation of these credits. The credits have supported a market for ethanol
that might disappear without the credits. These credits may not continue beyond
their scheduled expiration date or, if they continue, the incentives may not be
at the same level. The revocation or amendment of any one or more of these tax
incentives could adversely affect the future use of ethanol in a material way,
and we cannot assure investors that any of these tax incentives will be
continued. The elimination or reduction of federal tax incentives to the ethanol
industry could have a material adverse impact on the industry as a
whole.
  LAX
ENFORCEMENT OF ENVIRONMENTAL AND ENERGY POLICY REGULATIONS MAY ADVERSELY AFFECT
DEMAND FOR ETHANOL
  Our
success will depend in part on effective enforcement of existing environmental
and energy policy regulations. Many of our potential customers are unlikely to
switch from the use of conventional fuels unless compliance with applicable
regulatory requirements leads, directly or indirectly, to the use of ethanol.
Both additional regulation and enforcement of such regulatory provisions are
likely to be vigorously opposed by the entities affected by such requirements.
If existing emissions-reducing standards are weakened, or if governments are not
active and effective in enforcing such standards, our business and results of
operations could be adversely affected. Even if the current trend toward more
stringent emission standards continues, we will depend on the ability of ethanol
to satisfy these emissions standards more efficiently than other alternative
technologies. Certain standards imposed by regulatory programs may limit or
preclude the use of our products to comply with environmental or energy
requirements. Any decrease in the emission standards or the failure to enforce
existing emission standards and other regulations could result in a reduced
demand for ethanol. A significant decrease in the demand for ethanol will reduce
the price of ethanol, adversely affect our profitability and decrease the value
of your stock.
  COSTS
OF COMPLIANCE WITH BURDENSOME OR CHANGING ENVIRONMENTAL AND OPERATIONAL SAFETY
REGULATIONS COULD CAUSE OUR FOCUS TO BE DIVERTED AWAY FROM OUR BUSINESS AND OUR
RESULTS OF OPERATIONS TO SUFFER
  Ethanol
production involves the emission of various airborne pollutants, including
particulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatile
organic compounds and sulfur dioxide. The production facilities that we will
build will discharge water into the environment. As a result, we are subject to
complicated environmental regulations of the U.S. Environmental Protection
Agency and regulations and permitting requirements of the states where our
plants are to be located. These regulations are subject to change and such
changes may require additional capital expenditures or increased operating
costs. Consequently, considerable resources may be required to comply with
future environmental regulations. In addition, our ethanol plants could be
subject to environmental nuisance or related claims by employees, property
owners or residents near the ethanol plants arising from air or water
discharges. Ethanol production has been known to produce an odor to which
surrounding residents could object. Environmental and public nuisance claims, or
tort claims based on emissions, or increased environmental compliance costs
could significantly increase our operating costs.
  OUR
PROPOSED NEW ETHANOL PLANTS WILL ALSO BE SUBJECT TO FEDERAL AND STATE LAWS
REGARDING OCCUPATIONAL SAFETY
  Risks of
substantial compliance costs and liabilities are inherent in ethanol production.
We may be subject to costs and liabilities related to worker safety and job
related injuries, some of which may be significant. Possible future
developments, including stricter safety laws for workers and other individuals,
regulations and enforcement policies and claims for personal or property damages
resulting from operation of the ethanol plants could reduce the amount of cash
that would otherwise be available to further enhance our business.
  RISKS
RELATED TO OUR COMMON STOCK
  THERE
IS NO LIQUID MARKET FOR OUR COMMON STOCK.
  Our
shares are traded on the OTCBB and the trading volume has historically been very
low. An active trading market for our shares may not develop or be sustained. We
cannot predict at this time how actively our shares will trade in the public
market or whether the price of our shares in the public market will reflect our
actual financial performance.
     -11-
  OUR COMMON STOCK PRICE HAS FLUCTUATED
CONSIDERABLY AND STOCKHOLDERS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE
THE PRICE AT WHICH SUCH SHARES WERE PURCHASED
  The
market price of our common stock may fluctuate significantly.  From
July 11, 2006, the day we began trading publicly as BFRE.PK, and
December 31, 2008 traded as BFRE.OB, the high and low price for our common
stock has been $7.90 and $0.52 per share, respectively.  Our share
price has fluctuated in response to various factors, including not yet beginning
construction of our first plant, needing additional time to organize engineering
resources, issues relating to feedstock sources, trying to locate suitable plant
locations, locating distributors and finding funding sources.
 OUR
COMMON STOCK MAY BE CONSIDERED “A PENNY STOCK” AND MAY BE DIFFICULT FOR YOU TO
SELL
  The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The market
price of our common stock has been for much of its trading history since July
11, 2006, and may continue to be less than $5.00 per share, and therefore may be
designated as a “penny stock” according to SEC rules. This designation requires
any broker or dealer selling these securities to disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suitable to purchase the securities.
These rules may restrict the ability of brokers or dealers to sell our common
stock and may affect the ability of investors to sell their shares.
  FAILURE
TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION
404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS AND OPERATING RESULTS
  It may be
time consuming, difficult and costly for us to develop and implement the
additional internal controls, processes and reporting procedures required by the
Sarbanes-Oxley Act. If we are unable to comply with these requirements of the
Sarbanes-Oxley Act, we may not be able to obtain the independent accountant
certifications that the Sarbanes-Oxley Act requires of publicly traded
companies.
  If we
fail to comply in a timely manner with the requirements of Section 404 of the
Sarbanes-Oxley Act regarding internal control over financial reporting or to
remedy any material weaknesses in our internal controls that we may identify,
such failure could result in material misstatements in our financial statements,
cause investors to lose confidence in our reported financial information and
have a negative effect on the trading price of our common stock.
  Pursuant
to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, beginning
with this annual report on Form 10-KSB for our fiscal period ending December 31,
2007, we are required to prepare assessments regarding internal controls over
financial reporting and beginning with our annual report on Form 10-KSB for our
fiscal period ending December 31, 2008, furnish a report by our management on
our internal control over financial reporting. We have begun the process of
documenting and testing our internal control procedures in order to satisfy
these requirements, which has resulted in increased general and administrative
expenses and has shifted management time and attention from revenue-generating
activities to compliance activities. There can be no assurance that our auditors
will be able to issue an unqualified opinion on management’s assessment of the
effectiveness of our internal control over financial reporting. Failure to
achieve and maintain an effective internal control environment or complete our
Section 404 certifications could have a material adverse effect on our stock
price.
  In
addition, in connection with our on-going assessment of the effectiveness of our
internal control over financial reporting, we may discover “material weaknesses”
in our internal controls as defined in standards established by the Public
Company Accounting Oversight Board, or the PCAOB. A material weakness is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. The PCAOB
defines “significant deficiency” as a deficiency that results in more than a
remote likelihood that a misstatement of the financial statements that is more
than inconsequential will not be prevented or detected.
  In the
event that a material weakness is identified, we will employ qualified personnel
and adopt and implement policies and procedures to address any material
weaknesses that we identify. However, the process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a
public company. We cannot assure you that the measures we will take will
remediate any material weaknesses that we may identify or that we will implement
and maintain adequate controls over our financial process and reporting in the
future.
  Any failure to remediate any material
weaknesses that we may identify or to implement new or improved controls, or
difficulties encountered in their implementation, could harm our operating
results, cause us to fail to meet our reporting obligations or result in
material misstatements in our financial statements. Any such failure could also
adversely affect the results of the periodic management evaluations of our
internal controls and, in the case of a failure to remediate any material
weaknesses that we may identify, would adversely affect the annual auditor
attestation reports regarding the effectiveness of our internal control over
financial reporting that are required under Section 404 of the Sarbanes-Oxley
Act of 2002. Inadequate internal controls could also cause investors to lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our common stock.
 
    -12-
   OUR PRINCIPAL STOCKHOLDER HAS
SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS THAT MAY NOT BE IN THE BEST
INTEREST OF ALL OTHER STOCKHOLDERS
  The
Company’s Chairman and President controls approximately 49.03% of its current
outstanding shares of voting common stock. He may be able to exert significant
control over our management and affairs requiring stockholder approval,
including approval of significant corporate transactions. This concentration of
ownership may expedite approvals of company decisions, or have the effect of
delaying or preventing a change in control, adversely affect the market price of
our common stock, or be in the best interests of all our
stockholders.
  YOU
COULD BE DILUTED FROM THE ISSUANCE OF ADDITIONAL COMMON STOCK.
  As of
February 28, 2009, we had 28,133,053shares of common stock
outstanding and no shares of preferred stock outstanding.  We are
authorized to issue up to 100,000,000 shares of common stock and 1,000,000
shares of preferred stock. To the extent of such authorization, our Board of
Directors will have the ability, without seeking stockholder approval, to issue
additional shares of common stock or preferred stock in the future for such
consideration as the Board of Directors may consider sufficient. The issuance of
additional common stock or preferred stock in the future may reduce your
proportionate ownership and voting power.
  ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
 Not
applicable.
 ITEM 2.  DESCRIPTION OF PROPERTY
  We lease
approximately 6,425 square feet of furnished office space at 31 Musick, Irvine,
California 92618 from Jeong Yun Kim for $11,565 per month on a
month-to-month basis.
  On
November 9, 2007, we issued a check in the amount of $96,851, towards the
purchase of the land for the Lancaster facility totaling a purchase price of
$109,108. The approximately 10 acre site is presently vacant and undisturbed
except to occasional use by off road vehicles.  The site is flat and
has no distinguishing characteristics and is adjacent to a solid waste landfill
at a site that minimizes visual access from outside the immediate
area.
  ITEM 3.  LEGAL PROCEEDINGS
  We are
currently not involved in any litigation that we believe could have a materially
adverse effect on our financial condition or results of operations. There is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the executive officers of our company or any of our
subsidiaries, threatened against or affecting our company, our common stock, any
of our subsidiaries or of our company’s or our company’s subsidiaries’ officers
or directors in their capacities as such, in which an adverse decision could
have a material adverse effect
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  No
matters were submitted to shareholders for the period ended December 31,
2008.
 
 PART
II
  ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
  MARKET
INFORMATION
  Our
shares of common stock began trading under the symbol “BFRE.PK” on the Pink
Sheets of the National Quotation Bureau on July 11, 2006 and later began trading
on the OTCBB under the symbol “BFRE.OB” on June 19, 2007.
  The
following table sets forth the high and low trade information for our common
stock for each quarter since we completed the Reverse Merger and began trading
on July 11, 2006. The prices reflect inter-dealer quotations, do not include
retail mark-ups, markdowns or commissions and do not necessarily reflect actual
transactions.
  Quarter
      ended
                      
                      Low
      Price
                      
                      
                      High
      PriceSeptember
      30, 2006
                      
                      $
                      1.35
                      
                      
                      $
                      6.80December
      31, 2006
                      
                      $
                      1.47
                      
                      
                      $
                      4.00March
      31, 2007
                      
                      $
                      3.99
                      
                      
                      $
                      7.70June
      30, 2007
                      
                      $
                      5.40
                      
                      
                      $
                      7.15September
      30, 2007
                      
                      $
                      3.30
                      
                      
                      $
                      6.40December
      31, 2007
                      
                      $
                      3.15
                      
                      
                      $
                      5.01March
      31, 2008
                      
                      $
                      3.00
                      
                      
                      $
                      4.15June
      30, 2008
                      
                      $
                      3.05
                      
                      
                      $
                      4.40September
      30, 2008
                      
                      $
                      2.05
                      
                      
                      $
                      4.15December
      31, 2008
                      
                      $
                      0.55
                      
                      
                      $
                      2.15
 
  -13-
  HOLDERS
OF OUR COMMON STOCK
  As of
February 28, 2009 a total of 28,133,053 shares of the Company’s common stock are
currently outstanding held by approximately 2,750 shareholders of
record.
  DIVIDENDS
  We have
not declared or paid any dividends on our common stock and intend to retain any
future earnings to fund the development and growth of our
business.  Therefore, we do not anticipate paying dividends on our
common stock for the foreseeable future.  There are no restrictions on
our present ability to pay dividends to stockholders of our common stock, other
than those prescribed by Nevada law.
  SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
  2006
INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, AS AMENDED
  In order
to compensate our officers, directors, employees and/or consultants, on December
14, 2006 our Board of Directors approved and stockholders ratified by consent
the 2006 Incentive and Non-Statutory Stock Option Plan (the
“Plan”).  The Plan has a total of 10,000,000 shares reserved for
issuance.
  On
October 16, 2007, the Board of Directors reviewed the Plan. As such, it
determined that the Plan was to be used as a comprehensive equity incentive
program for which the Board of Directors serves as the plan administrator and,
therefore, amended the Plan (the “Amended and Restated Plan”) to add the ability
to grant restricted stock awards.
  Under the
Amended and Restated Plan, an eligible person in the Company’s service may
acquire a proprietary interest in the Company in the form of shares or an option
to purchase shares of the Company’s common stock. The amendment includes certain
previously granted restricted stock awards as having been issued under the
Amended and Restated Plan.
  As of
December 31, 2008, we have issued the following stock options and grants under
the Amended and Restated Plan:
  Equity
Compensation Plan Information
  Plan
      category
                    
                    Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights and number of shares of restricted stock
                    
                    
                    Weighted
      average
                      exercise
      price
                      of
      outstanding
                      options,
      warrants
                      and
      rights(2)
                    
                    
                    Number
      of securities remaining available for future issuanceEquity compensation plans approved by security holders under the Amended
      and Restated Plan
                    
                    
                    3,517,659
                    (1)
                    
                    $
                    2.48
                    
                    
                    
                    6,482,341Equity compensation not pursuant to a plan
                    
                    
                    602,203
                    (3)
                    
                    $
                    3.88Total
                    
                    
                    4,099,862
  (1) Of
this amount, 20,000 options have been exercised.
 (2)
Excludes shares of restricted stock issued under the Plan.
 (3)
Includes a warrant to purchase 200,000 shares of its common stock at an exercise
price of $5.00 per share to a certain consultant issued by the Company on
November 9, 2006, for consulting services.
  RULE
10B-18 TRANSACTIONS
 
 The
following table provides information about purchases by BlueFire of shares of
BlueFire’s common stock during the year ending December 31, 2008.  All
repurchases were made in compliance with the safe harbor provisions of Rule
10b-18 under the Securities Exchange Act of 1934, subject to market conditions,
applicable legal requirements and other factors.
 -14-
  
 A monthly
summary of the repurchase activity for the year ending December 31, 2008 is as
follows:
  ISSUER
PURCHASES OF EQUITY SECURITIES 1
 Period
                              
                              Total
                                number
      of
                                shares
                                purchased
                              
                              
                              Average
                                price
      paid
                                per
      share
                              
                              
                              Total
      number of
                                shares
      purchased as
                                part
      of publicly
                                announced
      plans or
                                programs
                              
                              
                              Maximum
      number (or approximate dollar value)
                                of
      shares that may yet be
                                purchased
      under the plans
                                or
      programs4/1/08
      – 4/30/08
                              
                              
                              9,901
                              
                              
                              $
                              3.48
                              
                              
                              
                              0
                              
                              
                              
                              05/1/08
      – 5/31/08
                              
                              
                              0
                              
                              
                              
                              
                              
                              
                              
                              0
                              
                              
                              
                              06/1/08
      – 6/30/08
                              
                              
                              0
                              
                              
                              
                              
                              
                              
                              
                              0
                              
                              
                              
                              07/1/08
      – 7/31/08
                              
                              
                              7,525
                              
                              
                              $
                              3.60
                              
                              
                              
                              0
                              
                              
                              
                              08/1/08
      – 8/31/08
                              
                              
                              3,000
                              
                              
                              $
                              2.64
                              
                              
                              
                              0
                              
                              
                              
                              09/1/08
      – 9/30/08
                              
                              
                              11,746
                              
                              
                              $
                              2.73
                              
                              
                              
                              0
                              
                              
                              
                              0Total
                              
                              
                              32,172
                              
                              
                              $
                              3.16
                              
                              
                              
                              0
                              
                              
                              
                              0
 
 (1)
                The
      Company implemented a stock repurchase program effective April 1, 2008
      with the intent to repurchase BlueFire shares in accordance with SEC Rule
      10b-18. During the year ended December 31, 2008, the Company
      repurchased a total of 32,172 shares at a cost of approximately $101,581.
      Under the stock repurchase program, the Company is not obligated to
      repurchase any additional shares of common
  stock.
 
 ITEM 6.  SELECTED FINANCIAL DATA.
 
 Not
applicable
  ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, PLAN OF OPERATION, AND RESULTS
OF OPERATIONS
  THE
FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED
ELSEWHERE IN THIS REGISTRATION STATEMENT. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS,
THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND THOSE
INCLUDED ELSEWHERE IN THIS REGISTRATION STATEMENT.
  -15-
  PLAN
OF OPERATION
  We plan
to raise additional funds through joint venture partnerships, Federal or State
grants or loan guarantees, project debt financings or through future sales of
our common stock, until such time as our revenues are sufficient to meet our
cost structure, and ultimately achieve profitable operations. There is no
assurance that we will be successful in raising additional capital or achieving
profitable operations. Our consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties. We will
need financing within 12 months to execute our business plan.
  We have
not developed our own proprietary technology but rather we are a licensee of the
Arkenol Technology and therefore have benefited from Arkenol’s research and
development efforts and cost expenditures.
  Our
business will encompass development activities culminating in the construction
and long-term operation of ethanol production biorefineries.  As such,
we are currently in the development-stage of finding suitable locations and
deploying project opportunities for converting cellulose fractions of municipal
solid waste and other opportunistic feedstock into ethanol fuels.  We
do not plan to significantly increase our number of employees over the next 12
months.
  For the
next 12 months, our Plan of Operations is as follows:
  ·
              Obtain
      additional operating capital from joint venture partnerships, Federal or
      State grants or loan guarantees, debt financing or equity financing to
      fund our ongoing operations and the development of initial biorefineries
      in North America.
  ·
              The
      Energy Policy Act of 2005 (“EPAct 2005”) provides for grants and loan
      guarantee programs to incentivize the growth of the cellulosic ethanol
      market. These programs include a Cellulosic Biomass Ethanol and Municipal
      Solid Waste Guarantee Program under which the U.S. Department of Energy
      (“DOE”) could provide loan guarantees up to $250 million per qualified
      project.  BlueFire plans to pursue all available opportunities
      within the Farm EPAct 2005.
  ·
                In
      June 2008 the Food, Conservation and Energy Act of 2008 (“Farm Bill”) was
      signed into law.  The 2008 Farm Bill also modified existing
      incentives, including ethanol tax credits and import duties and
      established a new tax credit for cellulosic biofuels. The Farm Bill
      also authorized new biofuels loan and grant programs, but these will
      be subject to appropriations, likely starting with the FY2010 budget
      request.  BlueFire plans to pursue all available opportunities
      within the Farm Bill.·
                Utilize
      proceeds from reimbursements under the Department of Energy contract and
      if needed monies from the $570,000 related party line of
      credit.
  ·
              As
      available and as applicable to our business plans, applications for public
      funding will be submitted to leverage private capital raised by
      us.
  Our
initial planned projects in North America are projected as follows:
  ·
              We
      intend to build a facility that will process approximately 190 tons of
      green waste material per day to produce roughly 3.9 million gallons of
      ethanol annually. In connection therewith, on November 9, 2007, we
      purchased the facility site which is located in Lancaster,
      California.  Permit applications were filed on June 24, 2007, to
      allow for construction of the Lancaster facility.  On December
      12, 2008 we were issued our Conditional Use Permit by the County of Los
      Angeles.  On February 12, 2009 we were issued our Authority to
      Construct permit by the Antelope Valley Air Quality Management
      District.·
              We
      are also developing a facility for construction in a joint effort with the
      Department of Energy. This facility will use approximately 700 metric dry
      tons per day of green waste and wood waste currently disposed in the
      landfill to produce about 16.6 to 18 million gallons of ethanol annually.
      Preliminary engineering design is in progress and permitting for this
      facility will commence once all required preliminary engineering design is
      completed.  We have received an Award from the DOE of up to $40
      million for the Facility. On or around October 4, 2007, we finalized Award
      1 for a total approved budget of just under $10,000,000 with the DOE. This
      award is a 60%/40% cost share, whereby 40% of approve costs may be
      reimbursed by the DOE pursuant to the total $40 million award announced in
      February 2007.  The remainder of financing for this project is
      yet to be determined.
   -16-
   ·
              Several
      other opportunities are being evaluated by us in North America but no
      definitive plans have been made.  Discussions with various
      landfill owners are underway to duplicate our proposed facility throughout
      North America although no definitive agreements have been
      reached.
  RECENT
DEVELOPMENTS IN BLUEFIRE’S BIOREFINERY ENGINEERING AND DEVELOPMENT
  During
the third quarter in 2008, BlueFire continued to develop the engineering package
for the Lancaster Biorefinery, and finalized the Front-End Loading
(FEL) 3 stage of engineering for the Lancaster Biorefinery. FEL is the process
for conceptual development of processing industry projects. This process is used
in the petrochemical, refining, and pharmaceutical industries. Front-End Loading
is also referred to as Front-End Engineering Design (FEED). There are three
stages in the FEL process:
 
 FEL-1
                *
      Material Balance
                *
      Energy Balance
                *
      Project Charter
              FEL-2
                *
      Preliminary Equipment Design
                *
      Preliminary Layout
                *
      Preliminary Schedule
                *
      Preliminary Estimate
              FEL-3
                *
      Purchase Ready Major Equipment Specifications
                *
      Definitive Estimate
                *
      Project Execution Plan
                *
      Preliminary 3D Model
                *
      Electrical Equipment List
                *
      Line List
                *
      Instrument Index
  In July
2008, BlueFire signed a teaming agreement with Amalgamated Research, Inc.
(“ARI”) for the exclusive right to use its Simulated Moving Bed Chromatographic
Separation (“SMB”) technology for the separation of concentrated sulfuric acid
and simple sugars. By using ARI’s SMB, BlueFire recovers approximately 99% of
the entrained sugars in the acid/sugar stream.
 
 In July
2008, BlueFire was granted a conditional-use permit from the County of Los
Angeles, Department of Regional Planning, to permit the construction of the
Lancaster Biorefinery. However, a subsequent appeal of the county
decision, which BlueFire overcame, combined with the waiting period under the
California Environmental Quality Act, pushed the effective date of the now
non-appealable permit approval to December 12, 2008.
 
 On
February 12, 2009 we were issued our Authority to Construct permit by the
Antelope Valley Air Quality Management District.
 
 RESULTS
OF OPERATIONS
 
 Twelve
Months Ended December 31, 2008 Compared to the Twelve Months Ended
December 30, 2007
 
 Revenue
from Department of Energy Grant
 
 Revenue in
2008 was approximately $1,076,000 and related to a federal grant from the United
States Department of Energy, (“U.S. DOE”). The grant generally provides for
payment in connection with related development and construction
costs involving commercialization of our technologies.
 
 Project
Development
 
 In 2008,
our project development costs were approximately $10,535,000 compared to project
development costs of $4,931,000 for the same period during
2007.  Included in project development costs in 2008 and 2007, was
approximately $4,901,000 and $970,000, respectively of expense incurred from
various engineering firms for the design and development of the
biorefineries.  Included in project development costs in 2008 and
2007, was approximately $2,078,000 and $2,388,000, respectively of non-cash
share-based compensation expense, incurred in connection with our 2007 and 2006
Stock Option awards.  The increase in project development costs is due
to the increased activity in the design and engineering development of the
biorefineries.
 
 General
and Administrative Expenses
 
 General
and Administrative Expenses were approximately $4,136,000 in 2008, compared to
$5,595,000 for the same period in 2007.  Included in general and
administrative expenses in 2008 and 2007, was approximately $1,691,000 and
$4,062,000, respectively of non-cash share-based compensation expense, incurred
in connection with our 2007 and 2006 Stock Option award.  The decrease
in general and administrative costs is mainly due to a decrease in share based
compensation.
 
 Interest
Income
 
 Interest
income was approximately $225,000 in 2008, compared to approximately $18,000 in
2007, related to funds invested.  The increase in interest income from
the same period in 2007 is mainly due to the fact that we had not yet completed
our offering of common stock till the end of 2007.
  -17-
 
 Related
Party License Fee
 
 In 2008
the Company incurred the remaining cost of the Arkenol technology license fee of
$970,000.  This is a one time fee.
  LIQUIDITY
AND CAPITAL RESOURCES
  Historically,
we have funded our operations through financing activities consisting primarily
of private placements of debt and equity securities with existing shareholders
and outside investors. Our principal use of funds has been for the further
development of our Biorefinery Projects, for capital expenditures and general
corporate expenses.
  During
the twelve months ended December 31, 2008, there were no proceeds received from
the sale of company securities. There were no additional proceeds received from
the exercise of stock options.
 
 During
the twelve months ended December 31, 2007, proceeds of approximately $17,394,500
were received from the sale of securities in connection with various private
placements. Additional proceeds of $40,000 were received from the exercise of
stock options.
 
 In
addition, as our Projects develop to the point of construction, we anticipate
significant purchases of long lead time item equipment for construction. As of
December 31, 2008, we had cash and cash equivalents of approximately
$2,999,599.
  In
February 2009, the Company obtained a line of credit in the amount of $570,000
from Arkenol Inc, its technology licensor, to provide additional liquidity to
the Company as needed. As of March 25, 2009, there were no amounts
outstanding.
 We expect
to rely upon funds raised from private placements, as well as future equity and
debt offerings, current and future grant opportunities, as well as a line of
credit from our technology licensor, to implement our growth plan and meet our
liquidity needs going forward.  Management believes that our Company’s
cash will be sufficient to meet our working capital requirements for the next
twelve month period, but will not be sufficient to move forward beyond the
development stage of either of our first two Projects, at which point further
funding will be necessary. However, we cannot assure you that such financing
will be available to us on favorable terms, or at all. If, after utilizing the
existing sources of capital available to the Company, further capital needs are
identified and we are not successful in obtaining the financing, we may be
forced to curtail our existing or planned future operations.
  CRITICAL
ACCOUNTING POLICIES
  We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements require the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
  The
methods, estimates, and judgment we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements. The SEC has defined “critical accounting policies” as those
accounting policies that are most important to the portrayal of our financial
condition and results, and require us to make our most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based upon this definition, our most critical estimates
are described below under the heading “Revenue Recognition.” We also have other
key accounting estimates and policies, but we believe that these other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period. For additional
information see Note 1, “Summary of Organization and Significant Accounting
Policies” in the notes to our audited financial statements appearing elsewhere
in this report. Although we believe that our estimates and assumptions are
reasonable, they are based upon information presently available, and actual
results may differ significantly from these estimates.
  CASH
AND CASH EQUIVALENTS
  For
purpose of the statement of cash flows, we consider all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
  REVENUE
RECOGNITION
  We are
currently a developmental-stage company and have recognized minimal revenues to
date. We will recognize revenues from 1) consulting services rendered to
potential sub licensees for development and construction of cellulose to ethanol
projects, 2) sales of ethanol from our production facilities when (a) persuasive
evidence that an agreement exists; (b) the products have been delivered; (c) the
prices are fixed and determinable and not subject to refund or adjustment; and
(d) collection of the amounts due is reasonably assured.
  The
Company received a federal grant from the United States Department of Energy,
(“U.S. DOE”). The grant generally provides for payment in connection with
related development and construction costs involving commercialization of
our technologies. Revenues from the grant are recognized in the period during
which the conditions under the grant have been met and the reimbursement is
estimatable. The Company determined that the payment received from the U.S.
Department of Energy should be accounted for as revenues.  This
determination was based on the fact the Company views the obtaining of future
grants as an ongoing function of its intended operations.  In
addition, costs related to government grant revenues are not readily
identifiable, and such costs are recorded in general and administrative expenses
and project development costs and thus could not be offset.
  -18-
   PROJECT
DEVELOPMENT
  Project
development costs are either expensed or capitalized. The costs of materials and
equipment that will be acquired or constructed for project development
activities, and that have alternative future uses, both in project development,
marketing or sales, will be classified as property and equipment and depreciated
over their estimated useful lives. To date, project development costs include
the research and development expenses related to our future cellulose-to-ethanol
production facilities.  During the twelve months ended
December 31, 2008 and December 31, 2007, we expensed all costs related to
the facility development.
  INCOME
TAXES
  The
Company accounts for income taxes in accordance with FASB Statement No. 109
“Accounting for Income Taxes.” SFAS No. 109 requires the Company to provide a
net deferred tax asset/liability equal to the expected future tax
benefit/expense of temporary reporting differences between book and tax
accounting methods and any available operating loss or tax credit carry
forwards.  We provide a valuation allowance to net deferred tax assets
when it is deemed unlikely that we will recover such deferred tax
assets.
  FAIR
VALUE OF FINANCIAL INSTRUMENTS
  The fair
value of financial instruments approximated their carrying values at December
31, 2008 and December 31, 2007. The financial instruments consist of cash and
accounts payable.
  LOSS
PER COMMON SHARE
  The
Company presents basic loss per share (“EPS”) and diluted EPS on the face of the
consolidated statement of operations. Basic loss per share is computed as net
loss divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants, and other convertible
securities.  As of December 31, 2008 and December 31, 2007, the
Company had options and warrants to purchase an aggregate of 10,673,853 shares
of common stock that were excluded from the calculation of diluted loss per
share as their effects would have been anti-dilutive.
  CONCENTRATIONS
OF CREDIT RISK
  The
Company, at times, maintains cash balances at certain financial institutions in
excess of amounts insured by federal agencies.
  RECENT
ACCOUNTING PRONOUNCEMENTS
  SHARE-BASED
PAYMENT
  In
December 2004, the FASB issued a revision of SFAS 123 (“SFAS 123(R)”) that
requires compensation costs related to share-based payment transactions to be
recognized in the statement of operations. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award. SFAS 123(R)
replaces SFAS 123 and was effective as of the first interim period beginning
after January 1, 2006. During the period ended December 31, 2006, the Company
adopted the provisions of SFAS 123(R).  No options were outstanding
prior to adoption.
  In July
2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”) which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes”. This pronouncement recommends
a recognition threshold and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken in the
Company’s tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure requirements for uncertain tax positions. The accounting provisions
of FIN 48 will be effective for the Company beginning January 1, 2007. The
Company is in the process of evaluating the impact, if any, the adoption of FIN
48 will have on its financial statements.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS
157 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This statement clarifies fair
value as permitted under other accounting pronouncements but does not require
any new fair value measurements. However, for some entities, the application of
this statement will change current practice. The Company will be required to
adopt SFAS No. 157 as of January 1, 2008 and is currently in the process of
evaluating the impact, if any, the adoption of SFAS No. 157 will have on its
financial statements.
 OFF-BALANCE
SHEET ARRANGEMENTS
  There are
no off-balance sheet arrangements.
 
  -19-
  ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
 We do not
hold any derivative instruments and do not engage in any hedging
activities
 
 ITEM 8. FINANCIAL STATEMENTS
  Our
consolidated financial statements are contained in pages 35 F-2 through F-25
which appear at the end of this annual report.
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  None.
  ITEM 9A. CONTROLS AND PROCEDURES
  EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
  Our
management team, under the supervision and with the participation of our
principal executive officer and our principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (Exchange Act), as of the last day
of the fiscal period covered by this report, December 31, 2008. The term
disclosure controls and procedures means our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our principal executive
and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based on
this evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were effective as
of December 31, 2008.
 
 Our
principal executive officer and our principal financial officer, are responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management
is required to base its assessment of the effectiveness of our internal control
over financial reporting on a suitable, recognized control framework, such as
the framework developed by the Committee of Sponsoring Organizations (COSO). The
COSO framework, published in Internal Control-Integrated
Framework, is known as the COSO Report. Our principal executive officer
and our principal financial officer, have chosen the COSO framework on which to
base its assessment. Based on this evaluation, our management concluded that our
internal control over financial reporting was effective as of December 31,
2008.
 
 This
annual report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Our principal executive officer and our principal financial officer’s
report was not subject to attestation by our registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual report on Form
10-K.
 
 There
were no changes in our internal control over financial reporting that occurred
during the last quarter of 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable and not absolute assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of certain events. Because of
these and other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
 
 CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 During
the fiscal year ended December 31, 2008, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
  ITEM 9B. OTHER
INFORMATION
 
 None.
 -20-
  PART
III
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE;
 The
following table and biographical summaries set forth information, including
principal occupation and business experience, about our directors and executive
officers at December 31, 2008. There is no familial relationship between or
among the nominees, directors or executive officers of the Company.
  NAME
                    
                    AGE
                    
                    POSITION
                    
                    OFFICER
      AND/OR DIRECTOR SINCEArnold
      Klann
                    
                    57
                    
                    President,
      CEO and Director
                    
                    June
      2006Necitas
      Sumait
                    
                    49
                    
                    Secretary,
      SVP and Director
                    
                    June
      2006Christopher
      Scott
                    
                    34
                    
                    Chief
      Financial Officer
                    
                    March
      2007John
      Cuzens
                    
                    57
                    
                    SVP,
      Chief Technology Officer
                    
                    June
      2006Chris
      Nichols
                    
                    43
                    
                    Director
                    
                    June
      2006Joseph
      Emas
                    
                    54
                    
                    Director
                    
                    July
      2007Victor
      Doolan
                    
                    68
                    
                    Director
                    
                    July
      2007
  The
Company’s Directors serve in such capacity until the first annual meeting of the
Company’s shareholders and until their successors have been elected and
qualified. The Company’s officers serve at the discretion of the Company’s Board
of Directors, until their death, or until they resign or have been removed from
office.
  There are
no agreements or understandings for any director or officer to resign at the
request of another person and none of the directors or officers is acting on
behalf of or will act at the direction of any other person. The activities of
each director and officer are material to the operation of the Company. No other
person’s activities are material to the operation of the Company.
  Arnold
R. Klann – Chairman of the Board and Chief Executive Officer
  Mr. Klann
has been our Chairman of the Board and Chief Executive Officer since our
inception in March 2006. Mr. Klann has been President of ARK Energy, Inc. and
Arkenol, Inc. from January 1989 to present. Mr. Klann has an AA from
Lakeland College in Electrical Engineering.
  Necitas
Sumait – Senior Vice President and Director
  Mrs.
Sumait has been our Director and Senior Vice President since our inception in
March 2006. Prior to this, Mrs. Sumait was Vice President of ARK Energy/Arkenol
from December 1992 to July 2006. Mrs. Sumait has a MBA in Technological
Management from Illinois Institute of Technology and a B.S. in Biology from De
Paul University.
  Christopher
Scott - Chief Financial Officer
  Mr. Scott
has been our Chief Financial Officer since March 2007. Prior to this, from 2002
to March 2007, Mr. Scott was most recently the CFO/CCO and FinOp of Westcap
Securities, Inc, an NASD Member Broker/Dealer and Investment Bank headquartered
in Irvine, CA. Mr. Scott currently holds the Series 7, 63, 24, 4, 27, 55, and
Series 53 NASD licenses. From 1997 to 2002, Mr. Scott was a General Securities
and Registered Options Principal at First Allied Securities Inc. Mr. Scott
earned his Bachelor’s Degree in Business Administration, with a concentration in
Finance, from CSU, Fullerton.
  John
Cuzens - Chief Technology Officer and Senior Vice President
  Mr.
Cuzens has been our Chief Technology Officer and Senior Vice President since our
inception in March 2006. Mr. Cuzens was a Director from March 2006 until
his resignation from the Board of Directors in July 2007.  Prior to
this, he was Director of Projects Wahlco Inc. from 2004 to June 2006. He was
employed by Applied Utility Systems Inc from 2001 to 2004 and Hydrogen Burner
Technology form 1997-2001. He was with ARK Energy and Arkenol from 1991 to 1997
and is the co-inventor on seven of Arkenol’s eight U.S. foundation patents for
the conversion of cellulosic materials into fermentable sugar products using a
modified strong acid hydrolysis process. Mr. Cuzens has a B.S. Chemical
Engineering degree from the University of California at Berkeley.
  
 -21-
   Chris
Nichols – Director (Chairman, Compensation Committee)
  Mr.
Nichols has been our Director since our inception in March 2006.  Mr.
Nichols is currently the Chairman of the Board and Chief Executive Officer of
Advanced Growing Systems, Inc. Since 2003 Mr. Nichols was the Senior Vice
President of Westcap Securities’ Private Client Group. Prior to this, Mr.
Nichols was a Registered Representative at Fisher Investments from December 2002
to October 2003. He was a Registered Representative with Interfirst Capital
Corporation from 1997 to 2002. Mr. Nichols is a graduate of
California State University in Fullerton with a B.A. degree in
Marketing.
  Joseph
Emas – Director (Chairman, Nomination Committee)
  Mr. Emas
is licensed to practice law in Florida, New Jersey and New York. Since 2001, Mr.
Emas has been the senior partner of Joseph I. Emas, P.A. Mr. Emas specializes in
securities regulation, corporate finance, mergers and acquisitions and corporate
law. Mr. Emas received his Honors BA at University of Toronto, Bachelor of
Administrative Studies, with distinction, at York University in Toronto, his JD,
cum laude from Nova Southeastern Shepard Broad Law School and his LL.M. in
Securities Regulation at Georgetown University Law Center. Mr. Emas was an
Adjunct Professor of Law at Nova Southeastern Shepard Broad Law School. Mr. Emas
received the William Smith Award, Pro Bono Advocate for Children in 2000 and the
2006 Child Advocacy Award in Florida and is the author of “Update of Juvenile
Jurisdiction Florida Practice in Juvenile Law.” Mr. Emas has been a member of
the Juvenile Court Rules Committee for the State of Florida from 1999 through
2006, and currently sits on the Florida Child Advocacy Committee. Mr. Emas
serves on the Board of Directors of HQ Sustainable Maritime Industries,
Inc.
  Victor
Doolan – Director (Chairman, Audit Committee)
  Mr.
Doolan served for approximately three years as president of Volvo Cars North
America until his retirement in March 2005. Prior to joining Volvo, Mr. Doolan
served as the Executive Director of the Premier Automotive Group, the luxury
division of Ford Motor Company from July 1999 to June 2002. Mr. Doolan also
enjoyed a 23-year career with BMW, culminating with his service as President of
BMW of North America from September 1993 to July 1999. Mr. Doolan has worked in
the automotive industry for approximately 36 years.  Mr. Doolan
currently serves on the Board of Directors for Sonic Automotive,
Inc.
  Significant
Employee
  William
Davis - VP Project Management.
  Mr. Davis
is currently Vice President of Project Management for us. Prior to this he was
Director of Power Plant Project Development for Diamond Energy from 2001 to
2006. Prior to this he was VP of Business Development for Oxbow Power. He has
over 30 years in the energy business and was an energy advisor to the Governor
of California. He has been involved in domestic and international power project
development. Mr. Davis is a registered Architect in three states and graduated
from California State University at San Luis Obispo with a Bachelors
of Architecture and a Masters of Science in Architecture.
  FAMILY
RELATIONSHIPS
  There are
no family relationships among our directors, executive officers, or persons
nominated or chosen by the Company to become directors or executive
officers.
  SUBSEQUENT
EXECUTIVE RELATIONSHIPS
  There are
no family relationships among our directors and executive officers. No director
or executive officer has been a director or executive officer of any business
which has filed a bankruptcy petition or had a bankruptcy petition filed against
it during the past five years. No director or executive officer has been
convicted of a criminal offense or is the subject of a pending criminal
proceeding during the past five years. No director or executive officer has been
the subject of any order, judgment or decree of any court permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities during the past five
years. No director or officer has been found by a court to have violated a
federal or state securities or commodities law during the past five
years.
  None of
our directors or executive officers or their respective immediate family members
or affiliates are indebted to us.
  COMMITTEES
OF THE BOARD OF DIRECTORS
  Each of
our Audit Committee, Compensation Committee and Nomination Committee are
composed of a majority of independent board members and are also chaired by an
independent board member.
  -22-
   Audit
Committee
 Victor Doolan, Chairman
 Christopher Nichols
 Joseph Emas
 
 Compensation
Committee
 Christopher Nichols,
Chairman
 Victor Doolan
 Joseph Emas
 
 Nomination
Committee
 Joseph Emas, Chairman
 Christopher Nichols
 Victor Dolan
  COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
  Section
16(a) of the Exchange Act requires the Company’s directors, executive officers
and persons who beneficially own 10% or more of a class of securities registered
under Section 12 of the Exchange Act to file reports of beneficial ownership and
changes in beneficial ownership with the SEC. Directors, executive officers and
greater than 10% stockholders are required by the rules and regulations of the
SEC to furnish the Company with copies of all reports filed by them in
compliance with Section 16(a).
  Based
solely on our review of certain reports filed with the Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, the following reports required to be filed with respect to transactions
in our Common Stock during the fiscal year ended December 31, 2008 were
timely:
  CODE
OF ETHICS
  The
Company has adopted a Code of Ethics that applies to the small business issuer’s
directors, officers and key employees.
  BOARD
NOMINATION PROCEDURE
  There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s board of directors since the Company
provided disclosure on such process on its proxy statement on Form Def14, as
amended, filed on May 23, 2008 with the SEC.
   -23-
   ITEM 11. EXECUTIVE COMPENSATION
  2008/2007
SUMMARY COMPENSATION TABLE YEAR
  NAME
      AND PRINCIPAL
                              POSITION
                            YEAR
                            
                            SALARY
                              ($)
                            
                            
                            BONUS
                              ($)
                            
                            
                            STOCK
                              AWARDS
                              (3)
                            
                            
                            OPTIONS
                              AWARDS ($) (3)
                            
                            NON-
                              EQUITY
                              INCENTIVE
      PLAN
                              COMPENSATION
                              ($)
                            CHANGE
                              IN
      PENSION
                              VALUE
      AND NONQUALIFIED DEFERRED COMPENSATION EARNINGS ($)
                            ALL
      OTHER
                              COMPENSATION
                              ($)
                            
                            TOTAL
                              ($)Arnold
      Klann Director and President
                            2008
                            
                            
                            226,000
                            
                            
                            
                            -
                            
                            
                            
                            24,600
                            (1)
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            250,6002007
                            
                            
                            216,583
                            
                            
                            
                            51,780
                            
                            
                            
                            5,070
                            (1)
                            
                            
                            750,519
                            
                            
                            
                            
                            
                            
                            1,023,952Necitas
      Sumait Director, Secretary and VP
                            2008
                            
                            
                            176,500
                            
                            
                            
                            -
                            
                            
                            
                            24,600
                            (1)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            201,1002007
                            
                            
                            149,500
                            
                            
                            
                            51,780
                            
                            
                            
                            5,070
                            (1)
                            
                            
                            556,521
                            
                            
                            
                            
                            
                            
                            762,871John
      Cuzens Treasurer and VP
                            2008
                            
                            
                            175,250
                            
                            
                            
                            -
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            175,2502007
                            
                            
                            149,500
                            
                            
                            
                            51,780
                            
                            
                            
                            
                            
                            
                            
                            556,521
                            
                            
                            
                            
                            
                            
                            757,801Christopher
      Scott Chief Financial Officer
                            2008
                            
                            
                            163,750
                            
                            
                            
                            -
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            163,7502007
                            
                            
                            86,250
                            
                            
                            
                            51,780
                            
                            
                            
                            275,001
                            (2)
                            
                            
                            556,521
                            
                            
                            
                            
                            
                            
                            969,552Chris
      Nichols Director
                            2008
                            
                            
                            5,000
                            
                            
                            
                            
                            
                            
                            
                            24,600
                            (1)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            29,6002007
                            
                            
                            7,500
                            (4)
                            
                            
                            
                            
                            
                            
                            5,070
                            (1)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            12,570Joseph
      Emas Director
                            2008
                            
                            
                            5,000
                            
                            
                            
                            
                            
                            
                            
                            24,600
                            (1)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            29,6002007
                            
                            
                            5,000
                            
                            
                            
                            
                            
                            
                            
                            25,350
                            (1)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            30,350Victor
      Doolan Director
                            2008
                            
                            
                            5,000
                            
                            
                            
                            
                            
                            
                            
                            24,600
                            (1)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            29,6002007
                            
                            
                            5,000
                            
                            
                            
                            
                            
                            
                            
                            25,350
                            (1)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            30,350
  (1)
                    Reflects
      value of shares of restricted common stock received as compensation as
      Director. See notes to consolidated financial statements for
      valuation.
  (2)
                    Reflects
      value of 50,000 shares of restricted common stock received as compensation
      related to February 2007 employment
agreement.
  (3)
                    Valued
      based on the Black-Scholes valuation model at the date of grant, see note
      to the consolidated financial
statements.
  (4)
                    Includes
      partial 2006 compensation of $2,500 paid in
  2007.
 2008
GRANTS OF PLAN-BASED AWARDS TABLE
  ESTIMATED
      FUTURE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS
                  
                  ESTIMATED
      FUTURE PAYOUTS UNDER EQUITY INCENTIVE PLAN
  AWARDS
  Name
                            Grant
      Date
                            Approval
      Date
                            Number
      of Non-Equity Incentive Plan Units Granted (#)
                            Threshold
                              ($)
                            Target
                              ($)
                            Maximum
                              ($)
                            Threshold
                              (#)
                            Target
                              (#)
                            Maximum
                              (#)
                            
                            All
      Other Stock Awards: Number of Shares of Stock or Units (#)
                            
                            All
      Other Option Awards: Number of Securities Underlying Options
      (#)
                            
                            Exercise
      or Base Price of Option Awards ($ / SH)
                            
                            Closing
      Price on Grant Date ($ / SH)Arnold
      Klann
                            NoneNecitas
      Sumait
                            NoneChristopher
      Scott
                            NoneJohn
      Cuzens
                            NoneChris
      Nichols
                            NoneJoseph
      Emas
                            NoneVictor
      Doolan
                            None
 
  
 -24-
 
  
 2008
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
 
 OPTION
      AWARDS
                        
                        
                        
                        STOCK
      AWARDSNAME
                        NUMBER
      OF
                          SECURITIES
                          UNDERLYING
                          UNEXERCISED
                          OPTIONS
                          (#)
                          EXERCISABLE
                        NUMBER
      OF
                          SECURITIES
                          UNDERLYING
                          UNEXERCISED
                          OPTIONS
                          (#)
                          UNEXERCISABLE
                        EQUITY
                          INCENTIVE
                          PLAN
      AWARDS:
                          NUMBER
      OF
                          SECURITIES
                          UNDERLYING
                          UNEXERCISED
                          UNEARNED
                          OPTIONS
                          (#)
                        OPTION
                          EXERCISE
                          PRICE
                          ($)
                        OPTION
                          EXPIRATION
                          DATE
                        NUMBER
      OF
                          SHARES
      OR
                          UNITS
      OF
                          STOCK
      THAT
                          HAVE
      NOT
                          VESTED
                          (#)
                        MARKET
                          VALUE
      OF
                          SHARES
      OR
                          UNITS
      OF
                          STOCK
      THAT
                          HAVE
      NOT
                          VESTED
                          ($)
                        EQUITY
      INCENTIVE
                          PLAN
      AWARDS:
                          NUMBER
      OF
                          UNEARNED
                          SHARES,
      UNITS
                          OR
      OTHER
                          RIGHTS
      THAT
                          HAVE
      NOT
                          VESTED
                          (#)
                        EQUITY
      INCENTIVE PLAN AWARDS:
                          MARKET
      OR
                          PAYOUT
      VALUE
                          OF
      UNEARNED
                          SHARES,
      UNITS
                          OR
      OTHER
                          RIGHTS
      THAT
                          HAVE
      NOT
                          VESTED
                          ($)Arnold
      Klann
                        1,000,000
                        -
                        
                        2.00
                        12/14/1128,409
                        -
                        
                        3.52
                        12/20/12125,000(1)
                        125,000(1)
                        
                        3.20
                        12/20/12Necitas
      Sumait
                        450,000
                        -
                        
                        2.00
                        12/14/11118,750(1)
                        87,500(1)
                        
                        3.20
                        12/20/12John
      Cuzens
                        450,000
                        -
                        
                        2.00
                        12/14/11118,750(1)
                        87,500(1)
                        
                        3.20
                        12/20/12Christopher
      Scott
                        118,750(1)
                        87,500(1)
                        
                        3.20
                        12/20/12Chris
      NicholsJoseph
      EmasVictor
      Doolan
 (1) 50%
vested immediately upon grant in 2007, 25% vests on closing remainder of
Lancaster Project Funding, 25% vests at the start of construction of Lancaster
Project
   
 -25-
 
  
 2008
OPTION EXERCISES AND STOCK VESTED TABLE
 
 OPTION
      AWARDS
                    STOCK
      AWARDS
 
 
 Number
      of Shares
                        Acquired
      on Exercise
                        (#)
                      Value
      Realized
                        onExercise
                        ($)
                      Number
      of Shares
                        Acquired
      on Vesting
                        (#)
                      Value
      Realized
                        onVesting
                        ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmasVictor
      Doolan
 
  2008
PENSION BENEFITS TABLE
   NAME
                      PLAN
      NAME
                      NUMBER
      OF YEARS
                        CREDITED
      SERVICE
                        (#)
                      PRESENT
      VALUE OF
                        ACCUMULATED  BENEFIT
                        ($)
                      PAYMENTS
      DURING
                        LAST
      FISCAL YEAR
                        ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmasVictor
      Doolan
  
 2008
NONQUALIFIED DEFERRED COMPENSATION TABLE
  NAME
                      EXECUTIVE
                        CONTRIBUTION
      IN
                        LAST
      FISCAL YEAR
                        ($)
                      REGISTRANT
                        CONTRIBUTIONSIN
                        LASTFISCAL
      YEARS
                        ($)
                      AGGREGATE
                        EARNINGS
      IN LAST
                        FISCAL  YEAR
                        ($)
                      AGGREGATE
                        WITHDRAWALS
      /
                        DISTRIBUTIONS
                        ($)
                      AGGREGATE
                        BALANCEAT
      LAST
                        FISCAL
      YEAR-END
                        ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmasVictor
      Doolan
 
  
 -26-
 
  
 2008
DIRECTOR COMPENSATION TABLE
   NAME
                                                
                                                FEES
      EARNED OR PAID IN CASH
                                                  ($)
                                                STOCK
                                                  AWARDS
                                                OPTION
                                                  AWARDS
                                                NON-EQUITY
      INCENTIVE PLAN COMPENSATION
                                                CHANGE
      IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION
      EARNINGS
                                                ALL
      OTHER COMPENSATION
                                                TOTAL
                                                  ($)Year
                                                ($)
      (1)
                                                ($)
                                                ($)
                                                ($)
                                                ($)Necitas
      Sumait
                                                2008
                                                
                                                24,600
                                                
                                                
                                                
                                                
                                                24,600Chris
      Nichols
                                                2008
                                                5,000
                                                24,600
                                                
                                                
                                                
                                                
                                                29,600Joseph
      Emas
                                                2008
                                                5,000
                                                24,600
                                                
                                                
                                                
                                                
                                                29,600Victor
      Doolan
                                                2008
                                                5,000
                                                24,600
                                                
                                                
                                                
                                                
                                                29,600Arnold
      Klann
                                                2008
                                                
                                                24,600
                                                
                                                
                                                
                                                
                                                24,600
  (1)
                        Reflects
      value of shares of restricted common stock received as compensation as
      Director. See notes to consolidated financial statements for
      valuation.
  
 2008 ALL
OTHER COMPENSATION TABLE
 
 
 NAME
                      YEAR
                      PERQUISITES
      AND OTHER PERSONAL BENEFITS
                        ($)
                      TAX
      REIMBURSEMENTS
                        ($)
                      INSURANCE
      PREMIUMS
                        ($)
                      COMPANY
      CONTRIBUTIONS TO RETIREMENT AND 401(K) PLANS
                        ($)
                      SEVERANCE
      PAYMENTS/
                        ACCRUALS
                        ($)
                      CHANGE
      IN
                        CONTROL
                        PAYMENTS/
                        ACCRUALS
                        ($)
                      TOTAL
                        ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmasVictor
      Doolan
 
 
 -27-
 
 
 
 
 
 2008
PERQUISITES TABLE
 
 NAME
                      YEAR
                      PERSONAL
      USE OF
                        COMPANY
                        CAR/PARKING
                      FINANCIAL
                        PLANNING
      LEGAL
                        FEES
                      CLUB
      DUES
                      EXECUTIVE
                        RELOCATION
                      TOTAL
      PERQUISITES
                        AND
      OTHER
                        PERSONAL
      BENEFITSArnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmasVictor
      Doolan
 
 2008
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
 
 NAME
                      BENEFIT
                      BEFORE
      CHANGE IN CONTROL
                        TERMINATION
      W/O
                        CAUSE
      OR FOR GOOD REASON
                      AFTER
      CHANGE IN
                        CONTROL
                        TERMINATION
      W/O
                        CAUSE
      OR GOOD
                        REASON
                      VOLUNTARY
                        TERMINATION
                      DEATH
                      DISABILITY
                      CHANGE
      IN CONTROLArnold
      Klann
                      
                      
                      
                      
                      
                      Full
      comp. first 2 months, 50% of comp. next 4 monthsNecitas
      Sumait
                      
                      
                      
                      
                      
                      Full
      comp. first 2 months, 50% of comp. next 4 monthsChristopher
      Scott (1)
                      
                      
                      
                      
                      
                      Full
      comp. first 2 months, 50% of comp. next 4 monthsJohn
      Cuzens
                      
                      
                      
                      
                      
                      Full
      comp. first 2 months, 50% of comp. next 4 monthsChris
      Nichols
                      
                      
                      
                      
                      
                      N/AJoseph
      Emas
                      
                      
                      
                      
                      
                      N/AVictor
      Doolan
                      
                      
                      
                      
                      
                      N/A
 
 (1) The
disability benefit came into effect with the signing of Mr. Scott’s employment
agreement on March 31, 2008.
  
  -28-
  EMPLOYMENT
CONTRACTS
  On June
27, 2006, the Company entered into employment agreements with three of its
executive officers. The employment agreements are for a period of three years,
with prescribed percentage increases beginning in 2007 and can be cancelled upon
a written notice by either employee or employer (if certain employee acts of
misconduct are committed). The total aggregate annual amount due under the
employment agreements is approximately $520,000.
  In
addition, on June 27, 2006, the Company entered into a Directors agreement with
four individuals to join the Company’s board of directors. Under the terms of
the agreement the non-employee Director (Chris Nichols) will receive annual
compensation in the amount of $5,000 and all Directors receive a onetime grant
of 5,000 shares of the Company’s common stock. The common shares vested
immediately. The value of the common stock granted was determined to be
approximately $67,000 based on the estimated fair market value of the Company’s
common stock over a reasonable period of time.
  In
connection with Christopher Scott’s appointment as the Company’s CFO on March
16, 2007, the Company and Mr. Scott entered into an at-will letter Employment
Agreement containing the following material terms: (i) initial monthly salary of
$7,500, to be raised to $10,000 on the earlier of April 30, 2007 or receipt by
the Company of a qualified investment financing, and (ii) standard employee
benefits; (iii) 50,000 shares of common stock issued throughout the year ended
December 31, 2007 to a consulting Company beneficially owned by him. On March
31, 2008, the Board of Directors of the Company replaced Mr.
Scott’s existing at-will Employment Agreement with a new employment
agreement, effective February 1, 2008, and terminating on May 31, 2009, unless
extended for additional periods by mutual agreement of both parties. The new
agreement contained the following material terms: (i) initial annual salary of
$170,000, paid monthly; and (ii) standard employee benefits; (iii) limited
termination provisions; (iv) rights to Inventions provisions; and (v)
confidentiality and non-compete provisions upon termination of
employment.
  In
addition, on July 9, 2007, the Company entered into a Directors agreement with
two individuals to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive annual compensation in the
amount of $5,000 and all Directors receive a one-time grant of 5,000 shares of
the Company’s common stock. The common shares vest immediately. The value of the
common stock granted was determined to be approximately $50,700 based on the
estimated fair market value of the Company’s common stock over a reasonable
period of time.
 
 On July
31, 2008, the Board of Directors approved the re-election of Victor Doolan,
Joseph Emas, Christopher Nichols, Arnold Klann and Necitas Sumait. The Company
also resolved to grant each Board Chair, and the Secretary each an additional
5,000 shares of stock. The value of the common stock granted at the time of the
grant was determined to be approximately $123,000 based on the estimated fair
market value of the Company’s common stock.
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
  As of
December 31, 2008, our authorized capitalization was 101,000,000 shares of
capital stock, consisting of 100,000,000 shares of common stock, $0.001 par
value per share and 1,000,000 shares of preferred stock, no par value per share.
As of December 31, 2008, there were 28,133,053 shares of our common stock
outstanding, all of which were fully paid, non-assessable and entitled to vote.
Each share of our common stock entitles its holder to one vote on each matter
submitted to the stockholders.
  The
following table sets forth, as of December 31, 2008, the number of shares of our
common stock owned by (i) each person who is known by us to own of record
or beneficially five percent (5%) or more of our outstanding shares,
(ii) each of our directors, (iii) each of our executive officers and
(iv) all of our directors and executive officers as a group. Unless
otherwise indicated, each of the persons listed below has sole voting and
investment power with respect to the shares of our common stock beneficially
owned.
  Title
      of Class
                                Name
      of Beneficial Owner (1)
                                
                                Number
      of
                                  shares
                                
                                Percent
      of
                                  Class
      (2)Common
                                Arnold
      Klann, Chairman and Chief Executive Officer
                                
                                
                                14,357,909
                                (4)
                                
                                
                                49.03
                                %Common
                                Necitas
      Sumait, Senior Vice President and Director
                                
                                
                                1,780,750
                                (5)
                                
                                
                                6.20
                                %Common
                                John
      Cuzens, Chief Technology Officer and Senior Vice President
                                
                                
                                1,752,250
                                (6)
                                
                                
                                6.11
                                %Common
                                Chris
      Scott, Chief Financial Officer
                                
                                
                                198,750
                                (7)
                                
                                
                                *Common
                                Chris
      Nichols, Director
                                
                                
                                54,000
                                
                                
                                
                                *Common
                                Victor
      Doolan, Director
                                
                                
                                11000
                                
                                
                                
                                *Common
                                Joseph
      Emas, Director
                                
                                
                                11,000
                                
                                
                                
                                *Common
                                Quercus
      Trust (3)
                                
                                
                                11,581,211
                                (8)
                                
                                
                                34.38
                                %All
      officers and directors as a group (7 persons)
                                
                                
                                18,165,659
                                
                                
                                
                                59.46
                                %All
      officers, directors and 5% holders as a group (8 persons)
                                
                                
                                29,746,870
                                
                                
                                
                                82.38
                                %
 
 (1)
                    Beneficial
      ownership is determined in accordance with Rule 13d-3(a) of the Exchange
      Act and generally includes voting or investment power with respect to
      securities.(2)
                    Figures
      may not add up due to rounding of percentages.(3)
                    David
      Gelbaum and Monica Chavez Gelbaum are co-trustees of The Quercus
      Trust.  Each of David Gelbaum and Monica Chavez Gelbaum, acting
      alone, has the power to exercise voting and investment control over the
      shares of common stock owned by the Trust.(4)
                    Includes
      options to purchase 1,153,409 shares of common stock vested at December
      31, 2008.(5)
                    Includes
      options to purchase 568,750 shares of common stock vested at December 31,
      2008.(6)
                    Includes
      options to purchase 568,750 shares of common stock vested
      at  December 31, 2008.(7)
                    Includes
      options and warrants to purchase 128,750 shares of common stock vested at
      December 31, 2008.(8)
                    Includes
      a warrant to purchase 5,555,556 shares of common
  stock.
 -29-
 
 SHARE
ISSUANCES/CONSULTING AGREEMENTS
  On
January 1, 2007, the Company entered into an employment agreement with a former
consultant to be Vice President of Project Management. Pursuant to the terms of
this agreement, the consultant was issued 10,000 shares of the Company’s
restricted common stock.
  On Feb
13, 2007, the Company entered into a consulting agreement with a corporate
technology consultant. The consultant shall review, comment, and implement as
requested by the Company on any Information Technology rollout. Under the terms
of the agreement consultant will receive 12,500 restricted shares of the
Company’s common stock at the signing of the agreement, 12,500 shares on June 1,
2007, 12,500 shares on September 1, 2007, and 12,500 shares on December 1,
2007.
  In
addition, on July 7, 2007, the Company entered into a Directors agreement with
two individuals to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive annual compensation in
the amount of $5,000 and all Directors receive a one time grant of 5,000 shares
of the Company’s common stock. The common shares vest immediately. The value of
the common stock granted was determined to be approximately $66,000 based
on the fair market value of the Company’s common stock of $5.07 on the date of
the grant. As of September 30, 2007, the Company expensed all of the costs
approximating $81,000 to general and administrative expenses.
  STOCK
OPTION ISSUANCES UNDER AMENDED 2006 PLAN
  On
December 20, 2007 the Company’s Board of Directors granted the following stock
options to employees and outside consultants as compensation:
  DATE
      ISSUED:
                    OPTIONEE
      NAME
                    NUMBER
      OF   OPTIONS
                    TYPE
                    PRICE
                    EXPIRATON
      DATEDecember
      20, 2007
                      December
      20, 2007
                    Arnold
      Klann, Officer and Director
                    28,409
                      250,000
                    ISO
      (1)
                      NSO
      (2)
                    $3.52
                      $3.20
                    December
      20, 2012
                      December
      20, 2012December
      20, 2007
                      December
      20, 2007
                    Necitas
      Sumait, Officer and Director
                    31,250
                      175,000
                    ISO
      (1)
                      NSO
      (2)
                    $3.20
                      $3.20
                    December
      20, 2012
                      December
      20, 2012December
      20, 2007
                      December
      20, 2007
                    John
      Cuzens, Officer
                    31,250
                      175,000
                    ISO
      (1)
                      NSO
      (2)
                    $3.20
                      $3.20
                    December
      20, 2012
                      December
      20, 2012December
      20, 2007
                      December
      20, 2007
                    Chris
      Scott, Officer
                    31,250
                      175,000
                    ISO
      (1)
                      NSO
      (2)
                    $3.20
                      $3.20
                    December
      20, 2012
                      December
      20, 2012December
      20, 2007
                      December
      20, 2007
                    Bill
      Davis, Employee
                    31,250
                      175,000
                    ISO
      (1)
                      NSO
      (2)
                    $3.20
                      $3.20
                    December
      20, 2012
                      December
      20, 2012December
      20, 2007
                      December
      20, 2007
                    Rigel
      Stone, Employee
                    31,250
                      150,000
                    ISO
      (1)
                      NSO
      (2)
                    $3.20
                      $3.20
                    December
      20, 2012
                      December
      20, 2012December
      20, 2007
                    Barbi
      Rios, Employee
                    5,000
                    ISO
      (1)
                    $3.20
                    December
      20, 2012December
      20, 2007
                    Scott
      Olson, Outside Consultant
                    10,000
                    NSO
      (3)
                    $3.20
                    December
      20, 2012December
      20, 2007
                    Aleshia
      Knickerbocker, Outside Consultant
                    2,500
                    NSO
      (3)
                    $3.20
                    December
      20, 2012December
      20, 2007
                    Bill
      Orr, Outside Consultant
                    10,000
                    NSO
      (3)
                    $3.20
                    December
      20, 2012December
      20, 2007
                    Elsa
      Ebro, Outside Consultant
                    5,000
                    NSO
      (3)
                    $3.20
                    December
      20, 2012Totals
                    
                    1,317,159
    (1)
                    These Incentive
      Stock Options (“ISO”) vested immediately(2)
                    These
      Non-Qualified Stock Options (“NSO”) vest as follows:
                      a.           50%
      vested immediately
                      b.           25%
      vest on BlueFire closing remainder of funding for Lancaster
      Project
                      c.           25%
      vest at start of construction of Lancaster
      Project(3)
                    These NSO’s vested
      monthly over 12 months (1/12th monthly
vesting)
   -30-
 
 Changes
in Control
  We are
not aware of any arrangements that may result in a change in control of the
Company.
  DESCRIPTION
OF SECURITIES
  General
  Our
authorized capital stock consists of 100,000,000 shares of common stock, par
value $0.001, and 1,000,000 shares of preferred stock, par value $0.001 (none of
which are issued and outstanding).
  Common
Stock
  The
shares of our common stock presently outstanding, and any shares of our common
stock issues upon exercise of stock options and/or warrants, will be fully paid
and non-assessable. Each holder of common stock is entitled to one vote for each
share owned on all matters voted upon by shareholders, and a majority vote is
required for all actions to be taken by shareholders. In the event we liquidate,
dissolve or wind-up our operations, the holders of the common stock are entitled
to share equally and ratably in our assets, if any, remaining after the payment
of all our debts and liabilities and the liquidation preference of any shares of
preferred stock that may then be outstanding. The common stock has no preemptive
rights, no cumulative voting rights, and no redemption, sinking fund, or
conversion provisions. Since the holders of common stock do not have cumulative
voting rights, holders of more than 50% of the outstanding shares can elect all
of our Directors, and the holders of the remaining shares by themselves cannot
elect any Directors. Holders of common stock are entitled to receive dividends,
if and when declared by the Board of Directors, out of funds legally available
for such purpose, subject to the dividend and liquidation rights of any
preferred stock that may then be outstanding.
  Voting
Rights
 
 Each
holder of Common Stock is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders.
 
 Dividends
 
 Subject
to preferences that may be applicable to any then-outstanding shares of
Preferred Stock, if any, and any other restrictions, holders of Common Stock are
entitled to receive ratably those dividends, if any, as may be declared from
time to time by the Company’s board of directors out of legally available funds.
The Company and its predecessors have not declared any dividends in the past.
Further, the Company does not presently contemplate that there will be any
future payment of any dividends on Common Stock.
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  On
February 13, 2007, we entered into a consulting agreement with a corporate
technology consulting company, E-Info Solutions, LLC, which entity is controlled
by our Chief Financial Officer, Christopher Scott. The consultant shall review,
comment, and implement as requested by us on any information technology rollout.
Under the terms of the agreement consultant received 12,500 restricted shares of
our common stock at the signing of the agreement and 37,500 shares after
effectiveness of the agreement in equal parts on June 1, 2007, September 1,
2007, and December 1, 2007.
  On March
16, 2007, we obtained a 10% annual interest line of credit in the amount of
$1,500,000 from our Chairman, Chief Executive Officer and majority stockholder,
Arnold Klann, to provide additional liquidity to us as needed. Under the terms
of the note, we are to repay any principal balance and interest within 30 days
of receiving qualified investment financing of $5,000,000 or more.As of December 31, 2007,
the Company repaid its outstanding balance on the line of credit of
approximately $631,000 which included interest of $37,800. This line of credit
was terminated with the closing of the private placement in December 2007 and
the subsequent line of credit balance repayment.
  On July
10, 2007, we and Director Chris Nichols mutually terminated our consulting
agreement dated December 21, 2006. The material terms of this agreement were
payment of 20,000 shares of our restricted common stock for Mr. Nichols to
prepare, review and comment on various presentations, press releases, or other
public relations documentation as requested by us, and provide us with capital
market support through its network of portfolio managers, hedge funds, brokers,
market- makers, institutions and other market support professionals and
organizations. Under the terms of the agreement, we had granted Mr. Nichols a
non-exclusive right to deploy our licensed technology on a to be determined
future cellulosic ethanol project. The purpose of the termination of this
agreement is for Mr. Nichols to qualify as an independent member of our Board of
Directors.
  In
February 2009, the Company obtained a line of credit in the amount of $570,000
from Arkenol Inc, its technology licensor, to provide additional liquidity to
the Company as needed. Under the terms of the note, the Company is to make
interest-only payments at the end of each calendar quarter at a rate of 6% per
annum on any outstanding principal balance. Any outstanding balance is to be
paid in full within 30 days of receiving qualified investment financing of at
least $2,000,000. As of March 25, 2009, there were no amounts
outstanding.
 -31-
 On July
13, 2007, we issued several convertible notes aggregating a total of $500,000
with eight accredited investors, including $25,000 from our Chief Financial
Officer. Under the terms of the notes, we are required to repay any principal
balance and interest, at 10% per annum within 120 days of the note. The
convertible promissory note is convertible only upon default. The holders also
received warrants to purchase common stock at $5.00 per share. The warrants vest
immediately and expire in five years. The total warrants issued pursuant to this
transaction were 200,000 on a pro-rata basis to investors. The convertible
promissory notes are only convertible into shares of our common stock in the
event of a default. The conversion price is determined based on one third of the
average of the last-trade prices of our common stock for the ten trading days
preceding the default date. On November 7, 2007, we re-paid all of our 10%
convertible promissory notes dated July 13, 2007, to all our private investors,
totaling approximately $516,000, including interest of approximately
$16,000.
  DIRECTOR
INDEPENDENCE
  The
common stock of the Company trades on the OTCBB, an exchange which currently
does not have director independence requirements. However, our internal
corporate governance guidelines provide that a majority of the Board will be
independent.  On an annual basis, each director and executive officer
will be obligated to disclose any transactions with the Company in which a
director or executive officer, or any member of his or her immediate family,
have a direct or indirect material interest.  Following completion of
these disclosures, the Board will make an annual determination as to the
independence of each director using the current standards for “independence”
that satisfy both the criteria for the Nasdaq and the American Stock
Exchange.
 
 As of
December 31, 2008, the Board determined that the following directors are
independent under these standards (i) Mr. Victor Doolan, (ii) Mr. Christopher
Nichols, and (iii) Mr. Joseph Emas.
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  a. 
Audit Fees: Aggregate fees billed for professional services rendered for the
audit of our annual financial statements and review of our financial statements
included in Form 10-Q for the years ended December 31, 2008 and 2007 were
approximately $57,000 and $63,000, respectively.
  b.
Audit-Related Fees: No fees were billed for assurance and related services
reasonably related to the performance of the audit or review of our financial
statements and not reported under “Audit Fees” above in the years ended December
31, 2008 and 2007.
  c. 
Tax Fees: Aggregate fees billed for tax services for the years ended December
31, 2008 and 2007 were approximately $8,000 and $2,562,
respectively.
  d. All
Other Fees: Aggregate fees billed for professional services other than those
described above were approximately $7,000 in the year ended December 31, 2008.
These fees were primarily for review of the Company’s registration statement and
other minor due diligence projects.
 AUDIT
COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
  The
Company’s Audit Committee has policies and procedures that require the
pre-approval by the Audit Committee of all fees paid to, and all services
performed by, the Company’s independent accounting firms. At the beginning of
each year, the Audit Committee approves the proposed services, including the
nature, type and scope of services contemplated and the related fees, to be
rendered by these firms during the year. In addition, Audit Committee
pre-approval is also required for those engagements that may arise during the
course of the year that are outside the scope of the initial services and fees
pre-approved by the Audit Committee.
  Pursuant
to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted above
were authorized and approved by the Audit Committee in compliance with the
pre-approval policies and procedures described herein.
 
 
 
 
 -32-
  
 ITEM 15. EXHIBITS
  (a) The
following documents are filed as a part of this Report.
  EXHIBITNO.
                    DESCRIPTION14.1
                    Code
      of Ethics (1)24.1
                    Power
      of Attorney (2)31.1
                    Rule
      13a-14(a)/15d-14(a) certification of Arnold Klann31.2
                    Rule
      13a-14(a)/15d-14(a) certification of Christopher Scott32.1
                    Certification
      pursuant to 18 USC, section 1350 of Arnold Klann32.2
                    Certification
      pursuant to 18 USC, section 1350 of Christopher Scott99.1
                    Audit
      Committee Charter (3)99.2
                    Compensation
      Committee Charter (3)
 
 (1)
Incorporated by reference to the Company’s Form 10-KSB, as filed with the SEC on
February 29, 2008.
 (2)
Incorporated by reference to the Company’s Form SB-2, as filed with the SEC on
December 20, 2007.
 (3)
Incorporated by reference to the Company’s Form 10-SB/A, as filed with the SEC
on February 28, 2007.
   -33-
  
  
  
 SIGNATURES
  In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  BLUEFIRE ETHANOL FUELS,
      INC.Dated:  
      March 26, 2009
                    By:
                    /s/ Arnold
      R. KlannPresident
      and Chief Executive Officer(Principal
      Executive Officer)
  By:
                      /s/ Christopher
      ScottChristopher
      ScottChief
      Financial Officer(Principal
      Financial officer and Principal Accounting Officer)
  In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
  Signature
                  
                  Title
                  
                  Date/s/
      Arnold R. Klann
                  
                  Director
      and Chairman of the Board;
                  
                  March
      26, 2009Arnold
      R. Klann
                  
                  President
      and Chief Executive Officer/s/
      Necitas Sumait
                  
                  Director,
      Secretary and Vice President
                  
                  March
      26, 2009Necitas
      Sumait/s/
      Chris Nichols
                  
                  Director
                  
                  March
      26, 2009Chris
      Nichols/s/
      Joseph I. Emas
                  
                  Director
                  
                  March
      26, 2009Joseph
      I. Emas/s/
      Victor H. Doolan
                  
                  Director
                  
                  March
      26, 2009Victor
      H. Doolan
   -34-
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
  CONSOLIDATED
FINANCIAL STATEMENTS
        
    INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTSReport
      of Independent Registered Public Accounting Firm
                  F-1Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
    2007
                  F-2Consolidated
      Statements of Operations for the years ended December 31, 2008, December
      31, 2007 and for the period from March 28, 2006 (Inception) to December
      31, 2008
                  F-3Consolidated
      Statements of Stockholders’ Equity from March 28, 2006 (inception) to
      December 31, 2008
                  F-4
      -F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, December
      31, 2007, and for the period from March 28, 2006 (Inception) to December
      31, 2008
                  F-7
      - F-8Notes
      to Consolidated Financial Statements
                  F-9
    
   Report
of Independent Registered Public Accounting Firm
 
 The
Board of Directors and Shareholders of  BlueFire Ethanol Fuels, Inc.
and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of BlueFire Ethanol Fuels,
Inc. and subsidiaries, a development-stage company, (the “Company”) as of
December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the years then ended and
for the period from March 28, 2006 (“Inception”) to December 31, 2008. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the  financial position of BlueFire Ethanol
Fuels, Inc. and subsidiaries, as of December 31, 2008 and 2007, and the results
of their operations and their cash flows for the years ended, and for the period
from Inception to  December 31, 2008, in conformity with
accounting  principles generally accepted in the United States of
America.
 
 /s/
McKennon Wilson & Morgan LLP
 
 Irvine,
California
 March 26,
2009
  
 F-1
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
BALANCE SHEETS
  December
      31, 2008
                    
                    
                    December
      31, 2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    2,999,599
                    
                    
                    $
                    13,031,939Accounts
      receivable
                    
                    
                    -
                    
                    
                    
                    49,000Department
      of Energy grant receivable
                    
                    
                    692,014
                    
                    
                    
                    -Prepaid
      expenses
                    
                    
                    89,871
                    
                    
                    
                    16,542Total
      current assets
                    
                    
                    3,781,484
                    
                    
                    
                    13,097,481Prepaid
      fees to related party
                    
                    
                    -
                    
                    
                    
                    30,000Property
      and equipment, net of accumulated
                      depreciation
      of $20,761 and $409, respectively
                    
                    
                    186,112
                    
                    
                    
                    151,007Total
      assets
                    
                    $
                    3,967,596
                    
                    
                    $
                    13,278,488LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    711,884
                    
                    
                    $
                    382,679License
      fee payable to related party
                    
                    
                    970,000
                    
                    
                    
                    -Accrued
      liabilities
                    
                    
                    173,618
                    
                    
                    
                    267,671Total
      current liabilities
                    
                    
                    1,855,502
                    
                    
                    
                    650,350Stockholders’
      equity:Preferred
      stock, no par value, 1,000,000 shares
                      authorized;
      none issued and outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $0.001 par value; 100,000,000shares
      authorized; 28,133,053 and 28,061,553 sharesissued
      and 28,100,881 and 28,061,553 outstanding,
    respectively
                    
                    
                    28,132
                    
                    
                    
                    28,061Additional
      paid-in capital
                    
                    
                    32,388,052
                    
                    
                    
                    28,431,992Treasury
      Stock at cost, 32,172 shares
                    
                    
                    (101,581
                    )
                    
                    
                    -Deficit
      accumulated during the development stage
                    
                    
                    (30,202,509
                    )
                    
                    
                    (15,831,915
                    )Total
      stockholders’ equity
                    
                    
                    2,112,094
                    
                    
                    
                    12,628,138Total
      liabilities and stockholders’ equity
                    
                    $
                    3,967,596
                    
                    
                    $
                    13,278,488
   See
accompanying notes to consolidated financial statements
 F-2
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  For
      the Twelve Months ended December 31,
                                  
                                  
                                  For
      the Twelve Months ended December 31,
                                  
                                  
                                  From
      March 28, 2006 (inception) Through December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008Revenues:Consulting
      Fees
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  49,000
                                  
                                  
                                  $
                                  49,000Department
      of  Energy Grant
                                  
                                  
                                  1,075,508
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,075,508Total
      revenues
                                  
                                  
                                  1,075,508
                                  
                                  
                                  
                                  49,000
                                  
                                  
                                  
                                  1,124,508Operating
      expenses:Project
      development, including stock based compensation of $2,078,356,
      $2,387,634  and $4,468,490, respectively
                                  
                                  
                                  10,535,278
                                  
                                  
                                  
                                  4,930,739
                                  
                                  
                                  
                                  15,932,017General
      and administrative, including stock based compensation of 1,690,921,
      $4,061,808, and $5,865,040 respectively
                                  
                                  
                                  4,136,235
                                  
                                  
                                  
                                  5,595,125
                                  
                                  
                                  
                                  10,814,557Related
      party license fee
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,000,000Total
      operating expenses
                                  
                                  
                                  15,671,513
                                  
                                  
                                  
                                  10,525,864
                                  
                                  
                                  
                                  27,746,574Operating
      loss
                                  
                                  
                                  (14,596,005
                                  )
                                  
                                  
                                  (10,476,864
                                  )
                                  
                                  
                                  (26,622,066
                                  )Other
      income and (expense):Other
      income
                                  
                                  
                                  225,411
                                  
                                  
                                  
                                  18,903
                                  
                                  
                                  
                                  247,114Financing
      related charge
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (211,660
                                  )
                                  
                                  
                                  (211,660
                                  )Amortization
      of debt discount
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (676,982
                                  )
                                  
                                  
                                  (676,982
                                  )Interest
      expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (56,097
                                  )
                                  
                                  
                                  (56,097
                                  )Related
      party interest expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (55,348
                                  )
                                  
                                  
                                  (64,448
                                  )Loss
      on extinguishment of  debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,818,370
                                  )
                                  
                                  
                                  (2,818,370
                                  )Net
      loss
                                  
                                  $
                                  (14,370,594
                                  )
                                  
                                  $
                                  (14,276,418
                                  )
                                  
                                  $
                                  (30,202,509
                                  )Basic
      and diluted loss per common share
                                  
                                  $
                                  (0.51
                                  )
                                  
                                  $
                                  (0.65
                                  )Weighted
      average common shares outstanding, basic and diluted
                                  
                                  
                                  28,064,572
                                  
                                  
                                  
                                  21,848,126
  See
accompanying notes to consolidated financial statements
  F-3
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
  Common
      Stock
                                      
                                      
                                      Additional
                                        Paid-in
                                      
                                      Deficit
                                        Accumulated
                                        During
                                        Development
                                      
                                      Stockholders'
      EquityShares
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      Stage
                                      
                                      (Deficit)Balance
      at March 28, 2006 (inception)
                                      -
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -Issuance
      of founder’s share at $.001 per share
                                      17,000,000
                                      
                                      
                                      17,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      17,000Common
      shares retained by Sucre Agricultural Corp., Shareholders
                                      4,028,264
                                      
                                      
                                      4,028
                                      
                                      
                                      
                                      685,972
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      690,000Costs
      associated  with the acquisition of Sucre Agricultural
      Corp.
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (3,550
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      (3,550
                                      )Common
      shares issued for services in November 2006  at $2.99 per share
      (Note 5)
                                      37,500
                                      
                                      
                                      38
                                      
                                      
                                      
                                      111,962
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      112,000Common
      shares issued for services in November 2006 at $3.35 per share (Note
      5)
                                      20,000
                                      
                                      
                                      20
                                      
                                      
                                      
                                      66,981
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      67,001Common
      shares issued for services in December 2006 at $3.65 per share (Note
      5)
                                      20,000
                                      
                                      
                                      20
                                      
                                      
                                      
                                      72,980
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      73,000Common
      shares issued for services in December 2006 at $3.65 per share (Note
      5)
                                      20,000
                                      
                                      
                                      20
                                      
                                      
                                      
                                      72,980
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      73,000Estimated
      value of common shares at $3.99 per share and warrants at $2.90 issuable
      for services upon vesting in February 2007 (Note 5)
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      160,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      160,000Share-based
      compensation related to options (Note 6)
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      114,811
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      114,811Share-based
      compensation related to warrants (Note 6)
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      100,254
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      100,254Net
      Loss
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,555,497
                                      )
                                      
                                      
                                      (1,555,497
                                      )Balances
      at December 31, 2006
                                      21,125,764
                                      
                                      $
                                      21,126
                                      
                                      
                                      $
                                      1,382,390
                                      
                                      
                                      $
                                      (1,555,497
                                      )
                                      
                                      $
                                      (151,981
                                      )
  See
accompanying notes to consolidated financial statements
     F-4
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
  Common
      Stock
                      
                      
                      Additional
      Paid-in
                      
                      
                      Deficit
      Accumulated During
                        Development
                      
                      
                      Stockholders’Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Stage
                      
                      
                      EquityBalances
      at December 31, 2006
                      
                      
                      21,125,764
                      
                      
                      $
                      21,126
                      
                      
                      $
                      1,382,390
                      
                      
                      $
                      (1,555,497
                      )
                      
                      $
                      (151,981
                      )Common
      shares issued for cash in January 2007, at $2.00 per share to unrelated
      individuals, including costs associated with private placement of 6,250
      shares and $12,500 cash paid
                      
                      
                      284,750
                      
                      
                      
                      285
                      
                      
                      
                      755,875
                      
                      
                      
                      -
                      
                      
                      
                      756,160Amortization
      of share based compensation related to employment agreement in January
      2007 $3.99 per share
                      
                      
                      10,000
                      
                      
                      
                      10
                      
                      
                      
                      39,890
                      
                      
                      
                      -
                      
                      
                      
                      39,900Common
      shares issued for services in February 2007 at $5.92 per
    share
                      
                      
                      37,500
                      
                      
                      
                      38
                      
                      
                      
                      138,837
                      
                      
                      
                      -
                      
                      
                      
                      138,875Adjustment
      to record remaining value of warrants at $4.70 per share issued for
      services in February 2007
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      158,118
                      
                      
                      
                      -
                      
                      
                      
                      158,118Common
      shares issued for services in March 2007 at $7.18 per
share
                      
                      
                      37,500
                      
                      
                      
                      37
                      
                      
                      
                      269,213
                      
                      
                      
                      -
                      
                      
                      
                      269,250Fair
      value of warrants at $6.11 for services vested in March
    2007
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      305,307
                      
                      
                      
                      -
                      
                      
                      
                      305,307Fair
      value of warrants at $5.40 for services vested in June
2007
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      269,839
                      
                      
                      
                      -
                      
                      
                      
                      269,839Common
      shares issued for services in June 2007 at $6.25 per share
                      
                      
                      37,500
                      
                      
                      
                      37
                      
                      
                      
                      234,338
                      
                      
                      
                      -
                      
                      
                      
                      234,375Share
      based compensation related to employment agreement in February 2007 $5.50
      per share
                      
                      
                      50,000
                      
                      
                      
                      50
                      
                      
                      
                      274,951
                      
                      
                      
                      -
                      
                      
                      
                      275,001Common
      Shares issued for services in August 2007 at $5.07 per
    share
                      
                      
                      13,000
                      
                      
                      
                      13
                      
                      
                      
                      65,901
                      
                      
                      
                      
                      
                      
                      
                      65,914Share
      based compensation related to options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,692,863
                      
                      
                      
                      -
                      
                      
                      
                      4,692,863Value
      of warrants issued in August, 2007 for debt replacement services valued at
      $4.18 per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      107,459
                      
                      
                      
                      -
                      
                      
                      
                      107,459Relative
      fair value of warrants associated with July 2007 convertible note
      agreement
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      332,255
                      
                      
                      
                      -
                      
                      
                      
                      332,255Exercise
      of stock options in July 2007 at $2.00 per share
                      
                      
                      20,000
                      
                      
                      
                      20
                      
                      
                      
                      39,980
                      
                      
                      
                      -
                      
                      
                      
                      40,000Relative
      fair value of warrants and beneficial conversion feature in connection
      with the $2,000,000 convertible note payable in August 2007
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,000,000
                      
                      
                      
                      -
                      
                      
                      
                      2,000,000Stock
      issued in lieu of Interest payments on the senior secured convertible note
      at $4.48 and $2.96  per share in October and December
      2007
                      
                      
                      15,143
                      
                      
                      
                      15
                      
                      
                      
                      55,569
                      
                      
                      
                      -
                      
                      
                      
                      55,584Conversion
      of $2,000,000 note payable in August 2007 at $2.90 per
    share
                      
                      
                      689,655
                      
                      
                      
                      689
                      
                      
                      
                      1,999,311
                      
                      
                      
                      -
                      
                      
                      
                      2,000,000Common
      shares issued for cash at $2.70 per share, December 2007, net of legal
      costs of $90,000 and placement agent cost of $1,050,000
                      
                      
                      5,740,741
                      
                      
                      
                      5,741
                      
                      
                      
                      14,354,259
                      
                      
                      
                      -
                      
                      
                      
                      14,360,000Loss
      on Extinguishment of debt in December 2007
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      955,637
                      
                      
                      
                      -
                      
                      
                      
                      955,637Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (14,276,418
                      )
                      
                      
                      (14,276,418
                      )Balances
      at December 31, 2007
                      
                      
                      28,061,553
                      
                      
                      $
                      28,061
                      
                      
                      $
                      28,431,992
                      
                      
                      $
                      (15,831,915
                      )
                      
                      $
                      12,628,138
 See
accompanying notes to consolidated financial
statements
  F-5
     BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
  Common
      Stock
                  
                  
                  Additional
                    Paid-in
                  
                  
                  Deficit
      Accumulated During
                    Development
                  
                  
                  Treasury
                  
                  
                  Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Stage
                  
                  
                  Stock
                  
                  
                  EquityBalances
      at December 31, 2007
                  
                  
                  28,061,553
                  
                  
                  $
                  28,061
                  
                  
                  $
                  28,431,992
                  
                  
                  $
                  (15,831,915
                  )
                  
                  $
                  -
                  
                  
                  $
                  12,628,138Share
      based compensation relating to options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,769,276
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,769,276Common
      shares issued for services in July 2008 at $4.10 per share
                  
                  
                  30,000
                  
                  
                  
                  30
                  
                  
                  
                  122,970
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  123,000Common
      shares issued for services in July, September, and December 2008 at $3.75,
      $2.75, and $.57 per share, respectively
                  
                  
                  41,500
                  
                  
                  
                  41
                  
                  
                  
                  63,814
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  63,855Purchase
      of treasury shares between April to September 2008 at an average of
      $3.12
                  
                  
                  (32,172
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (101,581
                  )
                  
                  
                  (101,581
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (14,370,594
                  )
                  
                  
                  -
                  
                  
                  
                  (14,370,594
                  )Balances
      at December 31, 2008
                  
                  
                  28,100,881
                  
                  
                  $
                  28,132
                  
                  
                  $
                  32,388,052
                  
                  
                  $
                  (30,202,509
                  )
                  
                  $
                  (101,581
                  )
                  
                  $
                  2,112,094






See
accompanying notes to consolidated financial statements






F-6




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS




For
      the Twelve Months ended December 31
                        
                        
                        For
      the Twelve Months ended to December 31
                        
                        
                        From
      March 28, 2006 (Inception) to December 31,2008
                        
                        
                        2007
                        
                        
                        2008Cash
      flows from operating activities:Net
      loss
                        
                        $
                        (14,370,594
                        )
                        
                        $
                        (14,276,418
                        )
                        
                        $
                        (30,202,509
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Founders
      shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,000Costs
      associated with purchase of SucreAgricultural
      Corp
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (3,550
                        )Interest
      expense on beneficial conversion featureof
      convertible notes
                        
                        
                        -
                        
                        
                        
                        676,983
                        
                        
                        
                        676,983Loss
      on extinguishment of convertible debt
                        
                        
                        -
                        
                        
                        
                        2,718,370
                        
                        
                        
                        2,718,370Common
      stock issued for interest on convertiblenotes
                        
                        
                        -
                        
                        
                        
                        55,585
                        
                        
                        
                        55,585Discount
      on sale of stock associated with privateplacement
                        
                        
                        -
                        
                        
                        
                        211,660
                        
                        
                        
                        211,660Share-based
      compensation
                        
                        
                        3,956,131
                        
                        
                        
                        6,449,441
                        
                        
                        
                        11,105,638Depreciation
                        
                        
                        20,352
                        
                        
                        
                        409
                        
                        
                        
                        20,761Changes
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        49,000
                        
                        
                        
                        (49,000
                        )
                        
                        
                        -Department
      of energy grant receivable
                        
                        
                        (692,014
                        )
                        
                        
                        -
                        
                        
                        
                        (692,014
                        )Prepaid
      fees to related party
                        
                        
                        30,000
                        
                        
                        
                        -
                        
                        
                        
                        -Prepaid
      expenses and other current assets
                        
                        
                        (73,329
                        )
                        
                        
                        (16,542
                        )
                        
                        
                        (89,872
                        )Accounts
      payable
                        
                        
                        329,205
                        
                        
                        
                        315,729
                        
                        
                        
                        711,883License
      fee payable to related party
                        
                        
                        970,000
                        
                        
                        
                        -
                        
                        
                        
                        970,000Accrued
      liabilities
                        
                        
                        (94,053
                        )
                        
                        
                        249,978
                        
                        
                        
                        173,618Accrued
      interest to related party
                        
                        
                        -
                        
                        
                        
                        (9,100
                        )
                        
                        
                        -Net
      cash used in operating activities
                        
                        
                        (9,875,302
                        )
                        
                        
                        (3,672,905
                        )
                        
                        
                        (14,326,447
                        )Cash
      flows from investing activities:Acquisition
      of property and equipment
                        
                        
                        (55,457
                        )
                        
                        
                        (151,416
                        )
                        
                        
                        (206,873
                        )




See
accompanying notes to consolidated financial statements
  F-7
   BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENT OF CASH FLOWS
   Cash
      flows from financing activities:Cash
      paid for treasury stock
                        
                        
                        (101,581
                        )
                        
                        
                        -
                        
                        
                        
                        (101,581
                        )Cash
      received in acquisition of Sucre Agricultural Corp.
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        690,000Proceeds
      from sale of stock through private placement
                        
                        
                        -
                        
                        
                        
                        544,500
                        
                        
                        
                        544,500Proceeds
      from exercise of stock options
                        
                        
                        -
                        
                        
                        
                        40,000
                        
                        
                        
                        40,000Proceeds
      from issuance of common stock
                        
                        
                        -
                        
                        
                        
                        14,360,000
                        
                        
                        
                        14,360,000Proceeds
      from convertible notes payable
                        
                        
                        -
                        
                        
                        
                        2,500,000
                        
                        
                        
                        2,500,000Repayment
      of notes payable
                        
                        
                        -
                        
                        
                        
                        (500,000
                        )
                        
                        
                        (500,000
                        )Proceeds
      from related party notes payable
                        
                        
                        -
                        
                        
                        
                        25,000
                        
                        
                        
                        116,000Repayment
      from related party notes payable
                        
                        
                        -
                        
                        
                        
                        (116,000
                        )
                        
                        
                        (116,000
                        )Net
      cash provided by financing activities
                        
                        
                        (101,581
                        )
                        
                        
                        16,853,500
                        
                        
                        
                        17,532,919Net
      increase in cash and cash equivalents
                        
                        
                        (10,032,340
                        )
                        
                        
                        13,029,179
                        
                        
                        
                        2,999,599Cash
      and cash equivalents beginning of period
                        
                        
                        13,031,939
                        
                        
                        
                        2,760
                        
                        
                        
                        -Cash
      and cash equivalents end of period
                        
                        $
                        2,999,599
                        
                        
                        $
                        13,031,939
                        
                        
                        $
                        2,999,599Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                        
                        $
                        -
                        
                        
                        $
                        56,375
                        
                        
                        $
                        56,375Income
      taxes
                        
                        $
                        2,400
                        
                        
                        $
                        800
                        
                        
                        $
                        3,200Supplemental
      schedule of non-cash investing and financing activities:Conversion
      of senior secured convertible notes payable
                        
                        $
                        -
                        
                        
                        $
                        2,000,000
                        
                        
                        $
                        2,000,000Interest
      converted to common stock
                        
                        $
                        -
                        
                        
                        $
                        55,569
                        
                        
                        $
                        55,569Fair
      value of warrants issued to placement agents
                        
                        $
                        -
                        
                        
                        $
                        725,591
                        
                        
                        $
                        725,591
   See
accompanying notes to consolidated financial statements
    F-8
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
1 - ORGANIZATION AND BUSINESS




BlueFire
Ethanol, Inc. (“BlueFire”) was incorporated in the state of Nevada on March 28,
2006 (“Inception”). BlueFire was established to deploy the commercially ready
and patented process for the conversion of cellulosic waste materials to ethanol
(“Arkenol Technology”) under a technology license agreement with Arkenol, Inc.
(“Arkenol”). BlueFire's use of the Arkenol Technology positions it as a
cellulose-to-ethanol company with demonstrated production of ethanol from urban
trash (post-sorted “MSW”), rice and wheat straws, wood waste and other
agricultural residues. The Company's goal is to develop and operate high-value
carbohydrate-based transportation fuel production facilities in North America,
and to provide professional services to such facilities worldwide. These
"biorefineries" will convert widely available, inexpensive, organic materials
such as agricultural residues, high-content biomass crops, wood residues, and
cellulose from MSW into ethanol.





BlueFire's
business will encompass development activities leading to the construction
and long-term operation of production facilities. BlueFire is currently in
the development stage of deploying project opportunities for converting
cellulose fractions of municipal solid waste and other
opportunistic feedstock into ethanol fuels. The Company entered into an
Asset Transfer and Acquisition Agreement with ARK Energy, Inc. ("ARK
Energy"). Based upon the terms of the agreement, ARK Energy transferred
certain rights, assets, work-product, intellectual property and other
know-how on 19 project opportunities, which may be used by BlueFire to
accelerate its deployment of the Arkenol technology.





On June
27, 2006, BlueFire completed a reverse acquisition of Sucre
Agricultural Corp. ("Sucre"), a Delaware corporation. At the time of
acquisition, Sucre had no operations, revenues or liabilities. The only
asset possessed by Sucre was $690,000 in cash which was included in the
acquisition. Sucre was considered a blank-check company prior to the
acquisition. In connection with the acquisition Sucre issued BlueFire
17,000,000 shares of common stock, approximately 85% of the outstanding
common stock of Sucre, for all the issued and outstanding BlueFire common
stock. The Sucre stockholders retained 4,028,264 shares of Sucre common
stock.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Managements’
Plans





The
Company is a development-stage company which has incurred losses since
inception. Management has funded operations primarily through proceeds received
in connection with the reverse merger, loans from its majority shareholder, the
private placement of the Company's common stock in January 2007, the issuance of
convertible notes with warrants in July and in August 2007 and from the sale of
the Company’s common stock in December 2007. The Company may encounter
difficulties in establishing these operations due to the time frame of
developing, constructing and ultimately operating the planned bio-refinery
projects.





As of
December 31, 2008, the Company has working capital of approximately $1,926,000.
In December 2007, the Company obtained net proceeds of approximately $14,500,000
from the issuance of its common stock.  The proceeds received are
being used in operations, and in funding plant design and development
costs.  Management has estimated that operating expenses for the next
twelve months will be approximately $2,300,000, excluding engineering costs
related to the development of bio-refinery projects. During 2009, the Company
intends to fund its operations with its current working capital, proceeds from
reimbursements under the Department of Energy contract and if needed monies from
the $570,000 related party line of credit. The Company expects the current
resources available to them will be sufficient for a period in excess of 12
months. If necessary, management has determined that general expenditures will
be reduced and additional capital will be required in the form of equity or debt
securities. There are no assurances that management will be able to raise
capital on terms acceptable to the Company
 
 Additionally,
the Company’s Lancaster plant is currently shovel ready and only requires
minimal capital to maintain until funding is obtained for the construction. The
preparation for the construction of this plant was the primary capital use in
2008.
 
 We
estimate the total cost of the bio-refinery, including contingencies to be in
the range of approximately $100 million to $120 million for this first plant.
This amount is significantly greater than our previous estimations communicated
to the public This is due in part to a combination of significant increases in
material costs on the world market from the last estimate until now, and the
complexity of our first commercial deployment. Recently, prices for materials
have been declining, and we expect, that throughout 2009, items like structural
and specialty steel will continue to decline significantly in price with other
materials of construction following suit. The cost approximations above do not
reflect any decrease in raw materials or any savings in construction cost. The
Company is currently in discussions with potential sources of financing for this
facility but no definitive agreements are in place.


F-9




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Changes
in Reporting Entity





The
acquisition of Sucre Agricultural Corp. by BlueFire Ethanol, Inc., as discussed
in Note 1, was accounted for as a reverse acquisition, whereby the assets and
liabilities of BlueFire are reported at their historical cost since the entities
are under common control immediately after the acquisition in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations." The assets and liabilities of Sucre, which were not significant,
were recorded at fair value on June 27, 2006, the date of the acquisition. No
goodwill was recorded in connection with the reverse acquisition since Sucre had
no business. The reverse acquisition resulted in a change in the reporting
entity of Sucre, for accounting and reporting purposes. Accordingly, the
financial statements herein reflect the operations of BlueFire from Inception
and Sucre from June 27, 2006, the date of acquisition, through December 31,
2006. The 4,028,264 shares retained by the stockholders of Sucre have been
recorded on the date of acquisition of June 27, 2006.


Principles
of Consolidation





The
consolidated financial statements include the accounts of BlueFire Ethanol
Fuels, Inc., and its wholly-owned subsidiary, BlueFire Ethanol, Inc. BlueFire
Ethanol Lancaster, LLC and BlueFire Mecca, LLC are wholly-owned subsidiaries of
BlueFire Ethanol, Inc. All intercompany balances and transactions have been
eliminated in consolidation.





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those
estimates.





Cash
and Cash Equivalents





For
purpose of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents.





Accounts
Receivable





Accounts
receivable are reported net of allowance for expected losses.  It
represents the amount management expects to collect from outstanding balances.
Differences between the amount due and the amount management expects to collect
are charged to operations in the year in which those differences are determined,
with an offsetting entry to a valuation allowance. As of December 31, 2008,
there have been no such charges.
  Intangible
Assets
  License
fees acquired are either expensed or recognized as intangible
assets.  The Company recognizes intangible assets when the following
criteria is met: 1) the asset is identifiable, 2) the Company has control over
the asset, 3) the cost of the asset can be measured reliably, and  4)
it is probable that economic benefits will flow to the Company.  As of
December 31, 2008, the Company purchased a license (see Note 8) from Arkenol,
Inc., a related party.  The license fee was expensed because the
Company is still in the research and development stage and cannot readily
determine the probability of future economic benefits for said
license.




F-10




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Depreciation





The
Company’s fixed assets are depreciated using the straight-line method over a
period ranging from one to five years.


Revenue
Recognition





The
Company is currently a developmental-stage company. The Company will recognize
revenues from 1) consulting services rendered to potential sub licensees for
development and construction of cellulose to ethanol projects, 2) sales of
ethanol from its production facilities when (a) persuasive evidence that an
agreement exists; (b) the products have been delivered; (c) the prices are fixed
and determinable and not subject to refund or adjustment; and (d) collection of
the amounts due is reasonably assured.





As
discussed in Note 3, the Company received a federal grant from the United States
Department of Energy, (“U.S. DOE”). The grant generally provides for payment in
connection with related development and construction costs involving
commercialization of our technologies. Revenues from the grant are recognized in
the period during which the conditions under the grant have been met and the
reimbursement is estimatable. The Company determined that the payment received
from the U.S. Department of Energy should be accounted for as
revenues.  This determination was based on the fact the Company views
the obtaining of future grants as an ongoing function of its intended
operations.  In addition, costs related to government grant revenues
are not readily identifiable, and such costs are recorded in general and
administrative expenses and project development costs and thus could not be
offset.





Project
Development





Project
development costs are either expensed or capitalized. The costs of materials and
equipment that will be acquired or constructed for project development
activities, and that have alternative future uses, both in project development,
marketing or sales, will be classified as property and equipment and depreciated
over their estimated useful lives. To date, project development costs include
the research and development expenses related to the Company's future
cellulose-to-ethanol production facilities.  During the years ended
December 31, 2008, 2007 and for the period from March 28, 2006 (Inception) to
December 31, 2008, research and development costs included in Project
Development were approximately $8,457,000, $2,543,000, and $11,463,000
respectively.


Convertible
Debt





Convertible
debt is accounted for under the guidelines established by APB Opinion No. 14
“Accounting for Convertible Debt and Debt issued with Stock Purchase
Warrants”  under the direction of Emerging Issues Task Force (“EITF”)
98-5,  Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, (“EITF 98-5”)
EITF 00-27 Application of Issue No 98-5 to Certain Convertible Instruments
(“EITF 00-27”), and EITF 05-8 Income Tax Consequences of Issuing Convertible
Debt with Beneficial Conversion Features. The Company records a beneficial
conversion feature (BCF) related to the issuance of convertible debt that have
conversion features at fixed or adjustable rates that are in-the-money when
issued and records the fair value of warrants issued with those instruments. The
BCF for the convertible instruments is recognized and measured by allocating a
portion of the proceeds to warrants and as a reduction to the carrying amount of
the convertible instrument equal to the intrinsic value of the conversion
features, both of which are credited to paid-in-capital.






F-11




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
Company calculates the fair value of warrants issued with the convertible
instruments using the Black-Scholes valuation method, using the same assumptions
used for valuing employee options for purposes of SFAS No. 123R, except that the
contractual life of the warrant is used. Under these guidelines, the Company
allocates the value of the proceeds received from a convertible debt transaction
between the conversion feature and any other detachable instruments (such as
warrants) on a relative fair value basis. The allocated fair value is recorded
as a debt discount or premium and is amortized over the expected term of the
convertible debt to interest expense. For a conversion price change of a
convertible debt issue, the additional intrinsic value of the debt conversion
feature, calculated as the number of additional shares issuable due to a
conversion price change multiplied by the previous conversion price, is recorded
as additional debt discount and amortized over the remaining life of the
debt.





The
Company accounts for modifications of its Embedded Conversion Features (“ECF’s”)
in accordance with EITF” 06-6”).  EITF 06-6 requires the modification
of a convertible debt instrument that changes the fair value of an embedded
conversion feature and the subsequent recognition of interest expense or the
associated debt instrument when the modification does not result in a debt
extinguishment pursuant to EITF 96-19.”Debtor’s Accounting for a Modification or
Exchange of Debt Instruments” (“EITF 96-16”).




Equity
Instruments Issued with Registration Rights Agreement





The
Company accounts for these penalties as contingent liabilities, applying the
accounting guidance of SFAS No. 5, “Accounting for Contingencies”. This
accounting is consistent with views established by the EITF in its consensus set
forth in EITF 05-04 and FASB Staff Positions FSP EITF 00-19-2 “Accounting for
Registration Payment Arrangements”, which was issued December 21, 2006.
Accordingly, the Company recognizes damages when it becomes probable that they
will be incurred and amounts are reasonably estimable.


In
connection with the issuance of common stock on for gross proceeds of
$15,500,000 in December 2007 and the $2,000,000 convertible note financing in
August 2007, the Company was required to file a registration statement on Form
SB-2 or Form S-3 with the Securities and Exchange Commission in order to
register the resale of the common stock under the Securities Act. The Company
filed that registration statement on December 18, 2007 and as required under the
registration rights agreement had the registration statement declared effective
by the Securities and Exchange Commission (“SEC”) on March 27, 2008 and in so
doing incurred no liquidated damages. As of December 31, 2008, the Company does
not believe that any liquidated damages are probable and thus no amounts have
been accrued in the accompanying financial statements.





Income
Taxes





The
Company accounts for income taxes in accordance with Financial Accounting
Standards Board (“FASB”) Statement No. 109 “Accounting for Income Taxes.” SFAS
No. 109 requires the Company to provide a net deferred tax asset/liability equal
to the expected future tax benefit/expense of temporary reporting differences
between book and tax accounting methods and any available operating loss or tax
credit carry forwards.






F-12




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


In
July 2006, the FASB issued Interpretation No. (“FIN”) 48, “Accounting
for Uncertainty in Income Taxes”. This Interpretation sets forth a recognition
threshold and valuation method to recognize and measure an income tax position
taken, or expected to be taken, in a tax return. The evaluation is based on a
two-step approach. The first step requires an entity to evaluate whether the tax
position would “more likely than not,” based upon its technical merits, be
sustained upon examination by the appropriate taxing authority. The second step
requires the tax position to be measured at the largest amount of tax benefit
that is greater than 50 percent likely of being realized upon ultimate
settlement. In addition, previously recognized benefits from tax positions that
no longer meet the new criteria would no longer be recognized. The application
of this Interpretation will be considered a change in accounting principle with
the cumulative effect of the change recorded to the opening balance of retained
earnings in the period of adoption. This Interpretation was effective for the
Company on January 1, 2007. Adoption of this new standard did not have a
material impact on our financial position, results of operations or cash
flows.




Fair
Value of Financial Instruments





The
financial instruments consist of cash, accounts receivable and accounts payable.
The fair value of the financial instruments approximates the carrying value at
December 31, 2008.





Risks
and Uncertainties





The
Company's operations are subject to new innovations in product design and
function. Significant technical changes can have an adverse effect on product
lives. Design and development of new products are important elements to achieve
and maintain profitability in the Company's industry segment. The Company may be
subject to federal, state and local environmental laws and regulations. The
Company does not anticipate expenditures to comply with such laws and does not
believe that regulations will have a material impact on the Company's financial
position, results of operations, or liquidity. The Company believes that its
operations comply, in all material respects, with applicable federal, state, and
local environmental laws and regulations.





Concentrations
of Credit Risk





The
Company maintains its cash accounts in a commercial bank and in an institutional
money-market fund account. The total cash balances held in a commercial bank are
secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At
times, the Company has cash deposits in excess of federally insured limits. In
addition, the Institutional Funds Account is insured through the Securities
Investor Protection Corporation (“SIPC”) up to $250,000. At times, the Company
has cash deposits in excess of federally and institutional insured
limits.




As of
December 31, 2008, the Department of Energy made up 100% of Grant Revenue and
Department of Energy grant receivables.  As of December 31, 2007, one
customer made up 100% of all revenues and accounts
receivables.  Management believes the loss of these organizations
would have a material impact on the Company’s financial position, results of
operations, and cash flows.




Loss
per Common Share





The
Company presents basic loss per share (“EPS”) and diluted EPS on the face of the
consolidated statement of operations. Basic loss per share is computed as net
loss divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants, and other convertible
securities. For both the years ended December 31, 2008 and 2007, the Company had
approximately 3,287,159 options and 7,386,694 warrants, to purchase shares of
common stock that were excluded from the calculation of diluted loss per share
as their effects would have been anti-dilutive.




F-13


BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Debt
Issuance Costs





Debt
issuance costs represent costs incurred related to the Company’s senior secured
convertible note payable. These costs were amortized over the term of the note
using the effective interest method and expensed upon conversion of senior
secured convertible note (Note 5).





Share-Based
Payments





The
Company accounts for stock options issued to employees and consultants under
SFAS No. 123(R), “Share-Based Payment”. Under SFAS 123(R), share-based
compensation cost to employees is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
employee's requisite vesting period.


The
Company measures compensation expense for its non-employee stock-based
compensation under EITF No. 96-18 “Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services” (“EITF 96-18”). The fair value of the option issued or
committed to be issued is used to measure the transaction, as this is more
reliable than the fair value of the services received. The fair value is
measured at the value of the Company's common stock on the date that the
commitment for performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the equity instrument
is charged directly to stock-based compensation expense and credited to
additional paid-in capital.





New
Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. However, in February 2008 the
FASB Staff Position No. 157-2 was issued, which delays the effective date of the
requirements of SFAS 157 as to non-financial assets and non-financial
liabilities except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The effective date has been
deferred to fiscal years beginning after November 15, 2008 for these
non-financial assets and liabilities. Our adoption of SFAS 157 on January 1,
2008 did not have a material impact on our consolidated financial position,
results of operations or cash flows during the year ended December 31, 2008. The
Company does not expect the deferred portion of the adoption of SFAS 157 to have
a material impact on the financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, which permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 also includes an amendment to SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which applies to all entities with
available-for-sale and trading securities. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007.  The adoption of SFAS No. 159 did not have a material impact on
the Company's results of operations or financial position.
  F-14
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


In
December 2007, the FASB issued SFAS No. 141(revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R will significantly change the
accounting for business combinations in a number of areas, including the
treatment of contingent consideration, contingencies, acquisition costs,
in-process research and development and restructuring costs. SFAS No. 141R
includes an amendment to SFAS No. 109, "Accounting for Income Taxes." This
statement is effective for fiscal years beginning after December 15, 2008. The
Company is assessing the impact of SFAS No. 141R and has not determined whether
it will have a material impact on the Company's results of operations or
financial position.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 5” (SFAS No.
160).   SFAS No. 160 amends ARB No. 51 to establish accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary.  It also amends certain of ARB
No. 51’s consolidation procedures for consistency with the requirements of SFAS
No. 141(R).  This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially
adopted.  The Company is in the process of evaluating the impact of
SFAS No. 160 on its financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 provides a framework for selecting
accounting principles for financial statements that are presented in conformity
with GAAP. The Company does not expect that the provisions of SFAS 162 will
result in a change in accounting practice for the Company.


NOTE
3 – DEVELOPMENT CONTRACTS





Department
of Energy Award 1





In
February 2007, the Company was awarded a grant for up to $40 million from the
U.S. Department of Energy's (“DOE”) cellulosic ethanol grant program to develop
a solid waste bio-refinery project at a landfill in Southern
California.





During
October 2007, the Company finalized Award 1 for a total approved budget of just
under $10,000,000 with the DOE. This award is a 60%/40% cost share, whereby 40%
of approve costs may be reimbursed by the DOE pursuant to the total $40 million
award announced in February 2007. For the years ended December 31, 2008 and
2007, the Company recorded grant revenue of approximately $1,076,000 and zero,
respectively.  As of December 31, 2008 and 2007 the Company recorded a
receivable of approximately $692,000 and zero, respectively related to the DOE
contract.


California
Energy Commission





In March
2007, the Company was selected to receive an award of approximately $1,000,000
in funding from the California Energy Commission (“CEC”). After careful review
and consideration of the CEC Grant Agreement, in January 2008, the Company
determined it would be to the best interest of its shareholders to decline the
acceptance of the grant. The terms under which the Company would have received
the grant came at a premium and clouded otherwise clear ownership structures of
the Company’s technology and its commercial projects.  When compared
to other available funding sources this presented difficulties to the Company’s
ongoing fund raising activities with private parties. Thus, the Company believed
it would not be the best interest of their shareholders to execute the
agreement.











F-15





BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
4 – PROPERTY AND EQUIPMENT




Property
and Equipment consist of the following:




December
      31,
                            2008
                          
                          
                          December
      31,
                            2007Land
                          
                          $
                          109,108
                          
                          
                          $
                          109,108Office
      equipment
                          
                          
                          55,089
                          
                          
                          
                          35,629Furniture
      and fixtures
                          
                          
                          42,676
                          
                          
                          
                          6,676206,873
                          
                          
                          
                          151,413Accumulated
      depreciation
                          
                          
                          (20,761
                          )
                          
                          
                          (406
                          )$
                          186,112
                          
                          
                          $
                          151,007




Depreciation
expense for the years ended December 31, 2008 and 2007 and for the period from
inception to December 31, 2008 was $20,352, $409, and $20,761,
respectively.




Purchase
of Lancaster Land





On
November 9, 2007, the Company purchased approximately 95 acres of land in
Lancaster, California for approximately $109,000, including certain site
surveying and other acquisition costs. The Company intends to use the land for
the construction of their first pilot refinery plant.





NOTE
5 – NOTES PAYABLE





Convertible
Notes Payable





On July
13, 2007, the Company issued several convertible notes aggregating a total of
$500,000 with eight accredited investors including $25,000 from the Company’s
Chief Financial Officer.  Under the terms of the notes, the Company
was to repay any principal balance and interest, at 10% per annum within 120
days of the note. The holders also received warrants to purchase common
stock at $5.00 per share. The warrants vested immediately and expire in five
years. The total warrants issued pursuant to this transaction were 200,000 on a
pro-rata basis to investors. The convertible promissory notes were only
convertible into shares of the Company’s common stock in the event of a default.
The conversion price was determined based on one third of the average of the
last-trade prices of the Company’s common stock for the ten trading days
preceding the default date.
 
 The fair
value of the warrants was $990,367 as determined by the Black-Scholes option
pricing model using the following weighted-average assumptions: volatility of
113%, risk-free interest rate of 4.94%, dividend yield of 0%, and a term of five
years.
 
 The
proceeds were allocated between the convertible notes payable and the warrants
issued to the convertible  note holders based on their relative fair
values which resulted in $167,744 allocated to the convertible notes and
$332,256 allocated to the warrants. The amount allocated to the warrants
resulted in a discount to the convertible notes.  The Company
amortized the discount over the term of the convertible notes. During the year
ended December 31, 2007, the Company amortized $332,256 of the discount to
interest expense.




F-16




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


In
accordance with EITF 98-05 “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”,
the Company calculated the value of the beneficial conversion feature to be
approximately $332,000 of which $167,744 was allocated to the convertible notes.
However, since the convertible notes were convertible upon a contingent event,
the value was recorded when such event was triggered.
 
 On
November 7, 2007, the Company re-paid the 10% convertible promissory notes
totaling approximately $516,000 including interest of approximately
$16,000.  This included approximately $800 of accrued interest to the
Company’s Chief Financial Officer.
 
 Senior
Secured Convertible Notes Payable
 
 On August
21, 2007, the Company issued senior secured convertible notes aggregating a
total of $2,000,000 with two institutional accredited
investors.  Under the terms of the notes, the Company was to repay any
principal balance and interest, at 8% per annum, due August 21, 2009. On a
quarterly basis, the Company has the option to pay interest due in cash or in
stock.  The senior secured convertible notes were secured by
substantially all of the Company’s assets. The total warrants issued pursuant to
this transaction were 1,000,000 on a pro-rata basis to investors. These include
class A warrants to purchase 500,000 common stock at $5.48 per share and class B
warrants to purchase an additional 500,000 shares of common stock at $6.32 per
share. The warrants vested immediately and expire in three years. The senior
secured convertible note holders had the option to convert the note into shares
of the Company’s common stock at $4.21 per share at any time prior to maturity.
If, before maturity, the Company consummated a Financing of at least $10,000,000
then the principal and accrued unpaid interest of the senior secured convertible
notes would be automatically converted into shares of the Company’s common stock
at $4.21 per share.


The fair
value of the warrants was approximately $3,500,000 as determined by the
Black-Scholes option pricing model using the following weighted-average
assumptions: volatility of 118%, risk-free interest rate of 4.05%, dividend
yield of 0% and a term of three years.  The proceeds were allocated
between the senior secured convertible notes and the warrants issued to the
convertible note holders based on their relative fair values and resulted in
$728,571 being allocated to the senior secured convertible promissory notes and
$1,279,429 allocated to the warrants. The resulting discount was to be amortized
over the life of the notes.





In
accordance with EITF 98-05 “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, as
amended by EITF 00-27, the Company calculated the value of the beneficial
conversion feature to be approximately $1,679,000 of which approximately
$728,000 was allocated to the beneficial conversion feature resulting in 100%
discount to the convertible promissory notes. During the year ended December 31,
2007, the Company amortized approximately $312,000 of the discount related to
the warrants and beneficial conversion feature to interest expense and
$1,688,000 to loss on extinguishment, see below for discussion.





In
addition, the Company entered into a registration rights agreement with the
holders of the senior secured convertible notes agreement whereby the Company
was required to file an initial registration statement with the Securities and
Exchange Commission in order to register the resale of the maximum amount of
common stock underlying the secured convertible notes within 120 days of the
Exchange Agreement (December 19, 2007).  The registration statement
was filed with the SEC on December 19, 2007. The registration statement was then
declared effective on March 27, 2008. The Company incurred no liquidated
damages.






F-17


BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Modification
of Conversion Price and Warrant Exercise Price on Senior Secured Convertible
Note Payable





On
December 3, 2007, the Company modified the conversion price into common stock on
its outstanding senior secured convertible notes from $4.21 to $2.90 per share.
The Company also modified the exercise price of the Class A and B warrants
issued with convertible notes from $5.48 and $6.32, respectively, to $2.90 per
share.





In
accordance with EITF 96-19 and EITF 06-6, the Company recorded an extinguishment
loss of approximately $2,818,000 for the modification of the conversion price as
the fair value of the conversion price immediately before and after the
modification was greater than 10% of the carrying amount of the original debt
instrument immediately prior to the modification.  The loss on
extinguishment was determined based on the difference between the fair value of
the new instruments issued and the previous carrying value of the convertible
debt at the date of extinguishment. Upon modification, the carrying amount of
the senior secured convertible notes payable of $2,000,000 and accrued interest
of approximately $33,000 was converted into a total of 700,922 shares of common
stock at $2.90 and $2.96 per share, respectively.  Prior to the
modification, during the quarter ended September 30, 3007, the Company satisfied
its interest obligation of approximately $20,000 by issuing 3,876 shares of the
Company’s common stock at $4.48 per share in lieu of cash.





The
extinguishment loss and non-cash interest expense for the warrants was
determined using the Black-Scholes option pricing model using the following
assumptions: volatility of 122.9%, expected life of 4.72 years, risk free
interest rate of 3.28%, market price per share of $3.26, and no
dividends.





Debt
Issuance Costs





Debt
issuance fees and expenses of approximately $207,000 have been incurred in
connection with the senior secured convertible note. These fees consisted of a
cash payment of $100,000 and the issuance of warrants to purchase 23,731 shares
of common stock. The warrants have an exercise price of $5.45, vested
immediately and expire in five years. The warrants were valued at approximately
$107,000 as determined by the Black-Scholes option pricing model using the
following weighted-average assumptions: volatility of 118%, risk-free interest
rate of 4.05%, dividend yield of 0% and a term of five years. These costs were
amortized over the term of the note using the effective interest method and
expensed upon conversion of senior secured convertible note.  During
the year ended December 31, 2007, the Company amortized approximately $32,000 of
the debt issuance costs to interest expense and approximately $175,000 to loss
on extinguishment, see above for further discussion.


NOTE
6 - COMMITMENTS AND CONTINGENCIES





Employment
Agreements





On June
27, 2006, the Company entered into employment agreements with three key
employees. The employment agreements are for a period of three years, with
prescribed percentage increases beginning in 2007 and can be cancelled upon a
written notice by either employee or employer (if certain employee acts of
misconduct are committed). The total aggregate annual amount due under the
employment agreements is approximately $586,000 per year.




On March
31, 2008, the Board of Directors of the Company replaced our Chief Financial
Officer’s previously existing at-will Employment Agreement with a new employment
agreement, effective February 1, 2008, and terminating on May 31, 2009, unless
extended for additional periods by mutual agreement of both parties. The new
agreement contained the following material terms: (i) initial annual salary of
$170,000, paid monthly; and (ii) standard employee benefits; (iii) limited
termination provisions; (iv) rights to Inventions provisions; and (v)
confidentiality and non-compete provisions upon termination of
employment.






F-18




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Board
of Director Arrangements





During
2008, the Company renewed all of its existing Directors appointments, issued
6,000 shares to each and paid $5,000 to the three outside
members.  Pursuant to the Board of Director agreements, the Company’s
“in-house” board members (CEO and Vice-President) waived their annual cash
compensation of $5,000. The value of the common stock granted was determined to
be approximately $123,000 based on the fair market value of the Company’s common
stock of $4.10 on the date of the grant.  During the years ended
December 31, 2008, the Company expensed approximately $138,000, related to
the agreements.
 
 On July
7, 2007, the Company entered into an agreement with two Directors to serve on
the Company’s Board.  Under the terms of the agreement the individuals
received annual compensation in the amount of $5,000 and a one-time grant of
5,000 shares of the Company’s common stock.  In addition, the Company
renewed three of its existing Directors appointment, issued 1,000 shares to each
and paid $5,000 to the one outside member. The value of the common stock granted
was determined to be approximately $66,000 based on the fair market value of the
Company’s common stock of $5.07 on the date of the grant.  During the
year ended December 31, 2007, the Company expensed approximately $81,000 related
to the agreements.


Investor
Relations Agreements





On
November 9, 2006, the Company entered into an agreement with a consultant. Under
the terms of the agreement, the Company is to receive investor relations and
support services in exchange for a monthly fee of $7,500, 150,000 shares of
common stock, warrants to purchase 200,000 shares of common stock at $5.00 per
share, expiring in five years, and the reimbursement of certain travel expenses.
The common stock and warrants vested in equal amounts on November 9, 2006,
February 1, 2007, April 1, 2007 and June 1, 2007. The Company accounted for the
agreement under the provisions of EITF 96-18.





At
December 31, 2006, the consultant was vested in 37,500 shares of common
stock.  The shares were valued at $112,000 based upon the closing
market price of the Company’s common stock on the vesting date. The warrants
were valued on the vesting date at $100,254 based on the Black-Scholes option
pricing model using the following assumptions: volatility of 88%, expected life
of five years, risk free interest rate of 4.75% and no dividends. The value of
the common stock and warrants was recorded in general and administrative expense
on the accompanying statement of operations.




The
Company revalued the shares on February 1, 2007, vesting date, and recorded an
additional adjustment of $138,875. On February 1, 2007 the warrants were
revalued at $4.70 per share based on the Black-Scholes option pricing method
using the following assumptions: volatility of 102%, expected life of five
years, risk free interest rate of 4.96% and no dividends. The Company recorded
an additional expense of $158,118 related to these vested warrants.





On March
31, 2007, the fair value of the vested common stock issuable under the contract
based on the closing market price of the Company’s common stock was $7.18 per
share and thus expensed $269,250. As of March 31, 2007, the Company estimated
the fair value of the vested warrants issuable under the contract to be $6.11
per share. The warrants were valued on March 31, 2007 based on the Black-Scholes
option pricing model using the following assumptions: volatility of 114%,
expected life of five years, risk free interest rate of 4.58% and no dividends.
The Company recorded an additional estimated expense of approximately $305,000
related to the remaining unvested warrants.









F-19




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


The
Company revalued the shares on June 1, 2007, vesting date, and recorded an
additional adjustment of $234,375. On of June 1, 2007 the warrants were revalued
at $5.40 per share based on the Black-Scholes option pricing method using the
following assumptions: volatility of 129%, expected life of four and a half
years, risk free interest rate of 4.97% and no dividends. The Company recorded
an additional expense of $269,839 related to these vested warrants during the
three months ended June 30, 2007.


During
the year ended December 31, 2007, total compensation expense related to the
common stock and warrants was $642,500 and $733,264, respectively.





Professional
Services Agreement




As of
December 31, 2008, the Company had contracts with several engineering firms.
During the period from inception to December 31, 2008, the Company paid
approximately $4,900,000 to various engineering firms.





NOTE
7 -STOCKHOLDERS' EQUITY





Amended
and Restated 2006 Incentive and Nonstatutory Stock Option Plan





On
December 14, 2006, the Company established the 2006 incentive and nonstatutory
stock option plan (the “Plan”). The Plan is intended to further the growth and
financial success of the Company by providing additional incentives to selected
employees, directors, and consultants. Stock options granted under the Plan may
be either "Incentive Stock Options" or "Nonstatutory Options" at the discretion
of the Board of Directors. The total number of shares of Stock which may be
purchased through exercise of Options granted under this Plan shall not exceed
ten million (10,000,000) shares, they become exercisable over a period of no
longer than five (5) years and no less than 20% of the shares covered thereby
shall become exercisable annually.





On
October 16, 2007, the Board reviewed the Plan.  As such, it determined
that the Plan was to be used as a comprehensive equity incentive program for
which the Board serves as the Plan administrator; and therefore added the
ability to grant restricted stock awards under the Plan.





Under the
amended and restated Plan, an eligible person in the Company’s service may
acquire a proprietary interest in the Company in the form of shares or an option
to purchase shares of the Company’s common stock. The amendment includes certain
previously granted restricted stock awards as having been issued under the
amended and restated Plan. As of December 31, 2008, 3,307,159
options and 204,500 shares have been issued under the plan. As of December 31,
2008,6,488,341shares are
still issuable under the Plan.





Stock
Options





On
December 14, 2006, the Company granted options to purchase 1,990,000 shares of
common stock to various employees and consultants having a $2.00 exercise price.
The value of the options granted was determined to be approximately $4,900,000
based on the Black-Scholes option pricing model using the following assumptions:
volatility of 99%, expected life of five (5) years, risk free interest rate of
4.73%, market price per share of $3.05, and no dividends. The Company expensed
the value of the options over the vesting period of two years for the employees.
For non-employees the Company revalued the fair market value of the options at
each reporting period under the provisions of EITF 96-18.


F-20


BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




On
December 20, 2007, the Company granted options to purchase 1,038,750 shares of
the Company’s common stock to various employees and consultants having an
exercise price of $3.20 per share. In addition, on the same date, the Company
granted its President and Chief Executive Officer 250,000 and 28,409 options to
purchase shares of the Company’s common stock having an exercise price of $3.20
and $3.52, respectively.  The value of the options granted was
determined to be approximately $3,482,000 based on the Black-Scholes option
pricing model using the following assumptions: volatility of 122.9%,
expected life of five (5) years, risk free interest rate of 3.09%, market price
per share of $3.20, and no dividends. Of the total 1,317,159 options granted on
December 20, 2007, 739,659 vested immediately and 27,500 issued to consultants
vested monthly over a one year period, and 550,000 of the options vested upon
two contingent future events.  Management’s belief at the time of the
grant was that the events were probable to occur and were within their control,
and thus accounted for the remaining vesting under SFAS 123(R) by
straight-lining the vesting through the expected date on which the future events
were to occur.  At the time, management believed that future date was
June 30, 2008. This determination was based on the fact that the Company
appeared to be on track to receive the permits and the related funding was
available. In June 2008, the Company determined that the June 30, 2008 estimate
would not be met due to delays in receiving the necessary permits and thus
modified the date to September 30, 2008. In September 2008, the Company
determined that the September 30, 2008 deadline would not be met due to the
difficulty in obtaining financing due to the pending collapse of the capital
markets. At that point the remaining unamortized portion was immaterial and
thus, the Company expensed the remaining amounts. Although the options were
expensed according to SFAS 123(R), the recipients are still not fully vested as
the triggering events have not yet occurred.
 
 The
Company accounts for the stock options to consultants under the provisions of
EITF 96-18. In accordance with EITF 96-18, as of December 31, 2008, the options
awarded to consultants under the 2006 and 2007 Stock Option Grant were re-valued
using the Black-Scholes option pricing model with the following assumptions:
volatility of 150%, risk free interest rate of 1.55%, no
dividends, expected life for the 2006 stock option award of three years;
and expected life for the 2007 stock option award of four
years.
 
 In
connection with the Company’s 2007 and 2006 stock option awards, during the
years ended December 31, 2008, and 2007 and for the period from March 28, 2006
(Inception) to December 31, 2008, the Company amortized stock based
compensation, including consultants, of approximately $ 1,691,000, $2,452,000
and $4,255,000 to general and administrative expenses and $2,078,000, $2,287,000
and $4,368,000 to project development expenses, respectively. Related to these
the 2007 and 2006 options awards, the Company will not record any future
employee compensation expense.
 
 A summary
of the status of the stock option grants under the Plan as of the years ended
December 31, 2007 and 2008 and changes during this period is presented as
follows:


F-21
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
   Options
                                                                                                        
                                                                                                        
                                                                                                        Weighted
      Average Exercise Price
                                                                                                        
                                                                                                        Weighted
      Average Remaining Contractual Term (Years)Outstanding
      January 1, 2007
                                                                                                        
                                                                                                        
                                                                                                        1,990,000
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        2.00Granted
      during the year
                                                                                                        
                                                                                                        
                                                                                                        1,317,159
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        3.21Exercised
      during the year
                                                                                                        
                                                                                                        
                                                                                                        (20,000
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        2.00Outstanding
      December 31, 2007
                                                                                                        
                                                                                                        
                                                                                                        3,287,159
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        2.48Granted
      during the year
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Exercised
      during the year
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -Outstanding
      December 31, 2008
                                                                                                        
                                                                                                        
                                                                                                        3,287,159
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        2.48
                                                                                                        
                                                                                                        3.40Options
      exercisable at December 31, 2008
                                                                                                        
                                                                                                        
                                                                                                        2,737,159
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        2.34
                                                                                                        
                                                                                                        3.28
  The total
amount of cash received from the exercise of stock options and the total
intrinsic value of options exercised during the year ended December 31, 2007,
was $40,000 and $35,000, respectively.  There were no amounts received
for the exercise of stock options in 2008. As of December 31, 2008, the average
intrinsic value of the options outstanding is zero as the exercise prices were
in excess of the closing price of the Company’s common stock as of December 31,
2008.


Private
Offerings





On
January 5, 2007, the Company completed a private offering of its stock, and
entered into subscription agreements with four accredited
investors.  In this offering, the Company sold an aggregate of 278,500
shares of the Company’s common stock at a price of $2.00 per share for total
proceeds of $557,000.  The shares of common stock were offered and
sold to the investors in private placement transactions made in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities Act
of 1933. In addition, the Company paid $12,500 in cash and issued 6,250 shares
of their common stock as a finder’s fee.





On
December 3, 2007 and December 14, 2007, the Company issued an aggregate of
5,740,741 shares of common stock at $2.70 per share and issued warrants to
purchase 5,740,741 shares of common stock for gross proceeds of
$15,500,000.  The warrants have an exercise price of $2.90 per share
and expire five years from the date of issuance.





The value of the warrants was
determined to be approximately $15,968,455 based on the Black-Scholes option
pricing model using the following assumptions: volatility of 122.9%, expected
life of five (5) years, risk free interest rate of 3.28%, market price per share
of $3.26, and no dividends.  The relative fair value of the warrants
did not have an impact on the financial statements as they were issued in
connection with a capital raise and recorded as additional paid-in
capital.





The
warrants are subject to “full-ratchet” anti-dilution protection in the event the
Company (other than excluded issuances, as defined) issues  any
additional shares of stock, stock options, warrants or any securities
exchangeable into common stock at a price of less than $2.90 per share. If the
Company issues securities for less $2.90 per share then the exercise price for
the warrants shall be adjusted to equal to the lower price.






F-22




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


In
connection with the capital raise, the Company paid $1,050,000 to placement
agents, $90,000 in legal fees and issued warrants for the purchase of 222,222
shares of common stock. The warrants were valued at $618,133 based on the
Black-Scholes assumptions above as recorded as a cost of the capital raised by
the Company.





Issuance
of Common Stock related to Employment Agreements




In
January 2007, the Company issued 10,000 shares of common stock to an employee in
connection with an employment agreement.  The shares were valued on
the initial date of employment at $40,000 based on the closing market of the
Company’s common stock on that date.





On
February 12, 2007, the Company entered into an employment agreement with a key
employee, and simultaneously entered into a consulting agreement with an entity
controlled by such employee; both agreements were effective March 16, 2007.
Under the terms of the consulting agreement, the consulting entity received
50,000 restricted shares of the Company’s common stock. The common stock was
valued at approximately $275,000 based on the closing market price of the
Company’s common stock on the date of the agreement. The shares vest in equal
quarterly installments on February 12, 2007, June 1, December 1, and December 1,
2007. The Company amortized the entire fair value of the common stock of
$275,000 over the vesting period during the year ended December 31,
2007.  No additional issuances were made in 2008.





Private
Placement Agreements




During
the year ended December 31, 2007, the Company entered into various placement
agent agreements, whereby payments are only ultimately due if capital is raised.
As of December 31, 2008, no other amounts are due under the
agreements.





Warrants
Outstanding




A summary
of the status of the warrants for the years ended December 31, 2007 and 2008 and
changes during the periods is presented as follows:
  Warrants
                  
                  
                  Weighted
      Average
                    Exercise
      Price
                  
                  
                  Weighted
      Average Remaining
                    Contractual
      Term
                    (Years)Outstanding
      January 1, 2007 (with 50,000 warrants exercisable)
                  
                  
                  200,000
                  
                  
                  $
                  5.00Issued
      during the year
                  
                  
                  7,186,694
                  
                  
                  
                  2.96Outstanding
      and exercisable at December 31, 2007
                  
                  
                  7,386,694
                  
                  
                  $
                  3.02
                  
                  
                  
                  4.60Issued
      during the year
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      and exercisable at December 31, 2008
                  
                  
                  7,386,694
                  
                  
                  $
                  3.02
                  
                  
                  
                  3.60




F-23


BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






NOTE
8 - RELATED PARTY TRANSACTIONS





Technology
Agreement with Arkenol, Inc.





On March
1, 2006, the Company entered into a Technology License agreement with Arkenol,
Inc. (“Arkenol”), which the Company’s majority shareholder and other family
members hold an interest in. Arkenol has its own management and board separate
and apart from the Company. According to the terms of the agreement, the Company
was granted an exclusive, non-transferable, North American license to use and to
sub-license the Arkenol technology. The Arkenol Technology, converts
cellulose and waste materials into Ethanol and other high value chemicals. As
consideration for the grant of the license, the Company shall make a one time
payment of $1,000,000 at first project construction funding and for each plant
make the following payments: (1) royalty payment of 4% of the gross sales price
for sales by the Company or its sub licensees of all products produced from the
use of the Arkenol Technology (2) and a one time license fee of $40.00 per 1,000
gallons of production capacity per plant. According to the terms of the
agreement, the Company made a one-time exclusivity fee prepayment of $30,000
during the period ended December 31, 2006. The agreement term is for 30 years
from the effective date.





During
2008, due to the receipt of proceeds from the Department of Energy, the Board of
Directors determined that the Company had triggered its obligation to incur the
full $1,000,000 Arkenol License fee. The Board of Directors determined that the
receipt of these proceeds constituted “First Project Construction Funding” as
established under the Arkenol technology agreement. As such, the statement of
operation reflects the one-time license fee of $1,000,000 and the unpaid balance
of $970,000 was included in license fee payable to related party on the
accompanying consolidated balance sheet as of December 31, 2008.  The
prepaid fee to related party of $30,000 was eliminated as of December 31,
2008.  The Company paid the $970,000 to the related party subsequent
to year end.


Asset
Transfer Agreement with Ark Entergy, Inc.





On March
1, 2006, the Company entered into an Asset Transfer and Acquisition Agreement
with ARK Energy, Inc. (“ARK Energy”), which is owned (50%) by the Company’s CEO.
ARK Energy has its own management and board separate and apart from the Company.
Based upon the terms of the agreement, ARK Energy transferred certain rights,
assets, work-product, intellectual property and other know-how on project
opportunities that may be used to deploy the Arkenol technology (as described in
the above paragraph). In consideration, the Company has agreed to pay a
performance bonus of up to $16,000,000 when certain milestones are met. These
milestones include transferee’s project implementation which would be
demonstrated by start of the construction of a facility or completion of
financial closing whichever is earlier. The payment is based on ARK Energy’s
cost to acquire and develop 19 sites which are currently at different stages of
development. As of December 31, 2008, the Company had not incurred any
liabilities related to the agreement.





Related
Party Line of Credit





In March
2007, the Company obtained a line of credit in the amount of $1,500,000 from its
Chairman/Chief Executive Officer and majority shareholder to provide additional
liquidity to the Company as needed. Under the terms of the note, the Company is
to repay any principal balance and interest, at 10% per annum, within 30 days of
receiving qualified investment financing of $5,000,000 or more. As of December
31, 2007, the Company repaid its outstanding balance on line of credit of
approximately $631,000 which included interest of $37,800. This line of credit
was terminated with the closing of the private placement in December 2007 and
the subsequent line of credit balance repayment.




Purchase
of Property and Equipment





During
the year ended December 31, 2007, the Company purchased various office furniture
and equipment from ARK Energy costing approximately $39,000 (see Note
3).  In 2008, the Company did not purchase any items from ARK
Energy.





Notes
Payable





As
mentioned in Note 3, on July 13, 2007, the Company issued several convertible
notes aggregating a total of $500,000 with eight accredited investors including
$25,000 invested by the Company’s Chief Financial Officer.  In 2008,
no additional notes were issued.






F-24




BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARIES
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
9 – INCOME TAXES





Income
tax reporting primarily relates to the business of the parent company Blue Fire
Ethanol Fuels, Inc. which experienced a change in ownership on June 27, 2006. A
change in ownership requires management to compute the annual limitation under
Section 382 of the Internal Revenue Code. The amount of benefits the Company may
receive from the operating loss carry forwards for income tax purposes is
further dependent, in part, upon the tax laws in effect, the future earnings of
the Company, and other future events, the effects of which cannot be
determined.





The
Company's deferred tax assets consist solely of net operating loss carry
forwards of approximately $6,615,000 and $3,347,000 at December 31, 2008 and
2007, respectively.  For federal tax purposes these carry forwards
expire in twenty years beginning in 2026 and for the State of California
purposes they expire in five years beginning in 2011. A full valuation allowance
has been placed on 100% of the Company's deferred tax assets as it cannot be
determined if the assets will be ultimately used.  During the years
ended December 31, 2008 and 2007, and for the period from March 28, 2006
(Inception) to December 31, 2008, the valuation increased by approximately
$3,268,000, $3,002,000, and $6,615,000, respectively.





In
addition, the Company is not current in their federal and state income tax
filings due to previous delinquencies by Sucre prior to the reverse acquisition.
The Company has assessed and determined that the effect of non filing is not
expected to be significant, as Sucre has not had active operations for a
significant period of time.
 
 We filed
U.S. Federal tax returns and U.S. State tax returns. We have identified our U.S.
Federal tax returns as our “major” tax jurisdiction. The U.S. Federal return
years 2005 through 2007 are still subject to tax examination by the U.S.
Internal Revenue Service, however we do not currently have any ongoing tax
examinations.


NOTE
10 -SUBSEQUENT EVENT





Related
Party Line of Credit





In
February 2009, the Company obtained a line of credit in the amount of $570,000
from Arkenol Inc, its technology licensor, to provide additional liquidity to
the Company as needed. Under the terms of the note, the Company is to make
interest-only payments at the end of each calendar quarter at a rate of 6% per
annum on any outstanding principal balance. Any outstanding balance is to be
paid in full within 30 days of receiving qualified investment financing of at
least $2,000,000. As of March 25, 2009, there were no amounts
outstanding.








F-25