UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





[X]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30,
2008


or


[   ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from ________________ to _________________.





Commission
file number 000-52852





BIOFUELS
POWER CORPORATION


(Exact
name of registrant as specified in its charter)





TEXAS
            56-2471691(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)25211
      Grogan’s Mill Road Suite 465
            77380The
      Woodlands, Texas
            (zip
      code)(Address
      of principal executive offices)Registrant’s
      telephone number, including area code
            (281)
      364-9500





Securities
Registered pursuant to Section 12(g) of the Act


Common
Stock, par value $0.001 per share





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 and (2) has been subject to such filing
      requirements for the past 90 days.
            Yes ___
            No  
      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
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer
            
            Accelerated
      filerNon-accelerated
      filer
            
            Smaller
      reporting company
            X




Indicate
      by check mark if the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).
            Yes ___
            No X





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.





Title
      of Class
            Outstanding
      at November 14, 2008Common
      Stock, $0.001 Par Value
            31,442,760
      Shares














TABLE
OF CONTENTS







PART
      I
            FINANCIAL
      INFORMATION
            PAGEITEM
      1
            Financial
      StatementsBalance
      Sheets as of September 30, 2008 and December 31, 2007
            F-1Unaudited
      Consolidated Condensed Statements of Operations
            F-2for
      the three and nine-month period ended September 30, 2008 and
      2007Unaudited
      Consolidated Condensed Statements of Cash Flow
            F-3for
      the nine-month period ended September 30, 2008 and 2007Notes
      to Unaudited Consolidated Condensed Financial Statements
            F-4
      - F-10ITEM
      2
            Managements’
      Discussion and Analysis of Financial Condition and Plan of
      Operation
            2ITEM
      3
            Quantitative
      and Qualitative Disclosures About Market Risk
            4ITEM
      4
            Controls
      and Procedures
            4PART
      II
            OTHER
      INFORMATIONITEM
      1
            Legal
      Proceedings
            6ITEM
      1A
            Risk
      Factors
            6ITEM
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            6ITEM
      3
            Defaults
      Upon Senior Securities
            6ITEM
      4
            Submission
      of Matters to a Vote of Security Holders
            6ITEM
      5
            Other
      Information
            6ITEM
      6
            Exhibits
            6SIGNATURES
            7


















BIOFUELS
POWER CORP.


CONSOLIDATED
BALANCE SHEETS


September
30, 2008 and December 31, 2007








September
              
              
              December30, 2008
              
              
              31, 2007ASSETS
              
              (Unaudited)
              
              
              (Audited)Current
      Assets:Cash
      and cash equivalents
              
              $
              -
              
              
              $
              1,089,308Accounts
      receivable
              
              
              70,252
              
              
              
              238,580Tax
      rebate receivable
              
              
              199,650
              
              
              
              -Investment
      in marketable securities (restricted)
              
              
              549,945
              
              
              
              -Accounts
      receivable - affiliate
              
              
              -
              
              
              
              3,680Prepaid
      expenses
              
              
              5,660
              
              
              
              -Inventory
              
              
              86,617
              
              
              
              401,928Total
      current assets
              
              
              912,124
              
              
              
              1,733,496Property
      and equipment, net
              
              
              5,339,248
              
              
              
              5,753,535Investment
      in certificate, restricted
              
              
              -
              
              
              
              889,823Total
      assets
              
              $
              6,251,372
              
              
              $
              8,376,854LIABILITIESCurrent
      LiabilitiesCash
      overdraft
              
              $
              22,869
              
              
              $
              -Accounts
      payable
              
              
              642,907
              
              
              
              329,423Payable
      to affiliate
              
              
              -
              
              
              
              27,792Notes
      payable, unsecured
              
              
              1,000,000
              
              
              
              -Notes
      payable, secured
              
              
              440,000
              
              
              
              -Commissions
      payable
              
              
              -
              
              
              
              21,650Interest payable
              
              
              31,353
              
              
              
              14,264Derivative
      liabilities
              
              
              835,966
              
              
              
              -Total
      Current Liabilities
              
              
              2,973,096
              
              
              
              393,129Long
      Term DebtNotes
      payable, unsecured
              
              
              191,250
              
              
              
              191,250Minority
      Interest
              
              
              218,504
              
              
              
              544,195Total
      liabilities3,382,850
              
              
              
              1,128,574Stockholders'
      EquityCommon
      stock, $.001 par value, 50,000,000 shares authorized;30,802,927
      and 30,306,390 shares issued and outstanding, respectively
              
              
              30,825
              
              
              
              30,306Additional
      paid in capital
              
              
              12,415,224
              
              
              
              11,776,732Deferred
      compensation
              
              
              -
              
              
              
              (595,000
              )Accumulated
      deficit during the development stage
              
              
              (9,577,527
              )
              
              
              (3,963,758
              )Total
      stockholders' equity
              
              
              2,868,522
              
              
              
              7,248,280Total
      liabilities and stockholders' equity
              
              $
              6,251,372
              
              
              $
              8,376,854





See
accompanying notes to unaudited consolidated condensed financial
statements.








F-1




BIOFUELS
POWER CORP.


UNAUDITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


for
the three and nine months ended September 30, 2008 and 2007






Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30, 2008
              
              
              September
      30, 2007
              
              
              September
      30, 2008
              
              
              September
      30, 2007RevenueSales
              
              $
              79,831
              
              
              $
              76,960
              
              
              $
              425,767
              
              
              $
              186,343Total
      revenue
              
              
              79,831
              
              
              
              76,960
              
              
              
              425,767
              
              
              
              186,343Cost
      of sales
              
              
              784,206
              
              
              
              302,863
              
              
              
              2,202,527
              
              
              
              464,822Gross
      profit
              
              
              (704,375
              )
              
              
              (225,903
              )
              
              
              (1,776,760
              )
              
              
              (278,479
              )Selling,
      general and administrative expenses
              
              
              861,951
              
              
              
              1,204,216
              
              
              
              3,008,429
              
              
              
              2,976,261Operating
      loss
              
              
              (1,566,326
              )
              
              
              (1,430,119
              )
              
              
              (4,785,188
              )
              
              
              (3,254,740
              )Other
      income:Gain
      on investment in futures contract
              
              
              -
              
              
              
              1,814,330
              
              
              
              -
              
              
              
              3,525,330Other
      income, net
              
              
              4,605
              
              
              
              32,362
              
              
              
              38,492
              
              
              
              83,678Unrealized
      loss on marketable securities
              
              
              (38,189
              )
              
              
              -
              
              
              
              (58,504
              )
              
              
              -Realized
      loss on sales of marketable securities
              
              
              -
              
              
              
              -
              
              
              
              (2,753
              )
              
              
              -Change
      in derivative liabilities
              
              
              (835,966
              )
              
              
              -
              
              
              
              (835,966
              )
              
              
              -Interest
      expense
              
              
              (32,345
              )
              
              
              -
              
              
              
              (58,041
              )
              
              
              -Total
      other income (loss), net
              
              
              (901,895
              )
              
              
              1,846,692
              
              
              
              (916,772
              )
              
              
              3,609,008Net
      loss before minority interest
              
              
              (2,468,221
              )
              
              
              416,573
              
              
              
              (5,701,960
              )
              
              
              354,268Minority
      interest
              
              
              
              
              
              
              (356,032
              )
              
              
              88,192
              
              
              
              (150,891
              )Net
      loss
              
              $
              (2,468,221
              )
              
              $
              60,541
              
              
              $
              (5,613,769
              )
              
              $
              203,377Basic
      and diluted net loss per common share
              
              $
              (0.08
              )
              
              $
              0.00
              
              
              $
              (0.18
              )
              
              $
              (0.01
              )Weighted
      average common shares outstanding - basicand
      diluted
              
              
              30,824,041
              
              
              
              24,323,082
              
              
              
              30,772,841
              
              
              
              24,323,082





See
accompanying notes to unaudited consolidated condensed financial
statements.









F-2


BIOFUELS
POWER CORP.


UNAUDITED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


for
the nine months ended September 30, 2008 and 2007





Nine
      Months EndedSeptember
      302008
              
              
              2007Cash
      flows operating activities:Net
      loss/gain
              
              $
              (5,613,769
              )
              
              $
              203,377Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      expense
              
              
              1,064,197
              
              
              
              398,873Expense
      related to issuance of common stock for limited
partnershipinterests
              
              
              12,501
              
              
              
              322,988Stock
      issued for services
              
              
              83,296
              
              
              
              -Change
      in derivative liabilities
              
              
              835,966
              
              
              
              -Realized
      loss on sales of marketable securities
              
              
              2,753Unrealized
      loss on marketable securities
              
              
              58,504
              
              
              
              (3,525,330
              )Minority
      interest
              
              
              (88,192
              )
              
              
              150,981Amortization
      of deferred compensation
              
              
              595,000
              
              
              
              -Bad
      debt expense
              
              
              -
              
              
              
              371,508Changes
      in operating assets and liabilities:Accounts
      Receivables
              
              
              (60,772
              )
              
              
              (357,516
              )Tax
      rebate receivable
              
              
              29,450
              
              
              
              -Prepaid
      expenses
              
              
              (5,660
              )Inventory
              
              
              315,311
              
              
              
              (37,632
              )Prepaid
      fuel costs
              
              
              -
              
              
              
              476,970Accounts
      payable
              
              
              441,698
              
              
              
              326,931Accrued
      expenses and other, net
              
              
              (33,278
              )
              
              
              -Net
      cash used in operating activities
              
              
              (2,362,994
              )
              
              
              (1,668,850
              )Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (662,411
              )
              
              
              (3,553,428
              )Advances
      to affiliate
              
              
              -
              
              
              
              (371,508
              )Purchase
      of investment in futures contract
              
              
              -
              
              
              
              (574,110
              )Purchase
      of maretable securities
              
              
              (806,597
              )
              
              
              -Proceeds
      from sale of investment in futures contract
              
              
              -
              
              
              
              4,895,362Proceeds
      from sale of marketable securities
              
              
              200,000
              
              
              
              -Proceeds
      from liquidation of restricted certificate of deposit
              
              
              902,149
              
              
              
              -Purchase
      of certificate of deposit
              
              
              (12,326
              )
              
              
              -Net
      cash provided by (used in) investing activities
              
              
              (379,185
              )
              
              
              396,316Cash
      flows from financing activities:Cash
      overdraft
              
              
              22,869
              
              
              
              -Net
      proceeds from sale of common stock
              
              
              190,003
              
              
              
              3,379,146Net
      proceeds from issuance of notes payable
              
              
              1,440,000
              
              
              
              -Distributions
      paid to minority shareholders
              
              
              -
              
              
              
              (919,918
              )Net
      proceeds from minority interests
              
              
              -
              
              
              
              (56,216
              )Purchase
      of limited partnership interests
              
              
              -
              
              
              
              (512,500
              )Net
      cash provided by (used in) financing activities
              
              
              1,652,871
              
              
              
              1,890,512Net
      increase (decrease) in cash and cash equivalents
              
              
              (1,089,308
              )
              
              
              617,978Cash
      and cash equivalents, beginning of period
              
              
              1,089,308
              
              
              
              2,703,535Cash
      and cash equivelent, end of period
              
              $
              -
              
              
              
              3,321,513Supplemental
      disclsoure of cash flow information:Interest
      paid
              
              $
              25,696
              
              
              
              -Income
      taxes paid
              
              $
              -
              
              
              
              -Non-cash
      investing and financing activities:Common
      stock issued upon conversion of limited partnership
    interest
              
              $
              237,499
              
              
              
              -Accrue
      accounts payable for offering costs
              
              $
              128,216
              
              
              $
              492,350




See
accompanying notes to unaudited consolidated condensed financial
statements.


F-3






BIOFUELS POWER
CORPORATION


NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Information
with respect to events occurring after December 31, 2007 is
unaudited)





1.         Summary
of Significant Accounting Policies





Basis of
Presentation The accompanying interim unaudited consolidated condensed
financial statements have been prepared without audit pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations.  These unaudited consolidated condensed financial
statements should be read in conjunction with the audited financial statements
and notes thereto of Biofuels Power Corp. (the "Company") for the year ended
December 31, 2007.  In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods presented have been included.  Operating results for
the interim periods are not necessarily indicative of the results that may be
expected for the respective full year.





The
balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for a complete
presentation of annual financial statements.





BackgroundBiofuels Power Corp.
(“BPC”), a Texas corporation, was incorporated in 2004 as Aegis Products,
Inc.  The Company is a distributed energy company that is pioneering
the use of biodiesel to fuel small electric generating facilities that are
located in close proximity to end-users.  BPC’s first power plant is
currently located near Houston, Texas in the city of Oak Ridge
North.  During February 2007, BPC began generating and selling its
power through Fulcrum Power to Centerpoint Energy.





Aegis
Products, Inc. was incorporated in Texas on January 20, 2004 as a wholly owned
subsidiary of Texoga Technologies Corp. (“Texoga”).  Effective
December 31, 2004, Aegis was spun off from Texoga through a share distribution
to the Texoga shareholders with 87 owners receiving a total of 14,512,380
shares.  During 2006, the Texoga BioFuels 2006-1 and 2006-2
partnerships were established and each raised $3.5 million to develop biofueled
power projects in the Houston, Texas area.  Texoga began serving as
the general partner and on November 6, 2006, Texoga transferred its general
partner role to Aegis which simultaneously changed its name to Biofuels Power
Corp.





During
2007 BPC created a wholly owned subsidiary, Alternative Energy Consultants, LLC
(“AEC”).  AEC will engage in the business of designing and building of
standardized biodiesel refineries.





ConsolidationIn accordance with FIN
46(R), which requires the consolidation of certain variable interest entities,
these unaudited consolidated condensed financial statements include the accounts
of BPC, Texoga BioFuels 2006-1, Ltd, (“TBF-1”) and Texoga BioFuels 2006-2, Ltd.
(“TBF-2”).  BPC, TBF-1 and TBF-2 are referred to collectively as the
“Company”.  For presentation purposes, the equity interests of the
limited partners in TBF-1 and TBF-2 have been reflected as minority interest
shareholders.  The unaudited consolidated condensed financial
statements also include the accounts of Alternative Energy Consultants, LLC,
which is a wholly owned subsidiary of BPC.  All material intercompany
transactions have been eliminated in consolidation.





Use of Estimates
and AssumptionsThe preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America (“U.S.”) 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
EquivalentsThe Company considers
any highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.





Derivative
Instruments and HedgingThe Company uses
derivatives to hedge against increases in the price of feedstock, primarily
soybean oils, used in the production of biodiesel.  All derivative
instruments are recorded as assets or liabilities on the balance sheet at fair
value.  Changes in the fair value of derivatives are either recorded
in the income statement or other comprehensive income, as
appropriate.  The gain or loss on derivatives designated as fair value
hedges and the offsetting loss or gain on the hedged item attributable to the
hedged risk are included in income in the period that changes in fair value
occur.  The effective portion of the gain or loss on derivatives
designated as cash flow hedges is included in other comprehensive income in the
period that changes in fair value occur and is reclassified to income in the
same period that the hedged item affects income.  The remaining gain
or loss in excess of the cumulative change in the present value of the cash
flows of the hedge item, if any, is recognized in income.  As of
December 31, 2007 and September 30, 2008, the Company did not have any open
hedge contracts, however its statement of operations for the three- and
nine-month period ended September 30, 2007 included significant gains from hedge
transactions.











F-4


Convertible
Debt Financing - Derivative Liabilities





The
Company reviews the terms of convertible debt and equity instruments issued to
determine whether there are embedded derivative instruments, including embedded
conversion options, that are required to be bifurcated and accounted for
separately as a derivative financial
instrument. In circumstances where the convertible instrument contains more than
one embedded derivative instrument, including the conversion option, that is
required to be bifurcated, the bifurcated derivative instruments are accounted
for as a single, compound derivative instrument. Also, in connection with the
sale of convertible debt and equity instruments, the Company may issue
freestanding options or warrants that may, depending on their terms, be
accounted for as derivative instrument liabilities, rather than as
equity.





In
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended, the convertible debt holder’s conversion right
provision, contained in the terms governing the convertible notes is not
clearly and closely related to the characteristics of the notes. Accordingly,
the feature qualifies as an embedded derivative instruments at issuance
and, because it does not qualify for any scope exception within SFAS No.
133, it is required by SFAS No. 133 to be accounted for separately from
the debt instrument and recorded as a derivative instrument
liability.





Revenue
RecognitionRevenue, which began to
be recorded during 2007, is recognized when the electricity produced is provided
to the electric grid maintained by the Electric Reliability Council of Texas
(ERCOT).  A power sales agreement is in place with Fulcrum Power, a
Qualified Scheduling Entity (QSE) for ERCOT.  Electric sales into
ERCOT may only be made through the scheduling of a QSE, which also receives
payment from ERCOT for all sales in a process called
“settlement.”  Initial settlement takes place eight days after
the date of sale with subsequent adjustments at 60 days and 180 days after
the sale, if needed.  To date, the Company has not experienced any
material settlement adjustments and it does not anticipate material settlement
adjustments in the future.  All of the sales from the Company’s
Oak Ridge North facility are made into the ERCOT Balancing Energy
Market.  Such sales are priced by ERCOT for each 15-minute interval of
each hour of each day.  The price for all balancing energy dispatched
in a given interval is the highest bid of any electricity dispatched by ERCOT in
that interval.  The price per megawatt is determined at the time of
the sale.  ERCOT bills each utility company purchaser, collects the
money due under a formal settlement process and remits the proceeds to the QSE
scheduling the electricity actually purchased.  The QSE pays the power
generator when it receives payment from ERCOT.  The Company pays
Fulcrum Power a monthly fee for services that are not directly related to the
revenue the Company receives from sales of electricity.





Biodiesel Tax
CreditsBiodiesel is classified
as a renewable fuel that is eligible for Federal credits of $1.00 per gallon for
biodiesel manufactured from virgin agricultural products and $0.50 per gallon
for biodiesel produced from non-virgin oils and fats.  The gallons
used are reported to the Federal government and the Company receives a payment
of $1.00 per gallon, which is accounted for as a direct offset to fuel prices
and included in the Company’s cost of sales.  At September 30, 2008,
the Company had Federal tax credits receivable of $199,650.  During
the nine months ended September 30, 2008, the Company received $368,649 in
Federal credits.





Accounts
ReceivableAccounts receivable
consist primarily of amounts due from certain companies for the sale of power to
the electric grid.  An allowance for doubtful accounts is provided,
when appropriate, based on past experience and other factors which, in
management’s judgment, deserve current recognition in estimating
probable bad debts.  Such factors include circumstances with
respect to specific accounts receivable, growth and composition of accounts
receivable, the relationship of the allowance for doubtful accounts to accounts
receivable and current economic conditions.  As of September 30,
2007 the Company had trade accounts receivable of $70,252 .





InventoryInventories are stated
at the lower of cost or market and consists of 33,013 gallons of unprocessed
fuel stock and 9,024 gallons of processed fuel stock at September 30,
2008.  Cost is determined using the first-in first-out (“FIFO”)
method.





Property and
EquipmentProperty and equipment
are stated at cost less accumulated depreciation.  Expenditures for
normal repairs and maintenance are charged to expense as
incurred.  Fixed assets are depreciated using the straight-line method
for financial reporting purposes over their estimated useful life of 3 to 5
years.  The cost and related accumulated depreciation of assets sold
or otherwise disposed of are removed from the accounts and any gain or loss is
included in operations.





Impairment of
Long-Lived AssetsManagement reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be realizable.  If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset’s carrying value amount to determine if
an impairment of such asset is necessary.  The effect of any
impairment would be to expense the difference between the fair value of such
asset and its carrying value.




F-5





Income
TaxesThe
Company uses the liability method in accounting for income
taxes.  Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and income tax
carrying amounts of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.  The Company provides a valuation allowance to reduce
deferred tax assets to their net realizable value. The Partnership’s taxable
income or loss for any period is included in the tax returns of the individual
partners and, therefore, the Partnership does not provide for federal income
taxes.




(Loss)/Income Per
Common ShareThe Company provides
basic and dilutive (loss)/income per common share information for each period
presented.  The basic net loss per common share is computed by
dividing the net (loss)/income by the weighted average number of common shares
outstanding.  Diluted net (loss)/income per common share is computed
by dividing the net (loss)/income, adjusted on an "as if converted" basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities.  For the nine months ended September 30, 2007, the Company
did not have any potential dilutive securities. See Stock Purchase agreements
below.





Stock-Based
CompensationThe Company has adopted
Statement of Financial Accounting Standards 123(R) Share Based Payments (“SFAS
123(R)”), using the modified prospective method.  Under the modified
prospective method, the Company recognizes compensation expense over the vesting
period of the award.





SFAS
123(R) is a revision of SFAS 123,Accounting for Stock-Based
Compensation, and supersedes APB No. 25,Accounting for Stock Issued to
Employees .  Under SFAS 123(R), the cost of employee services
received in exchange for stock is measured based on the grant-date fair value
(with limited exceptions).  That cost is to be recognized over the
period during which an employee is required to provide service in exchange for
the award (usually the vesting period).  The fair value of immediately
vested shares is determined by reference to quoted prices for similar shares and
the fair value of shares issued subject to a service period is estimated using
an option-pricing model.  Excess tax benefits, as defined in SFAS
123(R) are recognized as addition to paid-in-capital.





Fair Value of
Financial Instruments The Company includes fair value information in the
notes to financial statements when the fair value of its financial instruments
is different from the book value.  When the book value approximates
fair value, no additional disclosure is made.  Fair value estimates of
financial instruments are based on relevant market information and may be
subjective in nature and involve uncertainties and matters of significant
judgment.  The Company believes that the carrying value of its assets
and liabilities approximates the fair value of such items.  The
Company does not hold or issue financial instruments for trading
purposes.





Concentration of
Credit RiskFinancial instruments
which subject the Company to concentrations of credit risk include cash and cash
equivalents and accounts receivable.  The Company maintains its cash
and cash equivalents with major financial institutions selected based upon
management’s assessment of the banks’ financial stability.  Balances
periodically exceed the $100,000 federal depository insurance
limit.  The Company has not experienced any losses on
deposits.  Accounts receivable generally arise from sales of power to
the electric grid. Collateral is generally not required for credit
granted.  The Company will provide allowances for potential credit
losses when necessary.





Recently Issued
Accounting PronouncementsFASB Statement of
Financial Accounting Standards No. 157,“Fair Value Measurements”
(“SFAS 157”), issued in September 2006, establishes a formal framework for
measuring fair value under GAAP.  It defines and codifies the many
definitions of fair value included among various other authoritative literature,
clarifies and, in some instances, expands on the guidance for implementing fair
value measurements, and increases the level of disclosure required for fair
value measurements.  Although SFAS 157 applies to and amends the
provisions of existing FASB and AICPA pronouncements, it does not, of
itself, require any new fair value measurements, nor does it establish valuation
standards.  SFAS 157 applies to all other accounting pronouncements
requiring or permitting fair value measurements, except for SFAS No. 123 (R),
share-based payment and related pronouncements, the practicability exceptions to
fair value determinations allowed by various other authoritative pronouncements,
and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue
recognition.  This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years.  The adoption of SFAS 157 did not have a
material impact on the Company’s financial condition or results of
operations.





In
February 2007, the FASB issued SFAS 159,“The Fair Value Option for Financial
Assets and Financial Liabilities” which is an elective, irrevocable
election to measure eligible financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis.  The
election may only be applied at specified election dates and to instruments in
their entirety rather than to portions of instruments.  Upon initial
election, the entity reports the difference between the
instruments’ carrying value and their fair value as a cumulative-effect
adjustment to the opening balance of retained earnings.  At each
subsequent reporting date, an entity reports in earnings, unrealized gains and
losses on items for which the fair value option has been
elected.  SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and is applied on a prospective
basis.  Early adoption of SFAS 159 is permitted provided the entity
also elects to adopt the provisions of SFAS 157 as of the early adoption
date selected for SFAS 159.  The company has decided not to adopt SFAS
159.




F-6





In
December 2007, the FASB issued a revision and replacement of SFAS 141(“SFAS
141R”), “Business
Combinations” to increase the relevance, representational faithfulness,
and comparability of the information a reporting entity provides in its
financial reports about a business combination and its effects.  SFAS
141R replaces SFAS 141, “Business Combinations ” but retains the fundamental requirements of SFAS
141 that the acquisition method of accounting be used and an acquirer be
identified for all business combinations.  SFAS 141R expands the
definition of a business and of a business combination and establishes how the
acquirer is to: (1) recognize and measure in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquired company; (2) recognize and measure the goodwill
acquired in the business combination or a gain from a bargain purchase; and (3)
determine what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  SFAS 141R is applicable to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, and is to be applied
prospectively.  Early adoption is prohibited. SFAS 141R will impact
the Company only if it elects to enter into a business combination subsequent to
December 31, 2008.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements–an amendment of ARB No. 51,”
to improve the relevance, comparability, and transparency of the financial
information a reporting entity provides in its consolidated financial
statements.  SFAS 160 amends ARB 51 to establish accounting and
reporting standards for noncontrolling interests in subsidiaries and to make
certain consolidation procedures consistent with the requirements of SFAS
141R.  It defines a noncontrolling interest in a subsidiary as an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements.  SFAS 160 changes the way
the consolidated income statement is presented by requiring consolidated net
income to include amounts attributable to the parent and the noncontrolling
interest.  SFAS 160 establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that does not result in
deconsolidation.  SFAS 160 also requires expanded disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners of a subsidiary.  SFAS 160 is
effective for financial statements issued for fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal
years.  Early adoption is prohibited.  SFAS 160 shall be
applied prospectively, with the exception of the presentation and disclosure
requirements that shall be applied retrospectively for all periods
presented.  The Company does not believe that the adoption of SFAS 160
will have a material effect on its consolidated financial position, results of
operations or cash flows.





2.         Going
Concern





During
the nine months ended September 30, 2008, the Company has experienced negative
financial results as follows:





2008Accumulated
      deficit at December 31, 2007
            
            $
            (3,963,758
            )Net
      loss for nine-months ended September 30, 2008
            
            $
            (5,613,769
            )Accumulated
      deficit at September 30, 2008
            
            $
            (9,577,527
            )Negative
      cash flows used in operating activities
            
            $
            (2,362,994
            )





Management
has developed specific current and long-term plans to address its viability as a
going concern as follows:






            The
      Company is attempting to raise funds through debt and/or equity
      offerings.  If successful, these additional funds will be used
      to provide working capital. Subsequent to September 30, 2008, the Company
      has entered into a Stock Purchase Agreement as described above that will
      provide working capital that will meet cash flow needs while other efforts
      are on going to raise funds through debt and/or equity
      offerings.






            In
      the long-term, the Company believes that cash flows from growth in its
      operations will provide the resources for continued
      operations.






            The
      Company is also pursuing other strategic initiatives including a merger or
      sale of the Company, as opportunities are
  available.













F-7


There can
be no assurance that the Company will have the ability to implement its business
plan and ultimately attain profitability.  The Company’s long-term
viability as a going concern is dependent upon three key factors, as
follows:





            The
      ability of the Company to control costs and increase
    revenues.
            The
      ability of the Company to ultimately achieve adequate profitability and
      cash flows from operations to sustain its operations.




3.         Hedge
Accounts





During
the nine months ended September 30, 2007, the Company realized approximately
$3.5 million in gain on certain commodity hedge accounts. All of the Company’s
commodity hedge investments were liquidated during the year ended December 31,
2007. The Company did not realize comparable hedge account gains during the nine
months ended September 30, 2008 and did not have any open hedge contracts at
September 30, 2008.








4.           Investment
in Marketable Securities





As of
September 30, 2008, the Company had $ 549,945 in marketable securities that
consist of mutual funds.  These investments are classified as trading
securities during the periods presented and, accordingly, are carried at market
value with changes in value reflected in the current period operations.
Unrealized losses relating to trading securities held at September 30, 2008 were
($58,504). During the nine months ended September 30, 2008, net realized losses
on sales of marketable securities were ($2,753). These securities are pledged as
collateral for the Company’s line of credit as disclosed in Note 6.





5.         Property
and Equipment





Property
and equipment consisted of the following at September 30, 2008:





2008Power
      generating equipment
            
            $
            5,837,660Buildings
      and improvements
            
            
            1,172,805Machinery
      and equipment
            
            
            198,242Less
      accumulated depreciation
            
            
            (1,869,459
            )Total
      property and equipment, net
            
            $
            5,339,248





Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $1,064,197 of
which $991,531 was included in Cost of Sales, and $398,873 all of which was
included in Selling, General and Administrative expenses,
respectively.





6.         Notes
Payable





As of
September 30, 2008, there are three remaining notes payable of $191,250 due to
the former limited partners of TBF-1.  These notes bear interest at
12.5% due semi-annually.  Principal is due in full in forty-eight
months from the execution date of the note.  The notes are not
collateralized.





During
April 2008, the Company entered into a line of credit agreement with a financial
institution, which allows the company to draw up to $440,000 in principal. The
outstanding principal along with accrued interest is due in April
2009.





On August
20, 2008, the Company entered into a Securities Purchase Agreement with
accredited investors for the purchase of the Company’s convertible promissory
notes in the aggregate amount of up to $2,000,000 bearing interest at 18% per
annum, payable on or before August 19, 2009.  As of September 30,
2008, the Company has received $900,000, and as of this report has received a
total of $1,150,000.





The
Securities Purchase Agreement contains provisions that if qualified financing is
not secured by the maturity date, the Company will be required to issue warrants
to the note holders resulting in a valuation of $5,000,000 provided that the
strike price is $.75.  In addition, the note holder has the right, but
not the obligation, to convert all or a portion of the principal and accrued
interest outstanding under its note into shares of common
stock.




F-8





We have
evaluated these features of our convertible promissory notes and determined that
they meet the definition of embedded derivatives as defined by SFAS 133, “Accounting for Derivatives and
Hedging Activities”, and have recorded derivative liabilities of $835,966
as of September 30, 2008.





7.         Stockholders’
Equity





During
the nine months ended September 30, 2008, the company issued 72,537 shares of
its common stock as compensation for services rendered by consultants, and
132,669 shares of its common stock for cash. These shares were valued at $1.00
$1.50 per share which was the fair value of the common stock on the date of
grant based on the cash price received for the common stock in a private
placement offering.





During
the nine months ended September 30, 2008, limited partners in TBF-2 converted
250 partnership units at 1,267 shares per unit resulting in the Company issuing
316,665 shares of common stock.  The Company has recorded the value of
the excess shares issued upon conversion of the limited partnership interests of
$12,501 as settlement expense in selling, general and administrative expenses in
the accompanying statement of operations for the nine months ended September 30,
2008.  At September 30, 2008, the Company owns 3,500 units of TBF-1
and 3050 units of TBF-2, which represents 100% and 87% of the outstanding units
of the partnerships, respectively.




8.         Commitments
and Contingencies





Contractual
obligations





We have
contractual obligations that may affect our financial condition. The following
table summarizes our significant contractual obligations as of the date of this
report:





Total
            
            
            Less
      than
              1 year
            
            
            1
      to 3
              years
            
            
            3
      to 5
              yearsCorporate
      office lease
            
            $
            641,834
            
            
            $
            33,390
            
            
            $
            445,204
            
            
            $
            163,240Generating
      facility leases
            
            
            295,344
            
            
            
            10,500
            
            
            
            131,467
            
            
            
            153,377Total
            
            $
            937,178
            
            
            $
            43,890
            
            
            $
            576,671
            
            
            $
            316,617








LitigationThe Company does not
have any litigation at this time.








9.         Related
Party Transactions





On August
28, 2008, the Company received $400,000 loan proceeds from one of its
shareholders as part of the $2.5 million loan commitment for the purpose of
providing capital expenditures and working capital.





On
October 13, 2008 the Company received $100,000 loan proceeds from another
shareholder as part of the $2.5 million loan commitment noted
above.





On
October 1, 2008, the Company’s Chief Executive Officer, Fred O’Connor advanced
the company $12,500 in the form of a note payable. The Company repaid the loan
during the month of October 2008.





10.         Subsequent
Events





On
October 13, 2008, the Company received $100,000 from a shareholder as noted
above under the $2.5 million loan commitment executed in July 2008. An
additional $50,000 was received on November 12, 2008, bringing the total
received as of this report to $1,050,000.





On
October 28, 2008, the Company liquidated its bond fund assets of $546,861,
retired its line of credit obligation of $441,344, including accrued interest,
and recognized a realized loss of $28,230.





11.
            Fair
      Value Measurements




The
Company adopted Statement of Financial Accounting Standards No. 157 “Fair
Value Measurements” (“SFAS 157”) on January 1, 2008.  SFAS 157, among
other things, defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure for each major asset and liability
category measured at fair value on either a recurring or nonrecurring
basis.  SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants.  As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability.  As a basis for considering such
assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as
follows:





F-9





Level
      1.
            
            Observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;Level
      2.
            
            Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; andLevel
      3.
            
            Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.





As of
September 30, 2008, the Company’s assets and liabilities that are measured at
fair value on a recurring basis include the following:





Fair
      Value Measurements UsingTotal
            
            Quoted Prices in
              Active Markets
              (Level 1)
            
            Significant
              Other
              Observable
              Inputs
              (Level 2)
            
            Significant
              Unobservable Inputs
              (Level 3)Derivative
      liability
            
            $
            49,966
            
            —
            
            $
            49,966
            
            —Warrant
      liability
            
            $
            756,000
            
            —
            
            $
            786,000
            
            —




































F-10





ITEM 2
            MANAGEMENT’S
      DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following discussion of the financial condition and plan of operations contains
forward-looking statements that involve risks and uncertainties. Please see
“Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”
elsewhere in this annual report on Form 10-K.





Financial
condition, liquidity and capital resources





At
September 30, 2008, we had $6,251,372 in total assets and $3,382,850 in total
liabilities, resulting in a stockholders’ equity of $2,868,522. Our net working
capital deficit at September 30, 2008 was ($2,060,972), which is a decrease in
working capital since December, 31, 2007 of $3,401,339.





During
the nine months ended September 30, 2008, we incurred a net loss of
($5,613,769), which included $789,355 in non-cash expenses relating to equity
issuance and compensation transactions and $1,064,197 in non-cash depreciation
expense and an ($835,966) charge to record our derivative liabilities. For the
three months ended September 30, 2008, we incurred a net loss of ($2,468,222),
which included $128,750 in non-cash expenses relating to equity issuance and
compensation transactions and $361,963 in non-cash depreciation expense and
($835,966) charge to record our derivative liabilities.





During
the nine months ended September 30, 2008, our revenues were limited because our
10 Mw Montgomery County facility was placed in service during the first quarter
and we experienced significant down-time as we refined and  resolved
our start-up issues, developed new operating protocols and resolved the typical
problems associated with placing a new generating facility in service. Our
revenues for the first nine months of 2008 were adversely impacted by
seasonally low electric prices. While our revenues were low during the first
nine months, our operating expenses were higher than normal because of the
non-recurring costs associated with the start-up of our Montgomery County
facility, the non-recurring costs of registering our securities under the
Exchange Act, and use of higher priced feedstock and fuel inventories that we
purchased in 2007. Additionally, we experienced a serious disruption in our
business due to Hurricane Ike including the shutdown of the electrical grid into
which we sell our power. For the remainder of the year, we expect our cost of
sales to decline significantly as a direct result of reduced start-up expenses
and significantly reduced fuel costs. We also expect our outlays for legal and
accounting services to decline significantly.





We
believe our available resources, together with our anticipated operating revenue
and the anticipated proceeds of certain planned short-term borrowings, will be
sufficient to pay our anticipated operating expenses for a period of three to
six months from the date of this quarterly report on Form 10-Q. Our available
resources are not sufficient to pay all of our anticipated capital costs and we
are presently seeking additional financing. We believe we will need at least $20
million in additional capital to finance our planned facility expansions and
future acquisitions. Capital requirements are difficult to plan for companies
like ours that are developing novel business models. We expect that we will need
additional capital to pay our day-to-day operating costs, finance our feedstock
and fuel inventories, and finance additions to our infrastructure, pay for the
development of additional generating facilities and the marketing of our green
electricity. We intend to pursue additional financing as opportunities
arise.





Our
ability to obtain additional financing will be subject to a variety of
uncertainties. The inability to raise additional funds on terms favorable to us,
or at all, could have a material adverse effect on our business, financial
condition and results of operations. If we are unable to obtain additional
capital when required, we would be forced to scale back our planned
expenditures, which would adversely affect our growth prospects.





As a
result of our limited operating history, our operating plan and our growth
strategy are unproven and we have limited insight into the long-term trends that
may impact our business. There is no assurance that our operating plan and
growth strategy will be successful or that we will be able to compete
effectively, achieve market acceptance for green electricity or address the
risks associated with our existing and planned business activities.





Plan
of Operation





We began
selling electricity from our 5 MW facility in Oak Ridge North, Texas in February
2007 and commenced commercial sales of electricity from our 10 MW Montgomery
County facility in January 2008. During the nine months ended September 30,
2008, we received $425,767 in revenue from our generating
facilities, incurred $2,202,527 in fuel and direct operating
costs resulting in a gross loss of ($1,776,760). After deducting
$3,008,429 in selling, general and administrative expenses, we had a net
operating loss of ($4,785,188). During the three months ending September 30,
2008, we received $79,831 in revenue from generating facilities, incurred
$784,206 in fuel and direct operating costs resulting in a gross loss of
($704,375). After deducting $861,951 in selling, general and administrative
expenses, we had a net operating loss for the three months ended September 30,
2008 of ($1,566,326). During the nine months ended September 30, 2007, we
liquidated cash flow hedge investments and realized $3,525,330 million in
non-recurring investment gains. After adjusting for the minority interests
of the limited partners in TBF-TBF-II, our net income for the nine months ended
September 30, 2007 was $203,377.




2


We plan
to operate our Oak Ridge North and Montgomery County facilities as peaking
plants until we are able to negotiate suitable end-user contracts for the sale
of green electricity. Based on prevailing electric prices in Texas, we believe
we will be able to operate our facilities for at least six hours per day during
the winter months and for up to 18 hours per day during the summer months.
Accordingly, our revenues will be cyclical and our performance will vary
significantly from quarter to quarter. Since our single largest operating
expense will be fuel costs, which have been highly variable during recent
months, there is no assurance that we will ever attain
profitability.





We own a
2.5 MW steam turbine generator but cannot put the turbine in service until we
buy a suitable boiler, complete project engineering, build out the new system
and conduct necessary shakedown testing. We are presently conducting a technical
and mechanical evaluation of several used boilers that appear suitable for our
purposes and can be acquired for less than $100,000. After we purchase a
suitable boiler, we anticipate a lead-time of nine months to complete all
necessary installation and testing activities. The total estimated future costs
associated with our planned acquisition of a boiler and the installation of our
2.5 MW turbine are approximately $500,000. We plan to finance the boiler
acquisition and turbine installation with our currently available capital
resources.





We have
recently purchased a heat recovery steam generator (“HRSG”) that can increase
our generating capacity by approximately 10 MW without increasing our fuel
costs. In order to install the HRSG and put our planned secondary heat recovery
system in service, we will need to buy a suitable steam turbine with a
rated capacity of 10 to 15 MW, complete project engineering, build out the new
system and conduct necessary shakedown testing. We are presently conducting a
technical and mechanical evaluation of a used steam turbine that appears
suitable for our purposes and can be acquired for less than $1 million. Once we
purchase a suitable turbine, we anticipate a lead-time of nine to twelve months
to move the HRSG and steam turbine to our Montgomery County site and
complete all necessary installation and testing activities. The total
estimated future costs associated with our planned acquisition of a steam
turbine and the installation of the secondary heat recovery system are
approximately $2.5 million. We do not have sufficient financial resources to
complete our planned acquisition and installation of the secondary heat recovery
system and there can be no assurance that suitable financing will be available
when needed. If we are not able to attract adequate financing, we may have to
delay or abandon our plans to install the secondary heat recovery
system.





In
combination, we believe our existing and proposed facilities will give us
sufficient corporate mass to make credible sales presentations to potential
purchasers of green electricity and users of heat and air conditioning services
(“HACS”). There can be no assurances that future contract prices for green
electricity or HACS will provide sufficient revenue to offset our anticipated
operating expenses.





We
believe there are a large number of existing combined heat and power facilities
in the Houston-Galveston-Brazoria Eight Hour Ozone Non-Attainment
Area  (“HGB”) that are not presently economic because of natural gas
prices. We are evaluating a number of inactive facilities as potential
acquisition targets and actively seeking additional potential acquisitions. Our
business strategy is to acquire or build electric generating facilities that
will be powered by biodiesel fuel. We believe the heat and power generated by
those facilities can then be used to satisfy industrial demand within the HGB
while significantly reducing the air quality footprint of industrial concerns
that may contract to purchase our electricity. In many cases, we believe the
cost savings from industrial plant pollution control upgrades will more than
offset the premium that we will be required to charge for green electricity
generated from alternative fuels.





We
believe our Company has a unique market focus, is well positioned
demographically and is operationally efficient. Many retail electric providers
are actively seeking “green energy” for sale to environmentally conscious
residential and commercial customers who are willing to pay more for electricity
produced from renewable energy resources. Our expertise in the field and our
innovative approach to green energy distinguish our Company from its
competitors. Nevertheless, there is a possibility that new competitors, who
could be better capitalized than our Company, could seize upon our business
model and produce electricity more efficiently, which might allow them to
capture a significant share of our target market.





Until we
are able to negotiate contracts that provide for a significant green energy
premium, we intend to rely on equity financing to cover our current and
anticipated operating losses. We need additional capital and intend to take
advantage of financing opportunities as they arise. There is no assurance that
our current financial resources and the proceeds of any future financing
activities will be sufficient to pay our operating costs until we can negotiate
a significant GEP, or that any GEP we negotiate will be sufficient to offset all
of our operating costs.





3


Contractual
obligations





We have
contractual obligations that may affect our financial condition. The following
table summarizes our significant contractual obligations as of the date of this
report:





Total
            
            
            Less
      than
              1 year
            
            
            1
      to 3
              years
            
            
            3
      to 5
              yearsCorporate
      office lease
            
            $
            641,834
            
            
            $
            33,390
            
            
            $
            445,204
            
            
            $
            163,240Generating
      facility leases
            
            
            295,344
            
            
            
            10,500
            
            
            
            131,467
            
            
            
            153,377Total
            
            $
            937,178
            
            
            $
            43,890
            
            
            $
            576,671
            
            
            $
            316,617





Off-balance Sheet
Arrangements





We have
no off-balance sheet arrangements.








ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





We are a
smaller reporting issuer as defined in Item 10 of Regulation S-K and are not
required to report the quantitative and qualitative measures of market risk
specified in Item 305 of Regulation S-K.








ITEM
      4.
            CONTROLS
      AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that the
information we are required to disclose in our reports filed or submitted under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Our disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
is accumulated and communicated to management, including our chief executive
officer and our chief financial officer, to allow timely decisions regarding
required disclosure.





In
designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. While the design of our disclosure
controls and procedures is adequate for our current needs and anticipated future
conditions, there can be no assurance that our current design will succeed in
achieving its stated goals under all possible future conditions. Accordingly we
may be required to modify our disclosure controls and procedures in the
future.





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of September 30, 2008. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded the design of our
system of disclosure controls and procedures was not effective as of those dates
to ensure that material information relating to our Company would be made known
to them and that our system of disclosure controls and procedures was operating
to provide a reasonable level of assurance that information required to be
disclosed in our reports would be recorded, processed, summarized and reported
in a timely manner.  These conclusions were based on the
identification of the following material weaknesses:





·
            We
      did not maintain an effective control environment including sufficient
      personnel with the requisite knowledge of Generally Accepted Accounting
      Principles (GAAP) and the rules and regulations established by the SEC and
      appropriate policies and procedures relative to the Company’s accounting
      finance and information technology
functions;









4





·
            Inadequate
      controls over the process for the identification and implementation of the
      proper accounting for complex and non-routine transactions, particularly
      as they relate to hedge investments, financing and related party
      transactions;·
            We
      did not properly segregate duties and restrict access to accounting
      systems and data, spreadsheets used for critical calculations were not
      properly controlled, agreements and contracts were not always promptly
      provided to the accounting function, and assets were not always properly
      safeguarded; and·
            We
      do not have a comprehensive set of policies and procedures, related to
      corporate governance, accounting , human resources, and other significant
      matters.








·
            We
      added or are initiating the following additional controls to the Company’s
      internal control over financial reporting, which we expect will improve
      such internal control subsequent to the date of the assessment and earlier
      assessments that also concluded internal controls were not effective.
      These changes are:




·
            We
      have retained a qualified independent consultant to assist our Chief
      Financial Officer and accounting staff in matters relating to the
      identification and implementation of proper accounting procedures and
      provide guidance on financial reporting issues that apply to the
      Company;·
            We
      performed additional analysis and other procedures in order to identify
      weaknesses in order to develop an adequate system of disclosure and
      financial controls,·
            We
      are continuing to restructure certain departmental responsibilities as
      they relate to the financial reporting function,·
            We
      have changed our accounting software package in order to provide stricter
      controls for our accountingfunctions
      and internal controls.·
            We
      have retained a qualified Chief Financial
  Officer.





As a
result of these changes, management believes that all material weaknesses have
been remediated.





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our
system of internal control over financial reporting is designed to provide
reasonable assurance to our management and board of directors regarding the
preparation and fair presentation of published financial statements and the
reliability of financial reporting.  Because of their inherent
limitations, internal controls over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.





Our
management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based
on that assessment, we believe that as of September 30, 2008, our internal
control over financial reporting is effective.





Beginning
with our Annual Report on Form 10-K for the year ending December 31,
2008, management’s report on internal control over financial reporting must
contain a statement that our independent registered public accountants have
issued an attestation report on management’s assessment of such internal
controls and conclusion on the operating effectiveness of those controls, unless
the SEC extends the compliance date for such auditor attestation.





Changes
in Internal Control Over Financial Reporting





There was
no change in our internal control over financial reporting that occurred during
our third quarter ended September 30, 2008 that materially affected, or is
likely to materially affect, our internal control over financial
reporting.






5


Limitations
on the Effectiveness of Internal Controls





Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.





PART
II – OTHER INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGSNONE.








ITEM
      1A.
            RISK
      FACTORS





We are a
smaller reporting issuer as defined in Regulation S-K and are only required to
report material changes from the risk factors previously disclosed in our report
on Form 10-K for the year ended December 31, 2007.





ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





NONE





ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIESNONEITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERSNONE.ITEM
      5.
            OTHER
      INFORMATIONNONE.ITEM
      6.
            EXHIBITS








(a)
            EXHIBITS31.1
            Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)31.2
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a)32.1
            Statement
      of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the
      United States Code32.2
            Statement
      of Chief Financial Officer Pursuant to Section1350 of Title 18 of the
      United States Code(b)
            REPORTS
      ON FORM 8-KNONE







6








SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.





BIOFUELS
      POWER CORPORATION








/s/
      Fred O’ConnorFred
      O’Connor, Chief Executive OfficerDated:
      November 18, 2008/s/
      Sam H. Lindsey, JrSam
      H. Lindsey, Jr., Chief Financial OfficerDated:
      November 18, 2008




























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