UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K
 
  (Mark
One)
 
 [X]
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31,
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
      Grogans Mill Road, Suite 465The
      Woodlands, Texas
                  
                  77380(Address
      of principal executive offices)
                  
                  (zip
      code)
  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 if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act.
              Yes
      ___
              No
      XIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act.
              Yes
      ___
              No
      XIndicate
      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
                X
              NoIndicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K 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.
              
              þ
 
 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. (Check one):
  Large
      accelerated filer
                o
                
                Accelerated
      filer
                oNon-accelerated
      filer
                o
                
                Smaller
      reporting company
                xIndicate
      by check mark if the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).
                Yes ___
                No
      X
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.
 
 There has
never been a public market for our stock. Based on the most recent price
received by us in connection with private placement transactions, the aggregate
market value of the 24,665,585 shares of common stock held by non-affiliates was
$8,221,039 at March 31, 2009.
 
 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 March 31, 2009Common
      Stock, $0.001 Par Value
              
              30,839,594
      Shares
 
 No
documents are incorporated by reference in this Form 10-K.
 
 TABLE
OF CONTENTS
 
 PART
I
 
 ITEM
      1
              Business
              5ITEM
      1A
              Risk
      Factors
              12ITEM
      2
              Properties
              17ITEM
      3
              Legal
      Proceedings
              18ITEM
      4
              Submission
      of Matters to a Vote Of Security Holders
              18
 
 PART
II
 
 ITEM
      5
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              18ITEM
      6
              Selected
      Financial Data
              21ITEM
      7
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              21ITEM
      7A
              Quantitative
      and Qualitative Disclosures About Market Risks
              23ITEM
      8
              Financial
      Statements and Supplementary Data
              23ITEM
      9
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              24ITEM
      9A
              Controls
      And Procedures
              24
 
 PART
III
 
 ITEM
      10
              Directors,
      Executive Officers and Corporate Governance
              25ITEM
      11
              Executive
      Compensation
              28ITEM
      12
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              30ITEM
      13
              Certain
      Relationships and Related Transactions, and Director
      Independence
              31ITEM
      14
              Principal
      Accounting Fees and Services
              32
 
 PART
IV
 
 ITEM
      15
              Exhibits,
      Financial Statement Schedules
              32Signatures
              33
 
 CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
 “Forward-looking”
statements have been included throughout this report on Form 10-K. These
statements arise most frequently in connection with our attempt to predict
future events. The words “may,” “will,” “expect,” “believe,” “plan,” “intend,”
“anticipate,” “estimate,” “continue,” and similar expressions, as well as
discussions of our strategy, are intended to identify forward-looking
statements. Although we believe that these forward-looking statements are based
on reasonable assumptions, we can give no assurance that our expectations will
in fact occur and caution that actual results may differ materially from those
in the forward-looking statements. The important factors listed in the section
entitled “Risk Factors,” as well as any cautionary language in this report on
Form 10-K, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations described in any
forward-looking statements. You should be aware that the occurrence of the
events described in this Report on Form 10-K could have an adverse effect on our
business or financial condition. You should also be aware that the
“forward-looking” statements are subject to a number of risks, assumptions and
uncertainties, such as:
 
 ·
              Our
      early stage of development, our brief operating history and our rapidly
      evolving business plan which make our prospects difficult to
      evaluate;·
              Our
      need to raise substantial capital to finance our planned expansion, our
      history of significant operating losses and our inability to provide any
      assurances that our planned operations will be
  profitable;·
              Our
      history of significant related party transactions with former affiliates
      that may give rise to conflicts of interest, result in significant losses
      to our company or otherwise impair investor confidence;·
              Our
      reliance on part-time executive officers who are engaged in other
      activities and will face conflicts of interest in allocating their time
      among various interests;·
              Our
      need to obtain a premium price for green electricity, successfully execute
      our growth strategy in a rapidly evolving market and develop ancillary
      sources of revenue;·
              Our
      exposure to substantial volatility in the market prices for agricultural
      commodities used as biodiesel feedstock and our inability to fully hedge
      against commodity price changes which may cause our results of operations
      to fluctuate;·
              Our
      exposure to a variety of risks associated with the construction,
      permitting and operation of biodiesel fueled electric power generating
      facilities;·
              Our
      dependence on tax incentives, governmental subsidies and environmental
      policies and the risk that incentive that presently favor the use of
      biodiesel for power generation may change·
              Our
      inability to rely on pricing as a principal competitive advantage and our
      need to focus our marketing efforts primarily on environmental
      benefits;·
              Our
      ability to satisfy our future capital requirements and react to business
      opportunities;·
              The
      absence of a public market for our common stock and the time, effort and
      expense associated with any effort to develop and active, stable and
      sustained trading market; and·
              Other
      factors including those detailed in this report on Form 10-K under the
      heading “Risk Factors.”
 
 You
should not unduly rely on forward-looking statements, which speak only as of the
date of this report on Form 10-K. Except as required by law, we are not
obligated to publicly release any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this report or to
reflect the occurrence of unanticipated events. All subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the forward-looking statements in
this report.
 -4-
 ITEM
1— BUSINESS
 
 History:
 
 From
inception through mid-2006, we engaged in a largely unsuccessful effort to
complete live fire testing and obtain military procurement contracts for the
Deto-Stop explosion prevention system. In December 2006, we changed our name to
Biofuels Power Corporation, assumed control over two partnerships described
below that were organized and syndicated by Texoga during 2006, raised
approximately $1.5 million in equity from the sale of common stock and
reformulated our business plan to focus on building and operating distributed
electrical generating plants in the metropolitan Houston area that are fueled by
biodiesel and renewable diesel.
 
 Texoga
Biofuels 2006-I (“TBF-I”), a Texas limited partnership, was syndicated by Texoga
in April 2006 and raised $3.5 million from the private sale of 3,500 units of
limited partnership interest to 36 accredited investors. After paying selling
commissions of 10% to M1 Energy Capital Securities LLC, the net capital of TBF-I
was $3,150,000. TBF-I provided the principal financing for a biodiesel fueled
electric power generating facility in Oak Ridge North, Texas. In December 2006,
Texoga assigned its general partner interest in TBF-I to us with the written
consent of a 2/3 majority of the limited partners. While we assumed all of
Texoga’s rights and obligations as general partner of TBF-I, we did not issue
any securities or pay any consideration to Texoga in connection with the
assignment. After assuming our role as general partner of TBF-I, we offered to
exchange shares of our common stock for TBF-I units. Since December
2006, we have issued 4,417,500 shares of our common stock to purchase 2,245
TBF-I units; purchased 500 TBF-I units for cash; and purchased the remaining 755
TBF-I units for convertible subordinated notes. At the date of this annual
report on Form 10-K, we have acquired all 3,500 TBF-I units, dissolved the
partnership and assumed direct ownership of the Oak Ridge North
facility.
 
 Texoga
Biofuels 2006-II (“TBF-II”), a Texas limited partnership, was syndicated by
Texoga in August 2006 and raised $3.5 million from the private sale of 3,500
units of limited partnership interest to 45 accredited investors. After paying
selling commissions of 10% to M1 Energy Capital Securities LLC, the net capital
of TBF-I was $3,150,000. TBF-II provided substantial financing for a
biodiesel fueled electric power generating facility in Montgomery County Texas.
In December 2006, Texoga assigned its general partner interest in TBF-II to us
with the written consent of a 2/3 majority of the limited partners. While we
assumed all of Texoga’s rights and obligations as general partner of TBF-II, we
did not issue any securities or pay any consideration to Texoga in connection
with the assignment. After assuming our role as general partner of TBF-II, we
offered to exchange shares of our common stock for TBF-II units. Since
December 2006, we have issued 4,318,326 shares of our common stock to purchase
3,050 TBF-II units. On the date of this annual report on Form 10-K, we own a 10%
general partner interest in TBF-II, together with 87.1% of the limited partner
interests.
 
 The
exchange of TBF-II units for shares of our common stock has not changed the
structure of TBF-II or adversely impacted the rights of its limited partners.
However, as the beneficial owner of 87.1% of the limited partner interests, we
have voting control over the partnership and are entitled to receive the same
distributions the original limited partners would have received. Under the
applicable agreements, the holders of the TBF-II units that we do not own are
entitled to receive 12.9% of any federal tax credits generated by our Montgomery
County facility until they receive cumulative distributions of $900,000.
Thereafter, they will be entitled to receive 1.9% of any federal tax credits
generated by our Montgomery County facility until we exercise the buy-out rights
specified in the partnership agreement. Our consolidated financial statements
reflect the rights of the TBF-II limited partners as a minority interest.
In light of our current ownership of 87.1% of the limited partnership
interests, we do not expect the minority interests to have a material impact on
our future net income.
 
 Unless we
tell you otherwise, references to “our company,” “we,” “us,” and “our” refer
collectively to our company, the partnership that we manage as general partner
and our recently formed subsidiary Alternative Energy Consultants, LLC. Our
executive office is located at 25211 Grogan’s Mill Road, Suite 465, The
Woodlands, Texas 77380. Our telephone number is 281-364-9500.
 
 Introduction:
The delivery of useful energy to industrial, commercial and residential
buildings in the United States has evolved over many decades into a complex and
inherently inefficient dual-pronged system:
 
 ·
              Electricity
      for lighting, refrigeration, communications and electrical equipment comes
      almost exclusively from centralized power plants that serve users through
      a complex transmission and distribution grid; and·
              On-site
      heating systems that typically use oil or natural gas to fuel boilers and
      furnaces generally provide space heating, hot water and industrial process
      heat.
 
 This
dual-pronged energy delivery system has persisted despite a general recognition
that the cogeneration of electricity and heat, a practice known as “combined
heat and power,” or “CHP,” can be significantly more energy efficient. With the
exception of large-scale industrial applications like oil refining and
petrochemical and paper manufacturing, CHP has not attained general acceptance.
Even with technical improvements, the electric power industry discharges roughly
twice the energy in the form of heat than it delivers to users in the form of
electricity. While on-site heating systems usually have better thermal
efficiency than centralized power plants, they too suffer from significant heat
loss. These inefficiencies in centralized power plants and on-site heating
systems are a major contributor to rising atmospheric CO2 levels. We believe political
and economic pressures to limit the use of fossil fuels will favor the use of
alternative energy technologies.
 -5-
 We are
pioneering the use of biodiesel and renewable diesel to fuel small-scale
distributed electrical power generating plants that include ancillary heating
and cooling facilities and are located in close proximity to the end-users they
serve. We use the term “Integrated Energy Systems,” or “IES,” to describe these
facilities. We believe Integrated Energy Systems can reduce demand on the
nation's utility grid, increase energy efficiency, reduce air pollution and
greenhouse gas emissions, protect against power outages, and, in many cases,
significantly reduce total energy costs for end-users.
 
 We began
producing electricity and selling power into the ERCOT grid in 2007. We began
producing electricity and selling power into the Entergy grid in the first
quarter of 2008. Accordingly our revenues to date from power sales have been
limited. We are not engaged in the business of manufacturing biodiesel and we
only refine, blend and reprocess biofuels for use in our generating facilities.
We believe our refining, blending and reprocessing equipment is sufficient
for our current and anticipated needs.
 
 Biodiesel
is a diesel fuel substitute that is made from 100% renewable raw materials such
as plant oils and animal fats and has almost the same energy density (120,000
BTUs per gallon) as petroleum-based diesel (132,000 BTUs per gallon). Renewable
diesel is a broader class of diesel fuel substitutes that are derived from 100%
renewable plant and animal sources, including certain byproducts that remain
after agricultural products are processed into foods, cosmetics and other
products. In this annual report on Form 10-K, we use the term “off-spec” to
describe biodiesel that is made from fats and oils that solidify at cooler
temperatures and is not suitable for transportation applications, and renewable
diesel that satisfies the technical requirements of various Federal and State
programs that encourage the production and use of renewable fuels.
 
 The
process that transforms raw plant oils and animal fats into biodiesel is called
transesterification. The reaction is accomplished through a relatively simple
process of mixing lye and methanol with raw plant oil or animal fat; separating
the resulting biodiesel (90%) and glycerin (10%) using conventional gravity
separation; and removing any free methanol and water by passing the finished
biodiesel through a high-temperature evaporator. Biodiesel production does not
create toxic byproducts. Since the carbon dioxide released when biodiesel is
burned was removed from the air during production of the feedstock, biodiesel is
a “carbon neutral” fuel that does not contribute to the accumulation of
Atmospheric CO2. Biodiesel
also emits fewer ancillary pollutants such as unburned hydrocarbons, sulfates,
carbon monoxide and soot. Biodiesel is the only alternative fuel that complies
with the health effects testing requirements of the 1990 Clean Air Act
Amendments.  It is also is the only alternative fuel that runs in any
conventional, unmodified diesel engine. Other benefits of biodiesel
include:
 
 ·
              Reduced
      fire risk because the flash point of biodiesel is higher than
      petroleum-based diesel;·
              Reduced
      environmental risk because biodiesel is non-toxic and
      biodegradable;·
              Reduced
      reliance on limited natural resources like coal, oil and natural
      gas;·
              Reduced
      competition for uncertain imported energy supplies; and·
              Significant
      long-term benefits for agriculture and the domestic
    economy.
 
 Biodiesel
can be stored anywhere that petroleum-based diesel fuel is stored. It is safer
to handle and transport because biodiesel is biodegradable and has a higher
flashpoint (260°F) than petroleum-based diesel (130°F). Biodiesel can also
extend the life of diesel engines because it is more lubricating than
petroleum-based diesel fuel, while fuel consumption, power output, and engine
torque are relatively unaffected.
 
 Business:
The initial focus of our business is on an eight-county region surrounding
Houston, Texas that is generally referred to as the Houston-Galveston-Brazoria
Eight Hour Ozone Non-Attainment Area (the “HGB”). The HGB has chronic air
quality problems because of the density of petrochemical plants and other heavy
industry. As a result, the Texas Commission on Environmental Quality (the
“TCEQ”) has adopted a variety of source control regulations and strategies to
combat air pollution and improve air quality within the HGB.
 
 We
believe the use of biodiesel and renewable diesel in IES facilities can increase
air quality in the HGB and provide needed additional generating capacity without
adversely impacting the petrochemical and other industries that are the economic
lifeblood of the region. We also believe the collateral benefits of our strategy
to use biodiesel and renewable diesel in distributed IES facilities, as compared
with centralized generating plants, include:
 -6-
 ·
              Rapid
      response to changing demand requirements at a low cost per megawatt (“MW”)
      of installed capacity;·
              Reduced
      demand for generation, transmission and distribution upgrades in congested
      electric service areas and rapidly growing markets;·
              Increased
      grid stability from IES facilities located in close proximity to
      end-users;·
              Reduced
      reliance on fossil fuels for heating and cooling and lower toxic emissions
      than coal or petroleum fueled generators;·
              Relative
      insensitivity to fuel prices due to high overall efficiencies achieved at
      IES facilities, including the use of waste heat to operate absorption type
      air conditioning systems (displacing electric-powered refrigeration during
      periods of peak summer demand); and·
              First
      mover advantages from producing green electricity in the 4th largest
      metropolitan area in the country.
 
 Operations:
Our current operations are conducted at four sites in the HGB surrounding
Houston, Texas. All of our facilities are located within 35 miles of downtown
Houston.
 
 At the
date of this annual report on Form 10-K, we have:
 
 ·
              Leased
      a 1/2-acre industrial site from the City of Oak Ridge North on a 44-month
      renewable ground lease; built a 3,000 square foot building and control
      room; and installed a biodiesel fueled generating plant that has 15,000
      gallons of heated fuel storage and uses three Caterpillar diesel
      generators with a combined capacity of approximately 5
  MW;·
              Leased
      a 1.5 acre industrial site in an unincorporated area of Conroe, Texas on
      the outskirts of The Woodlands, Texas; built a 2,200 square foot building
      and control room; and installed a biodiesel fueled generating plant that
      has 25,000 gallons of heated fuel storage and uses a GE Frame 5 Turbine
      generator with a rated capacity of just under 10 MW;·
              Leased
      a 6 acre industrial site in an unincorporated area adjacent to Humble
      Texas that will use a boiler system in conjunction with a Westinghouse
      steam turbine to generate approximately 2.0 MW by burning biomass wood
      waste left from Hurricane Ike.  This project is expected to sell
      electricity to the ERCOT power grid and collect the exhaust (including CO
      and CO2 emissions) for underground injection into old oil wells located on
      the site.  This type of project is called Carbon Capture
      Sequestration (CCS) and could potentially qualify as a US Dept. of Energy
      pilot project funding as a research project.
                
                Purchased
      a 79 acre industrial site in Houston, Texas called H. O. Clarke that has a
      decommissioned former Houston Light and Power generating plant that had
      supplied up to 288 MW from gas fired steam turbines to the city from the
      1940’s to the late 1990’s when the industry was deregulated.  At
      that time Texas Genco acquired the generation assets and Centerpoint
      Energy acquired the transmission assets including the 500 MW substation
      adjacent to the site.  Texas Genco installed 6 Frame 5 gas fired
      turbines providing over 80 MW as peaker units into the Centerpoint
      distribution system.  This project was decommissioned in 2004
      but the interconnection assets remain intact and the substation is still
      used continuously.  We plan to move the turbine from the Conroe
      site to this site that will provide peaker power using liquid
      biofuels.  In addition, plan to acquire an additional gas
      turbine producing up to 25 MW using a combination of natural gas and
      syngas produced by atomizing liquid biofuels feedstocks.  We
      would also attach to this turbine a heat recovery steam generator (HRSG)
      that we have acquired that will take the heat from the turbine exhaust and
      produce up to 15 MW of additional power through steam
      generation.  The combination of these units would provide up to
      50 MW of peaker power into the Centerpoint distribution system already in
      place.  Future plans include installing larger units into the
      main transmission system that could bring renewable power directly to a
      major metropolitan area.
 
 Our Oak
Ridge North facility uses reciprocating diesel engines to power its generators
and has the most stringent fuel quality requirements. While the Oak Ridge North
facility has heated fuel storage systems and can use biodiesel made from animal
fats and other oils that are not suitable for use in transportation fuel because
they solidify in cooler weather, the engines require a high quality biodiesel
fuel that meets ASTM standards. In order to maximize our gross income from power
generating activities, we intend to opportunistically purchase off-spec
biodiesel for our Oak Ridge North facility from the lowest cost
producer.
 
 Our
Montgomery County Facility uses a diesel turbine to power its generator and has
greater flexibility to use either off-spec biodiesel or certain types of
renewable diesel that have appropriate energy content and meet the fuel
requirements for the turbine. Initially, all of the fuel used in our Montgomery
County facility was refined biodiesel. Later, we identified a number of
biodiesel refiners and other industrial processors of plant oils and animal fats
that had cheaper feedstocks or byproduct streams that are suitable for use as
turbine fuel. In order to maximize our gross profit from power generating
activities, we intend to opportunistically purchase off-spec biodiesel and
renewable diesel for our Montgomery County facility from the lowest cost
producer.
 
 Our
planned H.O. Clarke power plant will be able to use off-spec biodiesel,
renewable diesel, gasified glycerin, natural gas and other petroleum products to
generate heat for our steam turbines. We believe the ability to burn a variety
of fuels and adjust our fuel mix in response to market conditions will increase
our ability to opportunistically purchase suitable fuel from a wide variety of
sources, minimize our fuel costs and maximize our gross income from IES
activities.
 -7-
 We began
power sales at our Conroe power plant in January 2008. This Montgomery County
facility was connected to the Entergy grid and placed in service. Our Conroe
facility was the first generating plant in the United States to deliver
electricity to the grid running a turbine on biofuels. Entergy services 2.7
million utility customers in Texas, Arkansas, Louisiana and Mississippi and is
interconnected with the nationwide Federal Energy Regulatory Commission (“FERC”)
grid. We believe the ability to sell electricity to customers in two major
electric power grids will facilitate our planned growth.
 
 We
currently operate our Oak Ridge North and Montgomery County facilities as
“peaking plants,” which means that we operate the facilities during periods of
peak demand when the price for electricity is high and suspend our operations
during low-demand periods when electricity prices are lower. In light of the
relatively high cost biodiesel and renewable diesel, we continuously monitor our
expected revenue from power sales and suspend operations when the value of the
electricity we produce would be less than the cost of the fuel we
consume.
 
 Our power
generation operations are conducted at fixed locations using a variety of
generator technologies. As a result, we can and do:
 
 ·
              Use
      exhaust gasses to heat storage tanks for biodiesel made from less
      expensive feedstock including animal fat and high pour point plant oils
      that are not suitable for use in transportation fuel;
  and·
              Use
      raw feedstock, waste renewable oils and off-spec biodiesel that results
      from processing errors made by new entrants in the biodiesel industry who
      have not yet optimized their equipment, systems and
    processes.
 
 When our
planned boiler and steam turbines are installed and operational, we intend to
evaluate the potential for gasifying glycerin and other by-products of biodiesel
production, and using those byproducts together with readily available
biomass, to satisfy all or part of the fuel requirements for the boiler
systems.
 
 Biodiesel Supply
and Production:Biodiesel can be manufactured from almost any plant oil
or animal fat. However, the physical characteristics of the resulting fuel
depend in large part on the physical characteristics of the original feedstock.
Plant oils like soy and cottonseed that remain liquid over a wide temperature
range are converted into biodiesel that remains liquid over a wide temperature
range and can be easily used in transportation. Animal fats and plant oils that
solidify at warmer temperatures produce biodiesel that solidifies at warmer
temperatures. As a result, biodiesel made from these types of oils is generally
not desirable for use in automobiles, trucks and other transportation
applications where the fuel will be exposed to cooler weather
conditions.
 
 Biodiesel
and renewable diesel are classified as renewable fuels that are eligible for
refundable federal credits of $1.00 per gallon for fuels manufactured from new
plant oils, fats and other virgin agricultural productsand $0.50 per gallon for
fuels produced from non-virgin oil and fats. For fuels used in transportation,
the credit is claimed as an offset against the federal excise tax for motor
fuels. For fuels used in IES and other off-road applications, the credit is paid
directly by the federal government. Our business plan depends on the continued
availability of tax incentives and other governmental subsidies. If the subsidy
regime is modified in a way that significantly curtails the amount of available
subsidies, the negative impact on our company could be substantial.
  Biodiesel
requires approximately eight pounds of feedstock for each gallon of finished
fuel. It also requires ancillary raw materials (principally methanol and lye)
that cost an average $0.25 per gallon of finished fuel. At current feedstock
prices, biodiesel can be more expensive than petroleum-based diesel. While
various credits and agricultural support payments improve the economics of
biodiesel production, it is difficult to profitably produce biodiesel at current
feedstock prices.
 
 IES is a
stationary activity, meaning that IES facilities are built in a fixed location
with the intention of operating from that location for years. In a fixed
location, it is a simple matter to use exhaust gases to heat storage tanks and
fuel lines. Since we have the ability to heat our fuel systems and fuel costs
are the most expensive component of our overall operating costs, we plan to use
biodiesel made from less desirable feedstock supplies like beef tallow, pork
tallow, chicken fat and palm oil whenever possible. We believe our ability to
use biodiesel made from feedstock sources that are not suitable for
transportation fuel will help us to control our fuel costs and maximize our
gross profit contribution from power generating activities.
 
 We intend
to opportunistically purchase off-spec biodiesel and renewable diesel in the
open market. Since there are numerous producers of biodiesel that are
encountering difficulties in their efforts to sell off-spec products into the
transportation market and a wide variety of industrial processors of plant oils
and animal fats that generate byproduct streams that qualify as renewable
diesel, we believe that competition among potential suppliers of off-spec
biodiesel and renewable diesel is intense. We have encountered no difficulties
in sourcing and procuring adequate fuel supplies from third-party vendors in
recent months and we do not anticipate difficulties in obtaining adequate fuel
supplies in the future. Nevertheless, our experience in the off-spec biodiesel
and renewable diesel markets is limited and we have not entered into long-term
contracts with any suppliers. Accordingly, we cannot provide any assurance that
sufficient quantities of off-spec biodiesel and renewable diesel will be
available at attractive prices and in quantities sufficient to serve our future
needs.
 -8-
 Electric Power in
Texas:The generation, distribution and sale of electricity in Texas is
managed by ERCOT, which operates the high voltage transmission and distribution
grid and manages the deregulated market for approximately 75% of the State.
Unlike other regions in the United States, the ERCOT grid functions as a single
regulated system instead of as a network of cooperating utility companies. While
the high voltage transmission and distribution of electricity are regulated, the
production and retail sale of electricity are deregulated.
 
 Within
the ERCOT system, there are over 100 power generating companies (“PGCs”) that
own facilities for the generation of electricity, approximately 130 certified
retail electric providers (“REPs”) that sell electricity to end-users and
approximately 180 registered power marketers (“RPMs”) that act as wholesale
intermediaries between the PGCs and REPs. Under Texas law, only RPMs and REPs
can purchase electricity from PGCs and sell to retail end-users. REPs are not
allowed to own generating facilities, so all retail electricity is purchased in
the competitive ERCOT wholesale marketplace. Most electric power in ERCOT is
sold under bilateral contracts, but long-term contracts of two years or more are
very rare. Much of the electricity generated is sold in very short-term
contracts and roughly 5% is sold in a daily “balancing market” based on bids
submitted the previous evening. Most wholesale electric prices are indexed in
some way to natural gas prices. For all but the periods of very low system load,
gas units (which constitute 72% of the generating capacity in ERCOT) are the
marginal units and are dispatched on their relative efficiency of converting
natural gas to electricity. As a consequence, ERCOT wholesale prices closely
track the price of natural gas in Texas, even for generators not fueled by gas.
Municipal utilities, state power authorities and electrical cooperatives are not
required to participate in the competitive retail electric market, although some
of these do purchase power in the competitive wholesale market.
 
 As a PGC
in the ERCOT system, we have the option of selling our electricity:
 
 ·
              under
      a short-term contract with an end-user;·
              under
      a long-term contract with an end-user;·
              to
      an RPM or REP for the balancing energy price that is established every 15
      minutes;·
              to
      an RPM or REP for the day-ahead price that is established on a daily
      basis;
 
 We can
also pre-sell all or part of our electricity in the ERCOT futures
market.
 
 Operating
Revenues:The annual average wholesale producer’s price for electricity
in Texas is approximately $65 per megawatt-hour, or “MWh.” During the summer
months and other peak demand periods, producer’s prices increase to highs of
$180 per MWh.  In addition to the sale of wholesale electrical power,
we receive an IRS Excise Tax Rebate of up to $1.00 per gallon for renewable fuel
that we use to generate electricity.
 
 Our Oak
Ridge North facility burns an average of 75 gallons of biodiesel for each MWh of
electricity that it generates and fuel consumption at our Montgomery County
facility currently averages 135 gallons per MWh. To avoid a situation where our
fuel costs exceed our operating revenue, we must purchase fuel on opportunistic
terms; carefully monitor the balance between fuel costs and electricity value;
and restrict generating operations to peak demand periods when the value of the
electricity we produce is greater than the cost of the fuel we consume. Our
current practice of operating during peak price periods and remaining idle when
prices are lower does not fully utilize our generating capacity and our business
model will not be successful in the long-run unless we can realize a premium
price for our electricity and generate significant ancillary revenues. As our
business matures, we hope to derive additional operating revenue from a variety
of sources including:
 
 ·
              Federal Excise Tax Rebate
      (FETR)Biodiesel and renewable diesel produced from virgin oils and
      fats and used as a fuel are entitled to a $1.00 per gallon rebate ($0.50
      for non virgin oils and fats) from the Federal Government in the form of
      an Excise Tax Rebate.  IRS Form 720 is a quarterly report that
      allows registered blenders to request the rebate.·
              Green Electricity Premium
      (GEP)Electricity
      produced from biodiesel is classified as “green” electricity because the
      carbon dioxide released when biodiesel is burned was removed from the air
      during production of the feedstock. While we have not done so to date, we
      believe we may be able to obtain higher prices from end-users that are
      willing to pay a significant premium for the goodwill associated with
      environmentally conscious energy policies.·
              Heating and Air Conditioning
      Services (HACS) Waste heat produced by our generating plants is
      currently vented to the atmosphere and lost. Nevertheless, we believe our
      waste heat has substantial economic value to commercial and industrial
      concerns that operate in close proximity to our plants and can use our
      waste heat to satisfy their heating and air conditioning requirements. We
      plan to purchase and install a combination of heat collection and
      adsorption cooling equipment on each of our generating plants and to sell
      HACS to customers in the immediate vicinity of our plants. We believe the
      potential value of our planned HACS may equal or exceed the initial value
      of our power generation revenue.              -9-
 ·
              Renewable Energy Credits
      (REC)RECshave been mandated
      as part of Texas’ deregulation of the electric utility industry.
      Generating facilities are granted RECs in direct proportion to the MWh of
      renewable energy produced from sources such as hydro, wind, solar, biogas
      and renewable fuels. In turn, all retail electric providers in Texas are
      required to hold RECs based on the level of their annual retail sales in
      the state. RECs trade separately from the produced electricity and have an
      independent value determined by market forces. Since 2003, RECs in Texas
      generally have traded in the $10 to $13 per MWh range, although recent
      trading data implies a softening of demand and concomitant reduction in
      REC value.·
              Emission Reduction Credits
      (ERC)The HGB Mass
      Emission Cap & Trade program was adopted in December 2000. The program
      is managed by the TCEQ and establishes emission caps for the HGB. The
      emissions covered by the program include NOx;
      volatile organic compounds; carbon monoxide; SOx; and
      particulates. Since biodiesel, or biodiesel combined with additives or
      catalytic converters, can reduce emissions in each of the covered
      emissions classes and all of our current and planned operations will be
      conducted within the HGB, we may be able to generate substantial emission
      reduction credits.·
              Greenhouse Gas Credits
      (GGC)Large quantities
      of CO2, a
      “greenhouse gas” that is widely believed to be a principal cause of global
      warming, are produced whenever hydrocarbons are used for fuel. At present,
      there are no Federal, State or local regulations that restrict the
      production of CO2 or
      other greenhouse gases. Nevertheless, increased awareness of global
      warming and other problems associated with greenhouse gas emissions is
      driving efforts throughout the industrialized world to regulate and
      restrict future CO2emissions. If CO2emission standards are adopted, biodiesel is likely to become a
      preferred fuel because it is carbon neutral. It is presently impossible to
      predict whether CO2reduction initiatives will be adopted in the State of Texas, when
      such initiatives might be adopted or the potential value of any future
      carbon reduction credits that may be available to us.
 
                   Our Oak
Ridge North facility was connected to the ERCOT grid in February 2007 and our
Montgomery County facility was connected to the Entergy grid in December 2007.
At the date of this annual report on Form 10-K, neither facility has had a
sufficient operating history to be classified as a “base load” facility. To be
classified as a base load facility, a power generating plant is typically
required to demonstrate reliable power generation for a period of six to nine
months. Until our Oak Ridge North and Montgomery County facilities are
classified as base load facilities, it will be difficult for us to negotiate
contracts with companies that provide for a Green Electricity Premium (GEP)
because we will not be able to assure potential customers that our generating
facilities will be able to meet their requirements.
 
 There is
no assurance that our plans to augment our revenue from electricity sales with
the incentives described above will be successful. Even if we realize
substantial ancillary revenues from these sources and others, there are no
assurances that our revenues will ever exceed our operating costs or that we
will be able to generate operating profits on a sustained basis. If we are
unable to significantly increase our operating revenue or significantly reduce
our fuel costs, our business will fail.
 
 Sales and
Marketing: We began generating electricity at our Oak Ridge North
facility in February 2007. Our power marketing activities for electricity
generated at the Oak Ridge North facility are conducted by Fulcrum Power
Services, LP, an ERCOT RPM that receives a flat fee of $6,000 per month from us.
Currently, our electricity is sold into the ERCOT grid for the balancing
energy price, which is determined every 15 minutes based on prevailing supply
and demand considerations. The balancing energy price typically ranges from lows
of $20 per MWh to highs of $180 per MWh, and averages approximately $65 per MWh
on an annual basis.
 
 We began
generating electricity and selling power from Montgomery Country facility in
January 2008. Within the Entergy service territory we can only sell to electric
cooperatives, municipal electric systems or private electric
utilities.  Our Montgomery County facility is a qualified small power
producer under federal law and is therefore entitled to sell its output for the
prevailing price, which electric utilities are required to pay. Entergy is
currently purchasing the output of our Montgomery County facility under the
small power producer tariff on file with the FERC. Texas already has retail
competition within the territory served by ERCOT grid and has statutory
authority to extend that retail competition to Entergy’s territory under
transition plans now being studied by the Public Utility Commission. The
applicable pricing under Entergy’s small power producer tariff is generally
comparable to ERCOT pricing.
 
 While we
believe we will be able to negotiate a significant GEP when our generating
facilities have established a track record for reliability and performance, we
are unable to predict the amount of the potential GEP or the period of time that
we will be required to sell our electricity at the lower balancing energy price
before we can enter into an end-user contract. Since the balancing energy price
is significantly lower than the price we hope to realize over the long term,
delays in obtaining an end-user contract or less favorable terms than we
presently anticipate may adversely impact our current and future operating
performance.
 
 Since we
are not yet able to sell green electricity under long term contracts, we cannot
specifically identify the principal potential markets or likely customers for
green electricity. However, we believe that green electricity will be attractive
to industrial users that need to reduce their overall air pollution profile,
environmentally conscious consumers that want to make a tangible contribution to
air quality, and retail stores, restaurants and other commercial establishments
that want to project an environmentally conscious image to the general
public.
 -10-
 Newly formed
subsidiary:In August 2007, we organized a subsidiary limited liability
company named Alternative Energy Consultants, LLC (“AEC”), which will engage in
the business of designing and building standardized biodiesel refineries and IES
facilities for our company and third parties. Our ultimate goal for AEC is to
develop an engineering staff for the design work; a fabrication division to
manufacture key components; and a field staff to provide procurement,
construction and operating services. AEC’s initial designs are based on
modifications to our Oak Ridge North and Montgomery County facilities. As we
develop additional experience in the development and construction of new IES
facilities, those designs will also be made available to third parties through
AEC.
 
 Competition:In the electric power markets, we compete with all major utilities that
provide power to the ERCOT and Entergy grids, and a variety of small power
producers including CHP facilities, wind farms and solar power installations.
While we operate our Oak Ridge North and Montgomery County facilities as peak
load plants, we will have limited ability to secure bilateral contracts for sale
of our electricity. Until we are able to sell green electricity under long-term
contracts, we will operate in a largely non-competitive market segment
consisting of small electricity generators who can either produce electricity
and sell it for the prevailing price or refrain from producing and selling
electricity. If, as and when we are able to market green electricity to
end-users, our principal method of competition will be to emphasize the
environmental benefits of our electricity as compared with electricity produced
from coal fired plants and other sources.
 
 Most of
our competitors have greater financial resources and lower fuel costs than we
do; are able to produce electricity for a lower cost per MWh than we can; and
are better able to withstand periods of low electricity prices without suffering
negative cash flow from generating activities. In the markets for green and
renewable electricity, we will compete primarily with wind farms and solar power
installations, which offer the same renewable and clean power advantages
that we do while incurring significantly lower operating costs.
 
 At
present substantially all CHP facilities located within the ERCOT and Entergy
territories are facilities that provide heat and power to a single end-user. We
are not aware of any plans to install facilities like ours that are designed to
provide integrated energy services to multiple customers. If we are successful
in our efforts to develop a green energy industrial park on an adjacent
property, we expect to have a captive market for our electric power and
ancillary heat and cooling services. Since our planned industrial park will be
one of a handful of sites between Houston and Dallas that have ready rail
access, we believe it will be an attractive location for a wide variety of
potential tenants. However, there can be no assurance that we will be able to
attract tenants that have substantial requirements for electricity, heating and
cooling. Under the circumstances, there is no assurance that we will ever be
able to compete effectively.
 
 Regulatory
Compliance:All phases of designing, constructing and operating biodiesel
powered facilities for the generation of electricity are subject to
environmental regulation by various federal and state government agencies,
including, but not limited to, the EPA, the Texas Commission on Environmental
Quality (“TCEQ”) and other agencies in each jurisdiction where our existing and
proposed facilities are located. Environmental laws and regulations relating to
exhaust emissions, air and water quality and the discharge of pollutants in
general are extensive and have become progressively more stringent. Since
biodiesel is non-toxic and biodegradable, and emissions from the combustion of
biodiesel are lower than emissions from the combustion of other liquid
fuels, we have not been required to incur substantial costs to ensure compliance
with applicable environmental laws and regulations. Nevertheless, applicable
laws and regulations are subject to change, which could be made retroactively.
Violations of environmental laws and regulations or permit conditions can result
in substantial penalties, injunctive orders compelling installation of
additional controls, civil and criminal sanctions, permit revocations and/or
facility shutdowns. If significant unforeseen liabilities arise for corrective
action or other compliance, our sales and profitability could be adversely
affected.
 
 Our
current and planned operations require licenses, permits and in some cases
renewals of these licenses and permits from various governmental authorities.
Our ability to obtain, amend, comply with, sustain, or renew such licenses and
permits on acceptable, commercially viable terms are subject to change, as,
among other things, the regulations and policies of applicable governmental
authorities may change. Our inability to obtain, amend to conform to our
operations, or extend a license or a loss of any of these licenses or permits
may have a material adverse effect on our business, financial condition and
results of operations.
 
 Failure
to comply with government regulations could subject us to civil and criminal
penalties, require us to forfeit property rights and may affect the value of our
assets or our ability to conduct our business. We may also be required to take
corrective actions, including, but not limited to, installing additional
equipment, which could require us to make substantial capital expenditures. We
could also be required to indemnify our employees in connection with any
expenses or liabilities that they may incur individually in connection with
regulatory action against them. These could result in a material adverse effect
on our business, financial condition and results of operation. To date, our
expenditures for regulatory compliance have not been material, but we expect the
cost of regulatory compliance to increase as our business develops.
 
 Research and
Development, Patents and Intellectual Property: During the last two
years, we have no material expenditures for activities that are properly
classified as research and development. We do not own any patents and our
business plan is not based on intellectual property other than the know-how and
experience of our directors, officers and key employees.
 
 Employees: We have eleven
employees at the date of this annual report on Form 10-K including a
three-member management and business development team, three administrative
employees, an operations engineer and four operations employees. We also use
part-time independent contractors to perform a variety of specialized services.
Over the next twelve months, we plan to hire six additional employees for our
engineering and management teams. We are not subject to any collective
bargaining agreements and believe our relations with our employees are
good.  For construction of facilities, the company uses outside
construction firms and subcontract labor to supplement our
workforce.
 -11-
 Exchange
Act Registration, Periodic Reporting and Audited Financial
Statements
 
 We have
registered our common stock under the Securities Exchange Act of 1934 and are
required to file annual and quarterly reports, proxy statements and other
reports with the SEC. All reports and other filings we make with the SEC will be
available on our corporate website at www.biofuelspower.com. We presently expect
the costs of operating as a public company to increase our annual operating
expense by $200,000 to $300,000.
 
 ITEM
1A — RISK FACTORS
 
 Our
business involves a high degree of risk. The following risk factors should be
considered carefully in addition to the other information contained in this
annual report on Form 10-K.
 
 We
are an early stage company, our business is evolving and our prospects are
difficult to evaluate.
 
 From
inception through mid-2006, we engaged in an unsuccessful effort to negotiate
military procurement contracts for an explosion preventing aluminum mesh fuel
tank filler. In December 2006, we changed our name to Biofuels Power
Corporation, raised approximately $1.5 million in new capital and assumed
operational and legal responsibility for two partnerships that were organized by
Texoga during 2006. This change in focus required us to establish purchasing and
power distribution capabilities that we did not need in earlier periods. It has
also significantly increased the amount of capital required for fuel inventories
and increased our exposure to upstream commodity price and downstream power
price fluctuations. We have no material operating history that you can rely on
in connection with an investment decision. Our prospects must be carefully
considered in light of our history, our high capital costs, our exposure to
commodity and power price fluctuations and the other risks, uncertainties and
difficulties that are typically encountered by companies that are implementing
novel business models. Some of the principal risks and difficulties we expect to
encounter include our ability to:
 
 ·
              Raise
      substantial capital to finance our planned expansion, together with the
      losses we expect to incur as we begin a period of rapid
      growth;·
              Install
      our planned HACS facilities and design and build new IES facilities while
      maintaining effective control over the cost of new
    facilities;·
              Reduce
      the risk of commodity price swings and optimize the value of the GEP and
      HACS we produce through price hedging, forward contracts and similar
      activities;·
              Develop,
      implement and maintain financial and management control systems and
      processes to control the cost of our power generating
      activities;·
              Develop,
      implement and maintain systems to ensure compliance with a variety of
      governmental and quasi-governmental rules, regulations and
      policies;·
              Adapt
      and successfully execute our rapidly evolving and inherently unpredictable
      business plan and respond to competitive developments and changing market
      conditions;·
              Attract,
      retain and motivate qualified personnel; and·
              Manage
      each of the other risks identified in this annual report on Form
      10-K.
 
 Because
of our lack of operating history and our early stage of development, we have
limited insight into trends and conditions that may exist or might emerge and
affect our business. There is no assurance that our business strategy will be
successful or that we can or will successfully address these risks.
  The
auditors report on our financial statements includes a going concern
qualification.
 
 For the
years ended December 31, 2008 and 2007, we incurred net losses of ($5,671,788)
and ($3,531,327) respectively. At December 31, 2008, we had approximately
($1,952,508) in working capital and our accumulated deficit was ($9,635,547).
Therefore, the independent auditors’ report on our financial statements for the
year ended December 31, 2008 contains a fourth explanatory paragraph that our
financial statements have been prepared assuming that our company will continue
as a going concern and that our history of operating losses and negative cash
flow raise substantial doubt about that assumption.
 -12-
 We
have significant weaknesses in our system of internal controls that could
subject us to regulatory scrutiny or impair investor confidence, which could
adversely affect our business and our stock price.
 
 Section 404
of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive
evaluation of their internal controls. At present, our system of internal
controls does not satisfy all applicable regulatory requirements. Future efforts
to bring our system of internal controls into compliance with Section 404
and related regulations will likely require the commitment of significant
financial and managerial resources. If we fail in that effort, we could be
subject to regulatory scrutiny or suffer a loss of investor confidence, which
could adversely affect our business and our stock price.
 
 We
have engaged in significant related party transactions with former affiliates
that may give rise to conflicts of interest, result in significant losses to our
company or otherwise impair investor confidence, which could adversely affect
our business and our stock price.
 
 We have
engaged in significant related party transactions with Texoga, a former
affiliate of our company. The principal related party transactions during 2008
include participation under a rent sharing arrangement for the office space that
both companies use as their principal executive office. While we are not
controlled by or under common control with Texoga; the commonality of ownership
between both companies is declining; and all related party transactions must be
approved by the disinterested members of our board of directors; related party
transactions in general have a higher potential for conflicts of interest than
third-party transactions, could result in significant losses to our company and
may impair investor confidence, which could adversely effect our business and
our stock price.
 
 All
our officers are part-time employees who are engaged in other activities and
will face conflicts of interest in allocating their time among their various
interests.
 
 Our CEO,
Fred O’Connor presently serves as the Mayor of Oak Ridge North, Texas and also
serves as a part-time employee of our company. Similarly, our CFO, Robert
Wilson, is actively engaged in other business activities. While neither of our
officers are engaged in activities that are competitive with our business, they
will both face conflicts of interest in allocating their time among their
various interests. To the extent that material conflicts of interest arise,
those conflicts may have a material adverse impact on our business or stock
price. We plan to hire a full-time CEO and a full time CFO, but can offer no
assurance respecting the availability of suitably experienced executive
officers, the amount of time required to complete our planned executive search,
or the terms of any future employment agreement a newly hired executive officer
will require.
 
 Over
the long-term, we must obtain a premium price for our green electricity or our
business will fail.
 
 The
annual average commercial price for electricity in Texas is approximately $65
per MWh. During the summer and other periods of peak demand, average prices
increase to highs of $180 per MWh. If our net fuel costs after available tax
rebates exceed our revenue from electricity sales we will lose money. Over the
long term, we will not be able to profitably use biodiesel as fuel to generate
power unless we are able to obtain a premium price for “green electricity.” We
believe a variety of industrial, commercial and individual end-users will be
willing to pay a significant premium for a reliable source of green electricity,
but we have no end-user contracts at the date of this annual report on Form 10-K
and will not be able to negotiate such contracts until we establish our
reliability as a power producer. There is no assurance that our plans to augment
our revenue from electricity sales with ancillary revenue from GEPs, HACS, RECs,
ERCs and GGCs will be successful. Even if we realize substantial ancillary
revenues from these sources and others, there are no assurances that our
revenues will ever exceed our operating costs or that we will be able to
generate operating profits on a sustained basis. If we are unable to
significantly increase our operating revenue or significantly reduce our fuel
costs, our business will fail.
 
 Our
growth strategy may not be executed as planned which could adversely impact our
financial condition and results of operations.
 
 There can
be no assurance that our rapidly evolving and inherently unpredictable growth
strategy will be successful. For example, there can be no assurance that “green
electricity” generated from alternative fuels will command a meaningful premium
in the marketplace. Likewise, there can be no assurances that potential
HACS customers will be willing to pay a reasonable price for HACS services.
Similarly, there can be no guarantee that our investment in biodiesel fueled IES
facilities will not be adversely impacted as a result of unanticipated changes
in available technologies, fossil fuel prices or environmental regulatory
policies. Execution of our growth strategy, if achieved, may take longer than
expected or cost more than expected. Our growth strategy is dependent upon many
variables, including, but not limited to, market, legislative and regulatory
dynamics. Any change to any of these dynamics could affect the execution our
growth strategy, including causing management to change its
strategy.
 -13-
 The
operation and maintenance of IES facilities involves significant risks that
could adversely affect our results of operations and financial
condition.
 
 The
operation and maintenance of IES facilities involves many risks, including
start-up risks, breakdown or failure of facilities, lack of sufficient capital
to maintain the facilities, the dependence on a specific fuel source or the
impact of unusual or adverse weather conditions or other natural events, as well
as the risk of performance below expected levels of output, efficiency or
reliability, the occurrence of any of which could result in lost revenues and/or
increased expenses. Our existing facilities in Oak Ridge North and Montgomery
County were built with used equipment. Even if our equipment is maintained in
accordance with good engineering practices, it may require significant
expenditures to maintain adequate levels of efficiency and reliability. The risk
of increased maintenance and capital expenditures is exacerbated by our current
practice of running only during peak demand periods to maximize our revenues.
Our ability to successfully and timely complete capital improvements to existing
facilities or other capital projects is contingent upon many variables and
subject to substantial risks. Should any such efforts be unsuccessful, our
company could be subject to additional costs and/or the write-off of its
investment in the project or improvement.
 
 We
expect to incur substantial losses in the future as we expand our operations,
build new facilities and develop new markets for our green
electricity.
 
 We
commenced generating activities at our 5 MW facility in Oak Ridge North, Texas
in February 2007 and commenced generating activities at our 10 MW Montgomery
County facility in January 2008. We expect to incur substantial losses in the
future as we expand our operations, build new facilities and develop new markets
for our green electricity. We believe our losses will be highest during winter
months of the year when electricity prices are at their lowest. Even during the
summer months, however, we do not expect our operations to be profitable unless
we are able to negotiate a substantial GEP or develop substantial ancillary
revenue from other sources. Accordingly, we expect to generate recurring losses
until we can establish our reliability as a power producer and negotiate
end-user contracts that provide premium prices for green electricity.
Moreover:
 
 ·
              we
      will incur substantial additional costs for procurement, marketing and
      administrative overhead as we retain new management and hire suitable
      operating personnel;·
              we
      will incur substantial additional depreciation and amortization costs
      associated with new facilities and those costs may be significantly
      greater than the per unit costs we have incurred to date;
    and·
              our
      activities as an active power producer will expose our company to
      commodity price risks on both the fuel we use and the electricity we
      generate.
  In
combination, the foregoing costs and expenses will likely give rise to
substantial near-term operating losses and may prevent our company from
achieving profitability for an extended period of time. We expect to rely on
equity financing to fund our operating losses and other cash requirements until
we are able to negotiate a GEP and develop ancillary sources of revenue. If our
net losses continue, we will experience negative cash flow, which will hamper
current operations and prevent our company from expanding. We may be unable to
attain, sustain or increase profitability on a quarterly or annual basis in the
future, which could require us to scale back or terminate our
operations.
 
 The
market prices for feedstock are highly volatile and subject to increasing
pressure from alternative fuel producers, which may cause our results of
operations to fluctuate.
 
 The
principal raw materials used in the production of biodiesel are commodities that
are subject to substantial price variations due to factors beyond our control.
Commodity prices are determined from minute to minute based on supply and demand
and can be highly volatile. As more producers enter the biodiesel business,
competition for available feedstock supplies is expected to increase. There can
be no assurances that our hedging activities will effectively insulate us from
future commodity price volatility or that the value of the feedstock we use will
not exceed the value of the electricity we generate. In the event that we are
unable to pass increases in the price of raw materials to our customers, our
operating results will suffer. We cannot predict the future price of our
biodiesel feedstock and any material price increases will adversely affect our
operating performance.
 
 Our
activities cannot be fully hedged against changes in commodity prices and our
hedging procedures may not work as planned or hedge counterparties may default
on their obligations to us.
 
 We cannot
fully hedge the risk associated with changes in feedstock and electricity
prices. To the extent that we have un-hedged positions, fluctuating commodity
and power prices can materially impact our results of operations and financial
position. To manage our financial exposure to commodity and energy price
fluctuations, we will routinely enter into contracts to hedge portions of our
feedstock requirements and may enter into contracts to hedge portions of
our generating capacity. As part of this strategy, we may enter into fixed-price
forward purchase and sales contracts, futures, financial swaps and option
contracts traded in the over-the-counter markets or on exchanges. Although we
intend to devote a considerable amount of management time and effort to the
establishment of risk management procedures as well as the ongoing review of the
implementation of these procedures, the procedures in place may not always be
followed or may not always function as planned and we cannot eliminate all the
risks associated with these activities. As a result of these and other factors,
we cannot precisely predict the impact that risk management decisions may have
on our business, results of operations or financial position.
 
 To the
extent that we engage in hedging and risk management activities, our company
will be exposed to the risk that counterparties that owe us money or commodities
as a result of market transactions will not perform their obligations. Should
the counterparties to these arrangements fail to perform, we might be forced to
make alternative hedging arrangements or honor the underlying commitment at
then-current market prices. In such event, we might incur losses in addition
to amounts, if any, already paid to the counterparties. ERCOT market
participants are also exposed to risks that another ERCOT market participant may
default in its obligations to pay ERCOT for power taken, in which case such
costs, to the extent not offset by posted security and other protections
available to ERCOT, may be allocated to various non-defaulting ERCOT market
participants, including our company.
 -14-
 In
connection with our hedging and risk management activities, we may be required
to guarantee or indemnify our performance relating to such activities. We might
not be able to satisfy all of these guarantees and indemnification obligations
if they were to come due at the same time. In addition, reductions in credit
quality or changes in the market prices could increase the cash collateral
required to be posted in connection with hedging and risk management activities,
which could materially impact our liquidity and financial position.
 
 We
are dependent on tax incentives and other governmental subsidies.
 
 Our
business plan depends on the continued availability of tax incentives and other
governmental subsidies. If the Federal and/or State government decide to modify
the subsidy regime in a way that significantly curtails the amount of available
subsidies, the impact on our company could be substantial. While we believe the
existing tax incentives and other governmental subsidies are not likely to
change rapidly; there is no assurance that future incentives will be comparable
with current incentives. Even with current incentives, there can be no
assurance that our business will be profitable. The repeal or a material
reduction of the tax incentives and other subsidies would materially impact our
revenue and could force us to suspend or terminate operations.
 
 The
repeal or modification of environmental laws favoring the use of biodiesel for
power generation could reduce the demand for our green electricity and cause our
sales and profitability to decline.
 
 In areas
like the HGB that suffer from persistent air quality problems, the use of
biodiesel as fuel for electric generators can permit users to significantly
reduce their regulated emissions without requiring exotic pollution control
equipment and other expensive modifications to existing facilities. Most
industrial users of electricity require a reliable supply at a predictable cost
and are unwilling to accept the inherent risk of supply-chain disruptions that
accompany a new fuel like biodiesel or new production facilities like ours.
Therefore, we believe we will be unable to earn a significant market position in
the industrial power market until we can conclusively demonstrate our ability to
reliably produce and deliver green electricity in the volumes required by
industrial users. Since we believe the combination of tax incentives and
environmental regulations make biodiesel-fueled electricity particularly
attractive to industrial users, we believe the repeal or substantial amendment
of federal and state air quality regulations could have a detrimental effect on
our business and adversely affect our operating performance.
 
 We
will not be able to offer direct performance or price advantages to end-users
and our marketing efforts will be based primarily on environmental
benefits.
 
 Electricity
is a fungible commodity and green electricity has no performance advantages over
electricity generated from nuclear, coal or gas-fired plants. Therefore, our
only competitive advantages are indirect benefits from reduced emissions. While
emission reduction benefits can have substantial value to end-users who are
subject to regulatory compulsion to reduce their air quality footprint, that
value can be difficult to quantify. If we are unable to identify environmentally
conscious end-users who believe that the benefits of green electricity outweigh
the premium price that we must obtain, our business will not be
successful.
 
 Introducing
green electricity to the market is time consuming and expensive and may not
ultimately result in an operating profit.
 
 To
achieve profitable operations, we must convince potential customers that green
electricity generated from renewable fuels is worth a premium price. The cost
associated with the introduction of green products can be very high and new
product lines often generate substantial losses for an extended period of time
before making a meaningful contribution to administrative overhead. There is no
assurance that our green electricity will command a premium price in the market
or that our marketing activities will be successful or profitable. Even if
we are ultimately successful, delays, additional expenses and other factors may
significantly impair our potential profitability and there is no assurance that
our company will ever generate an operating profit.
 
 Violations
of environmental regulations could subject our company to severe penalties and
adversely affect our sales and profitability.
 
 The
generation of electricity in biodiesel-fueled facilities is subject to
regulation by various federal and state government agencies, including, but not
limited to the EPA, the TCEQ and other agencies in each jurisdiction where our
existing and proposed facilities are located. Environmental laws and regulations
that affect our operations, and that are expected to affect our planned
operations, are extensive and have become progressively more stringent.
Applicable laws and regulations are subject to change, which could be made
retroactively. Violations of environmental laws and regulations or permit
conditions can result in substantial penalties, injunctive orders compelling
installation of additional controls, civil and criminal sanctions, permit
revocations and/or facility shutdowns. If significant unforeseen liabilities
arise for corrective action or other compliance, our sales and profitability
could be adversely affected.
 -15-
 We
may be unable to obtain commercially reasonable terms on construction contracts
for our planned power generation facilities.
 
 We served
as our own contractor for our Oak Ridge North and Montgomery County facilities
and performed all necessary engineering, procurement and construction work
in-house or using third-party consultants. We have recently created a
wholly-owned subsidiary named Alternative Energy Consulting LLC (AEC) to manage
our engineering, procurement and construction work and perform comparable
services for third parties. We presently own 100% of AEC, although our
percentage interest is expected to decline as it hires additional staff and
expands its operations. We plan to rely on AEC in connection with planned
future expansion of our generating capacity. If we are not able to obtain
commercially reasonable terms from AEC for any future acquisition and
construction projects, our operations and planned growth could be adversely
affected.
 
 We
may need to increase cost estimates for the acquisition or construction of
future IES facilities.
 
 The cost
of engineering, procurement and construction for new IES facilities could
increase significantly and there is no assurance that the final cost of any IES
facilities we establish in the future will not be materially higher than
anticipated. There may be design changes, material cost escalations or budgetary
overruns associated with the construction of future plants. Any significant
increase in the estimated construction cost of the plants could delay our
ability to generate revenues or reduce the amount of revenues
realized.
 
 Various
risks associated with the construction of our planned generating facilities may
adversely affect our sales and profitability.
 
 We may
experience delays in the construction of our planned additional power generation
facilities that we decide to build or acquire in the future. We may also
encounter defects in materials and/or workmanship in connection with such
projects. Any defects could delay the commencement of operations of the
facilities, or, if such defects are discovered after operations have commenced,
could halt or discontinue operation of a particular facility indefinitely. In
addition, construction projects often involve delays in obtaining permits and
encounter delays due to weather conditions, the provision of materials or labor
or other events. In addition, changes in political administrations at the
federal, state or local levels that result in policy change towards
biodiesel or our project in particular, could cause construction and operation
delays. Any of these events may adversely affect our sales and
profitability.
 
 We
will be a small player in an intensely competitive industry and may be unable to
compete.
 
 The
electric power industry in Texas is large and intensely competitive. Potential
end-users of our electricity are generally dependent on their power supplies and
unlikely to accept our company as a reliable supplier until they are satisfied
that our operations will not materially impair the reliability or efficiency of
their operations. Therefore, we believe that potential end-users will be
unlikely to sign a contract with us until they have completed an extensive and
complex internal analysis. As a result, we anticipate a lengthy sales cycle and
there can be no assurance that end-users will conclude that electricity
generated by us is an acceptable alternative.
 
 We
intend to offer generous equity compensation packages to our management and
employees.
 
 As a key
component of our growth strategy, we intend to offer generous equity
compensation packages to our management and employees. We believe such
compensation packages will allow us to provide substantial incentives to our
executives and employees while minimizing our cash outflow. Nevertheless, we
will be required to account for the fair market value of compensatory stock
issuances as operating expenses. The non-cash expenses arising from future
incentive transactions are expected to materially and adversely affect our
future operating results.
 
 We
may issue additional shares of common stock or derivative securities that will
dilute the percentage ownership interest of our existing shareholders and may
dilute the book value per share of our common stock and adversely affect the
terms on which our company may obtain additional capital.
 
 Our
authorized capital includes 50,000,000 shares of common stock.  The
Board of Directors has the authority, without action by or vote of our
shareholders, to issue all or part of the authorized shares of common and
preferred stock for any corporate purpose, including equity-based incentives
under existing and future incentive stock plans. We are likely to seek
additional equity capital in the future as we develop our business and expand
our operations. Any issuance of additional shares of common stock or derivative
securities will dilute the percentage ownership interest of our shareholders and
may dilute the book value per share of our common stock. Additionally, the
exercise or conversion of derivative securities could adversely affect the terms
on which our company can obtain additional capital. Holders of derivative
securities are most likely to voluntarily exercise or convert their derivative
securities when the exercise or conversion price is less than the market price
for the underlying common stock. Holders of the securities will have the
opportunity to profit from any rise in the market value of our common stock or
any increase in our net worth without assuming the risks of ownership of the
underlying shares of our common stock.
 -16-
 
 We
will not be required to comply with all of the requirements of the
Sarbanes-Oxley Act of 2002 because we will not be quoted or listed on the Nasdaq
or a national securities exchange and quotation of our shares on the OTC
Bulletin Board will limit the liquidity and price of our securities more than if
our securities were so quoted or listed.
 
 Because
our securities are not quoted on or expected to qualify for quotation on the
Nasdaq or any other national securities exchange, we are not subject to all of
the corporate governance requirements of the Sarbanes-Oxley Act of 2002, such as
independent director standards and audit committee requirements. While we may
choose to voluntarily adopt some of the requirements of Sarbanes-Oxley, you may
not have all of the corporate governance protection afforded to investors in
companies listed on Nasdaq or a national exchange. Quotation of our securities
on the OTC Bulletin Board will limit the liquidity and price of our securities
more than if our securities were quoted or listed on Nasdaq or a national
exchange.
 
 Under
Rule 144, as recently amended by the SEC, the substantial bulk of our common
stock is eligible for unrestricted resale into the public markets and future
sales of large numbers of shares into a limited trading market or the perception
that those sales could occur may cause our stock price to decline.
 
 Fewer
than 20% of our outstanding shares are owned by directors, officers and
affiliates of our company and the substantial bulk of our remaining shares have
been outstanding for more than six months. Under Rule 144, as recently amended
by the SEC, all shares held by non-affiliates that have been issued and
outstanding for more than one year are presently eligible for resale. Commencing
90 days after the effective date of our Form 10 registration statement, all
shares held by non-affiliates that have been issued and outstanding for more
than six months will be eligible for resale. Future sales of large numbers of
shares into a limited trading market or the concerns that those sales may occur
could cause the trading price of our common stock to decrease or to be lower
than it might otherwise be. If an active, stable and sustained trading market
does not develop, the market price for our shares will decline and such declines
are likely to be permanent.
 
 Our
common stock will probably be subject to the “penny stock” rules which would
make it a less attractive investment.
 
 SEC rule
3a51-1 defines a “penny stock” as any equity security that is not listed on the
NASDAQ system or a national securities exchange and has an inside bid price of
less than $5 per share. Our common stock will probably be subject to the penny
stock rules. Before effecting a transaction that is subject to the penny stock
rules, a broker-dealer must make a determination respecting the suitability of
the purchaser; deliver certain disclosure materials to the purchaser and receive
the purchaser’s written approval of the transaction. Because of these
restrictions, most broker-dealers refrain from effecting transactions in penny
stocks and many actively discourage their clients from purchasing such
securities. Therefore, both the ability of a broker-dealer to recommend our
common stock and the ability of holders of our common stock to sell their shares
in the secondary market are likely to be adversely affected. Until the inside
bid price of our stock exceeds $5 per share, the penny stock rules will decrease
market liquidity and make it difficult for you to use our stock as
collateral.
 
 We
are unlikely to pay dividends for the foreseeable future.
 
 We have
never declared or paid cash dividends and we do not expect to pay cash dividends
in the foreseeable future. While our dividend policy will be based on the
operating results and capital needs of our business, we believe any future
earnings will be retained to finance ongoing operations and the expansion of our
business.
 
 
 ITEM
2 — PROPERTIES
 
 Our
executive office is located at 25211 Grogans Mill Road, Suite 465, The
Woodlands, Texas 77380. Our telephone number is 281-364-9500. In June 2008, we
entered into an office space lease with Zenith Realty.  The master
lease is a five-year operating lease for 7,500 square feet of Class A office
space that provides for monthly rental payments of approximately $11,130 for the
initial year with escalation each year thereafter until expiration in March
2013.
 
 In
addition to our executive office facilities, we have:
 
 ·
              leased
      a 1/2-acre industrial site in the City of Oak Ridge North, Texas and
      installed a biodiesel fueled reciprocating diesel power plant that has a
      rated capacity of approximately 5 MW;·
              leased
      a 1.5 acre industrial site in an unincorporated area of Montgomery County
      and installed a biodiesel fueled diesel turbine power plant that has a
      rated capacity of approximately 10 MW;·
              leased
      a 6 acre industrial site in an unincorporated area adjacent to Humble
      Texas that will use a boiler system in conjunction with a Westinghouse
      steam turbine to generate approximately 2.0 MW by burning biomass wood
      waste left from Hurricane Ike; and·
              purchased
      a 79 acre industrial site in Houston, Texas called H. O. Clarke that has a
      decommissioned former Houston Light and Power generating plant that had
      supplied up to 288 MW from gas fired steam turbines to the city from the
      1940’s to the late 1990’s when the industry was
    deregulated.
 -17-
 Oak Ridge North
Facility: Our Oak Ridge North facility is situated on a 1⁄2 acre parcel of
land that we leased from the City of Oak Ridge North in 2007. Our ground lease
provides for a monthly rental of $3,500, an initial term of 44 months and two
5-year renewal terms. We have built a 3,000 square foot metal building on the
site that houses three 1.6 MW Caterpillar diesel generators, 15,000 gallons of
heated fuel storage tanks, a generator control room and a 5 MW interconnection
substation to the ERCOT grid through Centerpoint Energy. Our total capital
investment in the Oak Ridge North facility was approximately $2.5 million,
including $750,000 in facility and $1,750,000 in equipment. We believe we will
need to make additional capital investments of approximately $800,000 to
purchase and install suitable waste heat collection equipment, adsorption
chillers and delivery equipment to convert our Oak Ridge North generating plant
into a fully functional IES.
 
 Montgomery County
Facility: Our Montgomery County facility is situated on a 1.5-acre parcel
of land that that we leased from an unaffiliated landlord in 2007. Our ground
lease provides for a monthly rental of $2,200, an initial term of 5 years and
two 5-year renewal terms. We have built a 2,200 square foot metal building on
the site that houses our generator control room. We have installed a 10 MW Frame
5 General Electric Combustion Gas Turbine and 25,000 gallons of heated fuel
storage on the site, along with two 500,000-gallon storage tanks that will hold
feedstock supplies and finished biodiesel for our turbine. We have installed a
10 MW interconnect to the Entergy grid. Our total capital investment to date in
the Montgomery County facility is approximately $2.7 million, including $900,000
in facilities costs and $1,800,000 in equipment.
 
 Humble
Facility: Our Humble facility is situated on a 6 acreage of land leased
for a period of ten years from November 1, 2008.  We contracted with
DMSC, Inc. to contribute the land lease, infrastructure including a 8400 sq ft
building and access and connection to three shut in oil wells on the site in
return for a 33% interest in profits from the project.
 
 H.O. Clarke
Facility: We purchased the 79 acre H.O. Clarke site from NRG Energy on
March 25, 2008. The facility has a decommissioned 288 MW steam plant, a
connection to the adjacent 500 MW Centerpoint Energy transmission
substation,  65,000 bbl above ground fuel storage tankage, two 6” and
one 12” natural gas pipelines previously connected to a Kinder Morgan high
pressure gas pipeline and six turbine pad sites with connections to a 12Kv
distribution power line.
 
 We
believe the costs we have incurred and plan to incur for the acquisition,
installation and pre-operational testing of our power generating facilities
compares favorably with the costs typically incurred for comparable distributed
generation facilities. While capital costs for distributed generating facilities
frequently range between $1 and $2 million per MW of installed capacity, our
average capital cost per MW of installed capacity is approximately $370,000 at
the date of this annual report on Form 10-K and we expect our average capital
cost per MW of installed capacity to be less than $300,000 per MW when the HRSG
and steam turbine systems have been installed.
 
 
 ITEM
3 — LEGAL PROCEEDINGS
 
 We are
not a party to any material litigation, and we are not aware of any pending or
threatened litigation against us that could have a material adverse affect on
our business, operating results or financial condition.
 
 
 ITEM
4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 We have
not submitted any matters for a stockholders vote during the fourth quarter of
2008 or the first quarter of 2009.
 
 PART
II
 
 
 ITEM 5—  MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
 
 Market
Information
 
 We are
currently trading on the OTCBB exchange as BFLS.BB.
 
 Holders
 
 As of
March 31, 2009, there were 329 holders of record of our common stock, including
100 original Texoga Shareholders; 58 former holders of TBP-I and TBP-II units
that exchanged their units for shares of our common stock; 58 shareholders who
purchased shares in our private placements; 54 shareholders who purchased
outstanding shares from our shareholders and 24 employees who received shares of
our stock in compensatory transactions. See "Security Ownership of Certain
Beneficial Owners and Management" for information on the holders of our common
stock. Also see "Description of Registrant’s Securities to be Registered" for a
description of our outstanding and issued capital stock.
 -18-
 Dividends
 
 We have
never paid cash dividends on our common stock and do not intend to pay cash
dividends in the foreseeable future. Our company is not likely to pay cash
dividends for an extended period of time, if ever. You should not subscribe to
purchase our shares if you require current income from your
investments.
 
 2007
Stock Incentive Plan
 
 Subject
to stockholder approval at our next annual meeting, our Board of Directors has
adopted an incentive stock plan for the benefit of our employees. Under the
terms of the plan, we are authorized to grant incentive awards for up to
2,000,000 shares of common stock. No incentive awards are outstanding at the
date of this annual report on Form 10-K. When we are eligible to do so, we
intend to file a registration statement under the Securities Act on Form S-8 to
register the securities included in and authorized by our 2007 Incentive Stock
Plan.  That registration statement is expected to become effective
upon filing.  Shares covered by the registration statement will
thereupon be eligible for sale in the public market, subject in certain cases to
vesting and other plan requirements.
 
 The plan
provides for the grant of incentive awards to full-time employees, non-employee
directors and consultants. Within the limits of the plan, the post-acquisition
company will have absolute discretion in deciding who will receive awards and
the terms of such awards. The plan authorizes the creation of incentive and/or
non-qualified stock options, shares of restricted and/or phantom stock and stock
bonuses. In addition, the plan will allow us to grant cash bonuses payable when
an employee is required to recognize income for federal income tax purposes
because of the vesting of shares of restricted stock or the grant of a stock
bonus.
 
 The
Compensation Committee will administer the plan; decide which employees will
receive incentive awards; make determinations with respect to the type of award
to be granted; and make determinations with respect to the number of shares
covered by the award. The Compensation Committee will also determine the
exercise prices, expiration dates and other features of awards. The Compensation
Committee will be authorized to interpret the terms of the plan and to adopt any
administrative procedures it deems necessary. The Compensation Committee may
not, however, increase the number of shares subject to the plan; materially
increase the benefits accruing to holders of incentive awards; or materially
modify the eligibility requirements. All decisions of the Compensation Committee
will be binding on all parties. We will indemnify each member of the
Compensation Committee for good faith actions taken in connection with the
administration of the plan.
 
 The
following table provides information as of December 31, 2008 with respect to the
shares of our common stock that may be issued under our existing equity
compensation plans.
 
 Plan
      Category
                  
                  Number
      of
                    Securities
      to be
                    Issued
      Upon
                    Exercise
      of
                    Outstanding
                    Options, Warrants
                    and
      Rights
                  
                  
                  Weighted
                    Average
      Exercise
                    Price
      of
                    Outstanding
                    Options, Warrants
                    and
      Rights
                  
                  
                  Number
      of Securities
                    Remaining Available
                    For
      Future Issuance
                    Under
      Equity
                    Compensation
      PlanEquity
      compensation plans
                    approved
      by security holders
                  
                  
                  0
                  
                  
                  
                  -
                  
                  
                  2,000,000
      (subject to
                    shareholder
      approval)Equity
      compensation plans
                    not
      approved by security holders
                  
                  
                  0
                  
                  
                  
                  -
                  
                  
                  
                  0Total
                  
                  
                  0
                  
                  
                  
                  -
                  
                  
                  2,000,000
      (subject to
                    shareholder
      approval)
 
 Securities
Eligible for Resale
 
 Rule
144Under
Rule 144, as recently amended by the SEC, all shares held by non-affiliates that
have been issued and outstanding for more than one year are presently eligible
for resale and commencing 90 days after the effective date of our registration
statement on Form 10, all shares held by non-affiliates that have been issued
and outstanding for more than six months will be eligible for resale. Future
sales of large numbers of shares into a limited trading market or the concerns
that those sales may occur could cause the trading price of our common stock to
decrease or to be lower than it might otherwise be. If an active, stable and
sustained trading market does not develop, the market price for our shares will
decline and such declines are likely to be permanent
 
 Rule 701
Under Rule 701, as currently in effect, shares of common stock acquired in
compensatory transactions by employees of privately held companies may be resold
by persons, other than affiliates, beginning 90 days after the date of the
effectiveness of this annual report on Form 10-K, subject to manner of sale
provisions of Rule 144, and by affiliates in accordance with Rule 144 without
compliance with its one-year minimum holding period.
 -19-
 Combined
On the date of this annual report on Form 10-K, we had 30,839,594 shares
outstanding, including 24,175,022 shares held by persons who are not directors,
officers or affiliates of our company.  Of this total:
 
 ·
              21,374,720
      shares held by non-affiliates have been outstanding since February 28,
      2007 and are presently eligible for resale pursuant to Rule
      144;·
              450,000
      shares were issued to non-affiliates pursuant to Rule 701 in November 2007
      and will be eligible for resale commencing 90 days after the effectiveness
      of our pending Form 10 registration statement; and·
              1,983,269
      shares were issued to non-affiliates between February 28, 2007 and
      September 10, 2007, and will become eligible for resale pursuant to Rule
      144 commencing 90 days after the effectiveness of our Form 10 registration
      statement.
  Recent
Sales of Unregistered Securities
 
 Set forth
below is information regarding common stock issued by our company during 2008
and the subsequent interim period. Also included is the consideration, if any,
we received and information relating to the section of the Securities Act, or
rule of the SEC, under which exemption from registration was
claimed.
 
 Sale
of Common Stock for Cash
 
 During
the period from November 2006 through March 2008, we sold 6,490,237 shares of
our common stock to accredited investors for cash. The offer was directed solely
to accredited investors who each had a pre-existing business relationship with
our company or M1-Energy Capital Securities and D.E. Wine Investments, the
broker-dealers we retained to act as selling agents. All potential investors
were provided disclosure documentation that was appropriate for an offering
restricted to accredited investors; afforded the opportunity to ask questions
and receive answers concerning the terms and conditions of the offering;
afforded the opportunity to obtain such additional information and documentation
as they deemed necessary to verify the accuracy of information furnished; and
afforded the opportunity to obtain any additional information they considered
material to their investment decisions. The offer and sale of our shares was
affected without any advertising or general solicitation. A total of 58
accredited investors purchased shares of our common stock for
cash.  All certificates representing shares sold for cash were
imprinted with a restrictive legend to the effect that the shares were not
transferable by the holders thereof in the absence of an effective registration
statement under the Securities Act, or an available exemption therefrom. The
sale of our securities for cash was affected in reliance on the exemption from
registration set forth in Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder
 
 Issuance
of Common Stock in Compensatory Transactions
 
 On
November 1, 2007, we issued a total of 1,250,000 shares of common stock to a
total of 24 individuals who are directors, officers and employees of, or
principal consultants to our company, including 60,000 shares that were
subsequently forfeit when the grantees resigned from our board of directors. The
total number of grant shares represented less than 5% of the total number of
common shares outstanding before the grants. Each recipient of grant shares
signed a written agreement that described the terms of the grant and was
provided information about the risks associated with our securities,
audited financial statements for the year ended December 31, 2006 and unaudited
financial statements for the six months ended June 30, 2007. Each recipient of
grant shares was also afforded the opportunity to ask questions and receive
answers concerning the terms and conditions of the grant; and to obtain such
additional information and documentation as they deemed necessary to verify the
accuracy of information furnished, or material to their investment decisions.
All shares were distributed to the recipients as outright grants and no cash
consideration was paid by any recipient. All stock grants were 50% vested on the
issue date and the remaining 50% will vest ratably at the rate of 5% per month
over the next 10 months. The distribution of compensatory shares was affected
without any advertising or general solicitation and all of the purchasers are
employees of or consultants to our company. None of the shares were issued in
connection with the offer or sale of securities in a capital-raising
transaction, or for the purpose of directly or indirectly promoting or
maintaining a market for our shares, which are not presently traded on any
market. All certificates representing shares issued to employees and consultants
were imprinted with a restrictive legend to the effect that the shares were not
transferable by the holders thereof in the absence of an effective registration
statement under the Securities Act, or an available exemption therefrom. The
issuance was affected in reliance on the exemption from registration set forth
in Rule 701.
 
 Purchases
of Equity Securities
 
 We have
never purchased any shares of our common stock and we are not likely to purchase
any shares in the foreseeable future. Our founders have not repurchased any
shares of our common stock and are not likely to do so in the foreseeable
future.
 -20-
 ITEM 6—SELECTED FINANCIAL
DATA.
 
 We are a
smaller reporting issuer as defined in Item 10 of Regulation S-K and are not
required to report the selected financial data specified in Item 301 of
Regulation S-K.
 
 ITEM
7 — MANAGEMENT’S DISCUSSION AND ANALYSIS 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
 
 In
December 2006, we became the general partner of TBF-I and TBF-II; sold
approximately 2 million shares of our common stock for approximately $1.5
million in cash; recorded 1,050,000 shares of common stock as unissued in
exchange for 700 units of limited partnership interest in TBF-I; and issued
870,000 shares of common stock in exchange for 580 units of limited partnership
interest in TBF-II. Since December 31, 2006, we have acquired all of the
remaining TBF-I units and dissolved the partnership. We have also acquired 2,470
additional TBF-II units and presently own an 87.1% majority of the outstanding
TBF-II units. In accordance with FIN 46(R), which requires the consolidation of
certain variable interest entities, our consolidated financial statements for
the years ended December 31, 2007 and 2006 include the accounts of TBF-I and
TBF-II, and reflect the limited partner interests held by others as a long-term
liability. During 2007, we sold approximately 4 million additional shares of our
common stock for approximately $3 million in cash. The following table provides
summary balance sheet information as of December 31, 2008 and 2007, and is
based on the audited annual financial statements included elsewhere in this
annual report on Form 10-K.
  December
      31, 2008
                
                
                December
      31, 2007ASSETSCash
      and cash equivalents
                
                $
                9,691
                
                
                $
                1,089,308Investments
      in future’s contracts, at fair valueOther
      current assets
                
                
                104,951
                
                
                
                644,188Property
      and equipment, net
                
                
                5,181,527
                
                
                
                5,753,535Certificate
      of deposit pledged as leasehold security
                
                
                
                
                
                
                889,823Total
      assets
                
                $
                5,296,169
                
                
                $
                8,376,854LIABILITIESCurrent
      Liabilities
                
                
                2,067,150
                
                
                $
                393,129Notes
      Payable
                
                
                191,250
                
                
                
                191,250Interests
      of limited partners in TPB-I and TBP-II
                
                
                218,504
                
                
                
                544,195Derivative
      Liability
                
                
                8,862Total
      liabilities
                
                $
                2,485,766
                
                
                $
                1,128.574STOCKHOLDERS
      EQUITYCommon
      stock, 30,306,390 outstanding at December 31, 2007 and 30,839,594
      shares outstanding at December 31, 2008
                
                $
                30,828
                
                
                $
                30,306Additional
      paid in capital
                
                
                12,415,122
                
                
                
                11,776,732Unissued
      common stockSubscription
      receivableAccumulated
      other comprehensive incomeDeferred
      compensation
                
                
                
                
                
                
                (595,000
                )Retained
      earnings (deficit)
                
                
                (9,635,547
                )
                
                
                (3,963,758
                )Total
      Stockholders equity
                
                $
                2,810,403
                
                
                $
                7,248,280
  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 year ended December 31, 2008, we
received $437,324 in revenue from our generating facilities, incurred $1,984,958
in fuel and direct operating costs resulting in a gross loss of
$(1,547,634). After deducting $4.0 million in selling, general and
administrative expenses, we had a net operating loss of $(5.5 million). During
2008, we earned $21,186 in interest income, earned $17,306 in other income,
realized a $(92,570) loss on marketable securities, recorded a loss from
derivative liability of $8,862, and interest expense of
$109,655.
 -21-
 We plan
to operate our Oak Ridge North as a peaking plant 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
facility for fewer hours per day during the winter months than 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 plan
to install our 2.0 MW steam turbine at the new Humble site to generate
electricity from burning biomass wood waste from Hurricane Ike.  In
addition, we expect to install an exhaust filtering system that will capture and
sequester emissions (including CO2, NOx, sulfur dioxide and CO) into depleted
oil wells on location.  The total estimated future costs associated
with this project are approximately $500,000. We plan to finance this with our
currently available capital resources.
 
 We have
just acquired the H.O. Clarke power plant site that is connected to an active
500 MW Centerpoint Energy substation that provides electricity to the City of
Houston.  Our site has four decommissioned gas–fired steam turbines
that totaled 288 MW.  These will be evaluated for components that can
be reused, sold or demolished for the scrap value.  Adjacent to the
steam units are six pad sites for gas turbines connected to Centerpoint’s 12Kv
distribution system.  We plan to move the Montgomery County GE Frame 5
turbine to this site to immediate produce biofueled power into this distribution
system as a peaker unit.  In addition, we have recently purchased a
heat recovery steam generator (HRSG) that can increase our generating capacity
by approximately 15 MW without increasing our fuel costs. In order to install
the HRSG at the H.O. Clarke site and put our planned secondary heat recovery
system in service, we will need to buy a suitable steam turbine with a rated
capacity of 25 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. Once we purchase a suitable turbine, we anticipate a lead time of nine
to twelve months to move the HRSG and turbine to our new 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 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 CHP facilities in the HGB region
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 REPs 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 GEP, 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.
 
 Liquidity
and capital resources
 
 During
the year ended December 31, 2008, we incurred net losses of $(5,671,788) and
$(3,531,327) respectively. We had $114,642 in current assets and $2,067,150 in
current liabilities at December 31, 2008, leaving us a working capital balance
of $(1,952,508).
 
 We
believe our available resources, together with our anticipated operating
revenue, will be sufficient to pay our anticipated operating expenses for a
period of at least six months from the date of this annual report on Form 10-K.
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, 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.
 -22-
 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.
 
 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
                  
                  $
                  748,608
                  
                  
                  $
                  140,238
                  
                  
                  $
                  510,600
                  
                  
                  $
                  97,770Generating
      facility leases
                  
                  
                  199,320
                  
                  
                  
                  75,579
                  
                  
                  
                  123,741
                  
                  
                  
                  –Employment
      contracts
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Total
                  
                  $
                  947,928
                  
                  
                  $
                  215,817
                  
                  
                  $
                  634,341
                  
                  
                  $
                  97,770
 
 Off-Balance
Sheet Arrangements
 
 We have
no off-balance sheet arrangements.
 
 
 ITEM
7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
 We are a
smaller reporting issuer as defined in Item 10 of Regulation S-K and are not
required to report the selected financial data specified in Item 305 of
Regulation S-K.
 
 
 ITEM
8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 -23-
 Financial Statements for the Year
Ended December 31, 2008:
 
 Report
      of Independent Registered Public Accounting Firm
                      F-2Consolidated
      Statement of Cash Flows for the years ended December 31, 2008 and
      2007
                      F-3Consolidated
      Balance Sheet as of December 31, 2008 and 2007
                      F-4Consolidated
      Statement of Stockholders' Equity for the years ended December 31, 2008
      and 2007
                      F-5Consolidated
      Statement of Cash Flows for the years ended December 31, 2008 and
      2007
                      F-6Notes
      to Consolidated Financial Statements
                      F-7




F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM


To the
Board of Directors and Management of
 Biofuels
Power Corporation
 The
Woodlands, Texas
 
 I have
audited the accompanying consolidated balance sheet of Biofuels Power
Corporation as of December 31, 2008 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 2008.  These financial statements are the responsibility
of the Company's management.  My responsibility is to express an
opinion on these financial statements based on my audit. The financial
statements for the period January 1, 2007 through December 31, 2007, were
audited by other auditors whose reports expressed unqualified opinions on those
statements.
 
 I
conducted my audit of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  I believe
that my audit provides a reasonable basis for my opinion.
 
 In my
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Biofuels Power Corporation as of
December 31, 2008, and the results of its operations and its cash flows for the
period then ended in conformity with accounting principles generally accepted in
the United States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered significant losses and will require
additional capital to develop its business until the Company either (1) achieves
a level of revenues adequate to generate sufficient cash flows from operations;
or (2) obtains additional financing necessary to support its working capital
requirements.  These conditions raise substantial doubt about the
Company's ability to continue as a going concern.  Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 
 
 /s/
Clay Thomas, P.C.
 www.claythomaspc.com
 Houston,
Texas
 May 4,
2009
 F-2




BIOFUELS
      POWER CORPORATIONCONSOLIDATED
      STATEMENT OF CASH FLOWSFor
      the years ended December 31, 2008 and 2007Year Ended December 31,2008
                                
                                
                                2007Cash
      flows from operating activities:Net
      loss
                                
                                $
                                (5,671,789
                                )
                                
                                $
                                (3,531,327
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                
                                
                                1,296,235
                                
                                
                                
                                746,088Expenses
      related to issuance of common stock for limited
partnershipinterest
                                
                                
                                12,501
                                
                                
                                
                                322,988Stock
      issued for services
                                
                                
                                83,296
                                
                                
                                
                                1,073,288Gain
      on investment in futures contract
                                
                                
                                
                                
                                
                                
                                (2,930,948
                                )Change
      in derivative liability
                                
                                
                                8,862Realized
      loss on sales of marketable securities
                                
                                
                                92,570Minority
      interest
                                
                                
                                (88,192
                                )
                                
                                
                                1,315,220Amortization
      of deferred compensation
                                
                                
                                595,000Bad
      debt expense
                                
                                
                                54,668
                                
                                
                                
                                407,501Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                242,260
                                
                                
                                
                                (242,259
                                )Prepaid
      expenses
                                
                                
                                (5,660
                                )Inventory
                                
                                
                                302,637
                                
                                
                                
                                (401,928
                                )Prepaid
      fuel cost
                                
                                
                                
                                
                                
                                
                                476,970Accounts
      payable
                                
                                
                                367,081
                                
                                
                                
                                130,969Accrued
      interest payable
                                
                                
                                61,383
                                
                                
                                
                                14,264Accrued
      expenses and other, net
                                
                                
                                93,029
                                
                                
                                
                                -Net
      Cash used in operating activities
                                
                                
                                (2,556,118
                                )
                                
                                
                                (2,619,174
                                )Cash
      flow from investing activities:Purchase
      of property and equipment
                                
                                
                                (686,728
                                )
                                
                                
                                (4,145,780
                                )Advances
      to affiliate
                                
                                
                                -
                                
                                
                                
                                (407,501
                                )Purchase
      of investment in futures contract
                                
                                
                                -
                                
                                
                                
                                (574,110
                                )Purchase
      of sale of marketable securities
                                
                                
                                (806,597
                                )Sale
      of futures contract
                                
                                
                                
                                
                                
                                
                                4,349,058Proceed
      from sale of marketable securities
                                
                                
                                200,000Proceed
      from liquidation of restricted certificate of deposit
                                
                                
                                902,149Purchase
      of certificate of deposit
                                
                                
                                (12,326
                                )
                                
                                
                                (34,047
                                )Net
      cash provided by (used in) investing activities
                                
                                
                                (403,502
                                )
                                
                                
                                (812,380
                                )Cash
      flows from financing activities:Net
      proceeds from sale of common stock
                                
                                
                                190,003
                                
                                
                                
                                2,594,566Net
      proceeds from notes
                                
                                
                                1,690,000Net
      proceeds (distributions) to / from minority interest
                                
                                
                                
                                
                                
                                
                                (777,239
                                )Net
      proceeds from minority interests
                                
                                
                                
                                
                                
                                
                                -Purchase
      of limited partnerships interests
                                
                                
                                -
                                
                                
                                
                                -Net
      cash provided by financing activities
                                
                                
                                1,880,003
                                
                                
                                
                                1,817,327Net
      increase (decrease) in cash and cash equivalents
                                
                                
                                (1,079,617
                                )
                                
                                
                                (1,614,227
                                )Cash
      and cash equivalents, beginning of period
                                
                                
                                1,089,308
                                
                                
                                
                                2,703,535Cash
      and cash equivalents, end of period
                                
                                $
                                9,691
                                
                                
                                $
                                1,089,308Supplemental
      disclosures of cash flow information:Interest
      paid
                                
                                $
                                109,655
                                
                                
                                $
                                11,481Income
      taxes paid
                                
                                $
                                -
                                
                                
                                $
                                -See
      accompanying notes to consolidated financial statements






F-3




BIOFUELS
      POWER CORPORATIONCONSOLIDATED
      BALANCE SHEETDecember
      31, 2008 and 2007




ASSETS
                              
                              2008
                              
                              
                              2007Current
      AssetsCash
      and cash equivalents
                              
                              $
                              9,691
                              
                              
                              $
                              1,089,308Accounts
      receivable
                              
                              
                              -
                              
                              
                              
                              238,580Accounts
      receivable - affliate
                              
                              
                              -
                              
                              
                              
                              3,680Prepaid
      expenses
                              
                              
                              5,660Inventory
                              
                              
                              99,291
                              
                              
                              
                              401,928Total
      current assets
                              
                              
                              114,642
                              
                              
                              
                              1,733,496Property
      and equipment, net
                              
                              
                              5,181,527
                              
                              
                              
                              5,753,535Investment
      in certificate of deposit (restricted)
                              
                              
                              -
                              
                              
                              
                              889,823Total
      Assets
                              
                              $
                              5,296,169
                              
                              
                              $
                              8,376,854LIABILITIES
      AND STOCKHOLDERS EQUITYCurrent
      LiabilitiesAccounts
      payable
                              
                              
                              696,504
                              
                              
                              
                              329,423Payable
      to affiliate
                              
                              
                              
                              
                              
                              
                              27,792Notes
      payable, unsecured
                              
                              
                              1,295,000Notes
      payable, secured
                              
                              
                              -Commissions
      payable
                              
                              
                              
                              
                              
                              
                              21,650Interest
      payable
                              
                              
                              75,647
                              
                              
                              
                              14,264Total
      Current Liabilities
                              
                              
                              2,067,150
                              
                              
                              
                              393,129Long
      Term DebtNotes
      payable, unsecured
                              
                              
                              191,250
                              
                              
                              
                              191,250Derivative
      Liability
                              
                              
                              8,862Minority
      Interest
                              
                              
                              218,504
                              
                              
                              
                              544,195Total
      Liabilities
                              
                              
                              2,485,766
                              
                              
                              
                              1,128,574Stockholders'
      EquityCommon
      stock, $001 par value, 50,000,000 shares authorized;30,839,594
      and 18,314,116 shares issued and outstanding,respectively
                              
                              
                              30,828
                              
                              
                              
                              30,306Additional
      paid in capital
                              
                              
                              12,415,122
                              
                              
                              
                              11,776,732Deferred
      compensation
                              
                              
                              -
                              
                              
                              
                              (595,000
                              )Accumulated
      deficit
                              
                              
                              (9,635,547
                              )
                              
                              
                              (3,963,758
                              )Total
      Stockholders Equity
                              
                              
                              2,810,403
                              
                              
                              
                              7,248,280$
                              5,296,169
                              
                              
                              $
                              8,376,854See
      accompanying notes to consolidated financial statements




F-3


BIOFUELS
POWER CORPORATION


CONSOLIDATED
STATEMENT OF OPERATIONS
 For
the years ended December 31, 2008 and 2007
  Year Ended December 31,2008
                                  
                                  
                                  2007RevenueSales
                                  
                                  $
                                  437,324
                                  
                                  
                                  $
                                  272,499Cost
      of sales
                                  
                                  
                                  1,984,958
                                  
                                  
                                  
                                  827,509Gross
      profit (deficit)
                                  
                                  
                                  (1,547,634
                                  )
                                  
                                  
                                  (555,010
                                  )Selling,
      general and administrative expenses
                                  
                                  
                                  4,039,751
                                  
                                  
                                  
                                  4,667,413Operating
      loss
                                  
                                  
                                  (5,587,385
                                  )
                                  
                                  
                                  (5,222,423
                                  )Other
      Income:Gain
      on investment in futures contract
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,930,948Interest
      income
                                  
                                  
                                  21,186
                                  
                                  
                                  
                                  101,113Other
      income, net
                                  
                                  
                                  17,306Unrealized
      loss on marketable securities
                                  
                                  
                                  -Realized
      loss on sales of marketable securities
                                  
                                  
                                  (92,570
                                  )Loss
      from derivative liability
                                  
                                  
                                  (8,862
                                  )Interest
      expense
                                  
                                  
                                  (109,655
                                  )
                                  
                                  
                                  (25,745
                                  )Total
      other income (loss), net
                                  
                                  
                                  (172,595
                                  )
                                  
                                  
                                  3,006,316Net
      Loss before minority interest
                                  
                                  
                                  (5,759,981
                                  )
                                  
                                  
                                  (2,216,107
                                  )Minority
      interest
                                  
                                  
                                  88,192
                                  
                                  
                                  
                                  (1,315,220
                                  )Net
      income (loss)
                                  
                                  $
                                  (5,671,789
                                  )
                                  
                                  $
                                  (3,531,327
                                  )Basic
      and diluted net loss per common share
                                  
                                  $
                                  (0.184
                                  )
                                  
                                  $
                                  (0.150
                                  )Weighted
      average common shares outstanding -basic
      and diluted
                                  
                                  
                                  30,791,006
                                  
                                  
                                  
                                  23,644,685See
      accompanying notes to consolidated financial statements






F-4




BIOFUELS
      POWER CORPORATIONCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITYFor
      the years ended December 31, 2008 and 2007
  AdditionalCommon
      Stock
                      
                      
                      Paid
      In
                      
                      
                      Deferred
                      
                      
                      AccumulatedShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Compensation
                      
                      
                      Deficit
                      
                      
                      TotalBalance
      atDecember
      31, 2007
                      
                      
                      30,306,390
                      
                      
                      $
                      30,306
                      
                      
                      $
                      11,776,732
                      
                      
                      $
                      (595,000
                      )
                      
                      $
                      (3,963,758
                      )
                      
                      $
                      7,248,280Issuance
      of commonstock
      for cash
                      
                      
                      144,002
                      
                      
                      
                      130
                      
                      
                      
                      189,872
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      190,002Issuance
      of common stockfor
      limited partnership interest
                      
                      
                      316,665
                      
                      
                      
                      316
                      
                      
                      
                      365,295
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      365,611Issuance
      of commonstock
      for services
                      
                      
                      72,537
                      
                      
                      
                      73
                      
                      
                      
                      83,223
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      83,296Vested
      portion of commonstock
      issued to employeesand
      directors
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      595,000
                      
                      
                      
                      
                      
                      
                      
                      595,000Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,671,788
                      )
                      
                      
                      (5,671,788
                      )Balance
      atDecember
      31, 2008
                      
                      
                      30,839,594
                      
                      
                      $
                      30,828
                      
                      
                      $
                      12,415,122
                      
                      
                      $
                      -
                      
                      
                      $
                      (9,635,547
                      )
                      
                      $
                      2,810,403See
      accompanying notes to consolidated financial statements






F-5


BIOFUELS
      POWER CORPORATIONCONSOLIDATED
      STATEMENT OF CASH FLOWSFor
      the years ended December 31, 2008 and 2007Year Ended December 31,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (5,671,789
            )
            
            $
            (3,531,327
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            1,296,235
            
            
            
            746,088Expenses
      related to issuance of common stock for limited
partnershipinterest
            
            
            12,501
            
            
            
            322,988Stock
      issued for services
            
            
            83,296
            
            
            
            1,073,288Gain
      on investment in futures contract
            
            
            
            
            
            
            (2,930,948
            )Change
      in derivative liability
            
            
            8,862Realized
      loss on sales of marketable securities
            
            
            92,570Minority
      interest
            
            
            (88,192
            )
            
            
            1,315,220Amortization
      of deferred compensation
            
            
            595,000Bad
      debt expense
            
            
            54,668
            
            
            
            407,501Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            242,260
            
            
            
            (242,259
            )Prepaid
      expenses
            
            
            (5,660
            )Inventory
            
            
            302,637
            
            
            
            (401,928
            )Prepaid
      fuel cost
            
            
            
            
            
            
            476,970Accounts
      payable
            
            
            367,081
            
            
            
            130,969Accrued
      interest payable
            
            
            61,383
            
            
            
            14,264Accrued
      expenses and other, net
            
            
            93,029
            
            
            
            -Net
      Cash used in operating activities
            
            
            (2,556,118
            )
            
            
            (2,619,174
            )Cash
      flow from investing activities:Purchase
      of property and equipment
            
            
            (686,728
            )
            
            
            (4,145,780
            )Advances
      to affiliate
            
            
            -
            
            
            
            (407,501
            )Purchase
      of investment in futures contract
            
            
            -
            
            
            
            (574,110
            )Purchase
      of sale of marketable securities
            
            
            (806,597
            )Sale
      of futures contract
            
            
            
            
            
            
            4,349,058Proceed
      from sale of marketable securities
            
            
            200,000Proceed
      from liquidation of restricted certificate of deposit
            
            
            902,149Purchase
      of certificate of deposit
            
            
            (12,326
            )
            
            
            (34,047
            )Net
      cash provided by (used in) investing activities
            
            
            (403,502
            )
            
            
            (812,380
            )Cash
      flows from financing activities:Net
      proceeds from sale of common stock
            
            
            190,003
            
            
            
            2,594,566Net
      proceeds from notes
            
            
            1,690,000Net
      proceeds (distributions) to / from minority interest
            
            
            
            
            
            
            (777,239
            )Net
      proceeds from minority interests
            
            
            
            
            
            
            -Purchase
      of limited partnerships interests
            
            
            -
            
            
            
            -Net
      cash provided by financing activities
            
            
            1,880,003
            
            
            
            1,817,327Net
      increase (decrease) in cash and cash equivalents
            
            
            (1,079,617
            )
            
            
            (1,614,227
            )Cash
      and cash equivalents, beginning of period
            
            
            1,089,308
            
            
            
            2,703,535Cash
      and cash equivalents, end of period
            
            $
            9,691
            
            
            $
            1,089,308Supplemental
      disclosures of cash flow information:Interest
      paid
            
            $
            109,655
            
            
            $
            11,481Income
      taxes paid
            
            $
            -
            
            
            $
            -See
      accompanying notes to consolidated financial statements




F-6


BIOFUELS
POWER CORP.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








1.           Summary
of Significant Accounting Policies





Background





Biofuels
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
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.  In January 2008, BPC’s second power plant
located just north of its first facility near the City of Oak Ridge North began
generating and selling its power directly to Entergy.





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.





Consolidation





In
accordance with FIN 46(R), which requires the consolidation of certain variable
interest entities, these consolidated 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 consolidated 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 Assumptions





The
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 Equivalents





The
Company considers any highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.





Derivative
Instruments and Hedging





The
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, 2008 and December 31, 2007, the Company did not have any open
hedge contracts.





Revenue
Recognition





Revenue,
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 (8)
days after the date of sale with subsequent adjustments at sixty (60) days and
one hundred eighty (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 fifteen (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.





F-7


Revenue
from the second power generating plant is sold directly to Entergy under an
agreement whereby the power provided to Entergy is metered through Entergy
facilities and then paid directly to Biofuel Power Corporation based upon the
Entergy rate schedule.





Biodiesel
Tax Credits





Biodiesel
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. BPC
received $199,650 and $437,905 in Federal credits during 2008 and 2007,
respectively.





Accounts
Receivable





Accounts
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 December 31, 2008 the Company had
no trade accounts receivable or Federal credits receivable.  As of
December 31, 2007 the Company had trade accounts receivable of $27,370 and
Federal credits receivable of $211,210.





Inventory





Inventory
is stated at the lower of cost or market and consists of 33,744 gallons and
35,368 gallons of unprocessed fuel stock, and 49,285 gallons and 163,221 gallons
of processed fuel stock at December 31, 2008 and 2007,
respectively.  Cost is determined using the first-in first-out
(“FIFO”) method.





Property
and Equipment





Property
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 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 Asset





Management
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.





Income
Taxes





The
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
Per Common Share





The
Company provides basic and dilutive loss per common share information for each
period presented.  The basic net loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding.  Diluted net loss per common share is computed by
dividing the net loss, adjusted on an "as if converted" basis, by the weighted
average number of common shares outstanding plus potential dilutive
securities.  For the year ended December 31, 2008 and 2007, the
Company did not have any potential dilutive securities.





Stock-Based
Compensation





On
January 1, 2006, the Company 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 would
begin recognizing expense on January 1, 2006 for the unvested portion of awards
granted before the adoption date expected to vest over the remaining vesting
period of the award. New awards granted after the adoption date will be expensed
ratably over the vesting period of the award.





F-8


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 Risk





Financial
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 Pronouncements





In
February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements No. 133 and
140”.  This Statement resolves issues addressed in Statement
133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets”.  This Statement permits
fair value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of Statement 133, establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives, amends Statement 140
to eliminate the prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument.  This statement is
effective for fiscal years beginning after September 15, 2006.  Its
adoption did not have a material impact on the Company’s financial condition or
results of operations.





FASB
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 docifies 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 (F),
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.  Management does not believe the adoption
of SFAS 157 will 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 elected not to
adopt the provisions of SFAS 159 at this time.





In June
2006, FASB issued FIN 48, “Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109”,  which
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with FASB 109,“Accounting for Income
Taxes”.   FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.  The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings.  The adoptions of this
pronouncement did not have a material effect on the financial position or
results of operations of the Company.





F-9


In
December 2007, the FASB issued a revision and replacement of SFAS 141(“SFAS
141R”), “Business
Combination,” 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 which 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 which shall be applied retrospectively for all periods presented.
The Company does not believe that the adoption of SFAS 160 would have a material
effect on its consolidated financial position, results of operations or cash
flows.





2.           Going
Concern





During
the years ended December 31, 2008 and 2007, the Company has experienced negative
financial results as follows:





2008
                
                
                2007Net
      loss
                
                $
                (5,671,788
                )
                
                $
                (3,531,327
                )Negative
      cash flows from operations
                
                
                (2,556,118
                )
                
                
                (2,619,174
                )Accumulated
      deficit
                
                
                (9,635,547
                )
                
                
                (3,963,758
                )





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.·
            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.





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
      Company’s ability to obtain adequate sources of debt or equity funding to
      meet current commitments and fund the continuation of its business
      operations in the near term.·
            The
      ability of the Company to control costs and expand
    revenues.·
            The
      ability of the Company to ultimately achieve adequate profitability and
      cash flows from operations to sustain its
  operations.








F-10


3.           Hedge
Accounts





In May
2006, TBF-1 invested $479,000 in a soybean commodity hedge and in August 2006,
TBF-2 invested $365,000 in a second soybean commodity hedge. At December 31,
2006, the net fair market value of the hedge accounts, as reported by the
brokerage firm that held the accounts, was $2,094,400 including unrealized gains
of $1,250,400. Since the two hedge accounts were a correlative hedge to protect
the price of feedstock used in the production of biodiesel is used as the fuel
in the Company’s renewable energy power plants, the unrealized gain, net of
minority interests, has been included in other comprehensive income in
stockholders’ equity. During February 2007 the hedge was closed and the Company
realized a gain of $1,705,918.  There were no hedges or futures
contracts as of December 31, 2008 or December 31, 2007.





In
February 2007, TBF-1 invested $286,420 in a cotton commodity hedge and TBF-2
invested $287,690 in a cotton commodity hedge. In July 2007, the Company closed
the hedge positions and realized a combined gain of $1,225,030.





The
following table summarizes the changes in the hedge account balances during the
year ended December 31, 2007 and 2006:





TBF-1
                  Hedge
                
                
                TBF-2
                  Hedge
                
                
                Combined
                  HedgeHedge
      Investment in May 2006
                
                $
                479,000
                
                
                $
                365,000
                
                
                $
                844,000Market
      Value at December 31, 2006
                
                
                1,047,200
                
                
                
                1,047,200
                
                
                
                2,094,400Unrealized
      Gain at December 31, 2006
                
                $
                568,200
                
                
                $
                682,200
                
                
                $
                1,250,400Sale
      of Hedge in February 2007 (net)
                
                $
                1,097,628
                
                
                $
                1,452,290
                
                
                $
                2,549,918Realized
      Gain in February 2007
                
                
                618,628
                
                
                
                1,087,290
                
                
                
                1,705,918Hedge
      Investment in February 2007
                
                $
                286,420
                
                
                $
                287,690
                
                
                $
                574,110Sale
      of Hedge in July 2007 (net)
                
                
                900,204
                
                
                
                898,936
                
                
                
                1,799,140Realized
      Gain in July 2007
                
                $
                613,784
                
                
                $
                611,246
                
                
                $
                1,225,030Total
      Realized Gain
                
                $
                1,232,412
                
                
                $
                1,698,536
                
                
                $
                2,930,948





4.           Property
and Equipment





Property
and equipment consisted of the following at December 31, 2007 and
2006:





2008
                
                
                2007Power
      generating equipment
                
                $
                5,327,607
                
                
                $
                4,731,070Buildings
      and improvements
                
                
                1,204,750
                
                
                
                1,106,996Machinery
      and equipment
                
                
                720,729
                
                
                
                720,729Less
      accumulated depreciation
                
                
                (2,101,559
                )
                
                
                (805,260
                )Total
      property and equipment, net
                
                $
                5,181,527
                
                
                $
                5,753,535





Depreciation
expense for the years ended December 31, 2008 and 2007 was $1,296,235 and
$746,088 of which $1,265,499 and $417,144 is included in Cost of Sales,
respectively.





5.           Notes
Payable





During
2007, the Company issued $456,450 of notes payable as payment for the purchase
of certain limited partnership interests.  Also during 2007, $265,200
of these notes payable were paid through the issuance of 353,592 shares of the
Company’s common stock valued at $.75 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.





As of
December 31, 2007, 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
2008, the Company entered into a note payable agreement with Chieftain Resources
for the financing of inventory.  The note is dated June 15, 2008, and
bears interest at 12% due monthly.  Principal is due monthly at 3% of
the outstanding balance, and may be renewed annually.  The note is not
collateralized.





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 December 31,
2008, the Company had received $1,195,000, and as of this report has received
$1,750,000.





F-11


The
Security 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 providing that the
strike price is $0.75.  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.





We have
evaluated these features of our convertible promissory notes and determined that
they meet the definition of embedded derivative as defined by SFAS 133, “Accounting for Derivatives and
Hedging Activities,”and have recorded derivative liabilities of $8,862
as of December 31, 2008.





6.           Income
Taxes





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  Significant components of
the Company’s deferred tax assets and liabilities at December 31, 2008 and 2007
were as follows:





2008
                
                
                2007Deferred
      tax assets:Receivable
      from affiliate
                
                $
                121,041
                
                
                $
                138,550Net
      operating loss carry-forwards
                
                
                220,788
                
                
                
                132,596Total
      deferred tax assets
                
                
                341,829
                
                
                
                271,146Valuation
      allowance
                
                
                (341,829
                )
                
                
                (271,146
                )Net
      deferred tax asset
                
                $
                -
                
                
                $
                -





The
difference between the income tax provision (benefit) in the accompanying
statement  of operations and the amount that would result if the U.S.
Federal statutory income tax rate of 34% were applied for the year-ended
December 31, 2008 and 2007, are as follows:





2008
                
                
                2007Amount
                
                
                %
                
                
                Amount
                
                
                %Benefit
      for income tax at federalstatutory
      rate
                
                $
                (1,928,551
                )
                
                
                (34.0
                )
                
                $
                (1,200,651
                )
                
                
                (34.0
                )Income
      attributable to limited partners
                
                
                223,588
                
                
                
                4.0
                
                
                
                447,175
                
                
                
                12.7Stock
      based compensation
                
                
                595,000
                
                
                
                10.5
                
                
                
                364,918
                
                
                
                10.3Settlement
      expense
                
                
                194,355
                
                
                
                3.4
                
                
                
                109,816
                
                
                
                3.1Increase
      in valuation allowance
                
                
                70,683
                
                
                
                1.2
                
                
                
                161,164
                
                
                
                4.6Other
                
                
                844,925
                
                
                
                14.9
                
                
                
                117,578
                
                
                
                3.3$
                -
                
                
                
                0.0
                
                
                $
                -
                
                
                
                0.0





As of
December 31, 2008, for U.S. federal income tax reporting purposes, the Company
has approximately $2,800,000 of unused net operating losses (“NOL's”) available
for carryforward to future years.  The benefit from carryforward of
such NOL's will expire during various years through 2028.  Because
United States tax laws limit the time during which NOL carryforwards may be
applied against future taxable income, the Company may be unable to take full
advantage of its NOL for federal income tax purposes should the Company generate
taxable income.  Further, the benefit from utilization of NOL
carryforwards could be subject to limitations due to material ownership changes
that may or may not occur in the Company.  Based on such limitations,
the Company has significant NOL’s for which realization of tax benefits is
uncertain.





6.           Stockholders’
Equity





The
Company entered into an investment banking contract with M1 Energy Capital
Securities, LLC (“M1 Energy”) of Chicago, Illinois to raise capital under a
Regulation D Private Placement Offering. M1 Energy raised $3,500,000 for TBF-1
and $3,500,000 for TBF-2. These offerings were to sell up to 3,500 Membership
Units (“Units”) to accredited investors at $1,000 per unit. The total cost paid
to M1 Energy of $777,239 was recorded as a reduction in the minority interest
liability.  M1 Energy also raised $3,926,355 through December 31, 2007
for a Private Placement for Biofuels Power Corp.  As compensation for
this service as of December 31, 2007, M1 Energy was paid $225,000 in cash and
was issued 247,816 shares of common stock with a value of $309,770 or $1.25 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.
..





F-12


Under the
terms of the Partnership agreements, the partners are entitled to receive 90% of
net cash flow from operations until they receive cumulative cash distributions
of $14 million.  Thereafter, the partners are entitled to receive 15%
of the net cash flow from operations until the Company exercises the buy-out
rights specified in the agreements.





During
the period from formation of the Partnerships through 2007, market prices of
feedstocks used in the production of the biodiesel fuel used to power the
Company’s power generation facilities rose dramatically, making the Company’s
projected operations less profitable than originally intended.  In
response to the adverse market conditions for biodiesel feedstocks, in December
2006 the Company made an exchange offer (the “December 2006 Exchange Offer”) by
which all limited partners of the Partnerships were given the opportunity to
exchange Units of limited partner interests in the Partnerships for shares of
the Company’s common stock equivalent in value to the cash amount paid by such
limited partners for the original purchase of their respective
Units.  The basis of the December 2006 Exchange Offer was 1,500 shares
of Company common stock for each tendered Unit, the equivalent of $0.67 per
share.  As of December 31, 2006, limited partners in TBF-1 had
tendered 700 Units, and limited partners in TBF-2 had tendered 580 Units,
resulting in the Company being obligated to issue 1,920,000 shares of its common
stock of which 870,000 shares were issued as of December 31, 2006 and 1,050,000
issued in 2007.  Since the fair value of the common stock is $0.75 per
share, based on the cash price received for the common stock in a current
private placement, the Company has recorded the value of the excess shares
issued upon conversion of the limited partnership interests of $160,000 as
settlement expense in general and administrative expense in the accompanying
statement of operations for the year ended December 31, 2006.





On March
15, 2007 the Company made a second exchange offer (the “March 15, 2007 Exchange
Offer”) for Units of TBF-1 and TBF-2.  The basis of the March 15, 2007
Exchange Offer was to exchange one hundred Units of $100,000 original issuance
value for 1,500 shares of the Company’s common stock per unit, the equivalent of
$0.67 per share (or ratable portion  thereof) or to exchange such 100
units for a cash payment of $102,500 (or ratable portion thereof).  As
a result, the Company was required to pay $512,500 for the exchange of 500
partnership units.  During the year ended December 31, 2007, limited
partners in TBF-1 converted 2,045 partnership units at 1,500 shares per unit,
and 755 partnership units at 1,133 shares per unit resulting in the Company
issuing 2,918,160 shares to limited partners in TBF-1.





In August
of 2007, the Company made a third exchange offer (the “August 2007 Exchange
Offer”) for all outstanding Units of TBF-2.  The basis of the August
2007 Exchange Offer was, following receipt by the limited partner of a
distribution by TBF-1 of current allocable income, as follows: a cash payment of
$100 from the Company plus, at the election of the tendering limited partner,
either (A), receipt of 1,133.33 shares of the Company’s common stock, valued at
$0.75 per share, which was subsequently changed to 1,267 shares per partnership
unit or (B) a promissory note made by the Company with a principal value of
$850, payable over four years with 12.5% annual interest.  In the case
of option (B), the Company has, with payee partner consent, the ability to repay
the principal in either cash or registered shares of Company common stock,
provided that the Company’s common stock is at the time of payment trading on a
public exchange or bulletin board quotation system and has achieved certain
trading volume requirements.  During the year ended December 31, 2007
limited partners in TBF-2 converted 1,370 partnership units at 1,500 shares per
unit, and 850 partnership units at 1,267 shares per unit resulting in the
Company issuing 3,131,661 shares to limited partners in TBF-2.





Since the
fair value of the common stock is $0.75 per share, based on the cash price
received for the common stock in the current private placement, the Company has
recorded the value of the excess shares issued upon conversion of the limited
partnership interests of $322,988 as settlement expense in general and
administrative expense in the accompanying statement of operations for the year
ended December 31, 2007.





As a
result of the December 2006 Exchange Offer, the March 15, 2007 Exchange Offer,
and the August 2007 Exchange Offer, the Company as of December 31, 2007 owns
3,500 Units of TBF-1 and 2,950 Units of TBF-2, representing 100% and 84% of the
outstanding Units of TBF-1 and TBF-2, respectively.





During
November 2007, the Company issued 300,000 shares of its common stock to
employees of the Company, 950,000 shares were issued to officers and directors
of the Company (of which 60,000 shares were subsequently forfeited) and 144,630
shares were issued to consultants for services performed.  The shares
issued to employees, officers and directors vest at 50% upon issuance and 5% per
month thereafter. These shares were valued at $1.25 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.  As a result,
the Company recorded $1,073,288 in selling, general and administrative expenses
and $595,000 in deferred compensation related to the issuance of this common
stock during 2007.  During 2008, the remaining balance of $595,000 in
deferred compensation was recorded in selling, general and administrative
expenses.





7.           Commitments
and Contingencies





Operating
Lease





On August
1, 2007 the Company entered into a ground lease agreement with the city of Oak
Ridge North for the location of the first power project. The lease is a
44-month-lease which requires monthly payments of $3,500 per
month.  The agreement contains options to renew the lease for two
consecutive five year terms.





On May 1,
2007 the Company entered into a commercial lease agreement for the location of
the second power plant. The lease is a five year lease with an option for an
additional five year period.  The lease requires payments starting at
$ 2,620 per month and escalating no more than 4% per year
thereafter.





F-13


On July
1, 2008, the Company relocated its corporate offices and executed a lease for
five years for $11,130 per month.  The lease escalates at 10% per
year.





Future
minimum rental payments required under non-cancelable lease agreements are as
follows:





Turbine
                          
                          
                          Corporate
                          
                          
                          
                          
                          Oak
      Ridge
                          
                          
                          
                          
                          AllYears
                          
                          Plant
                          
                          
                          Office
                          
                          
                          
                          
                          North
      Plant
                          
                          
                          
                          
                          Leases2009
                          
                          $
                          33,579
                          
                          
                          $
                          140,238
                          
                          
                          
                          
                          $
                          42,000
                          
                          
                          
                          
                          $
                          215,8172010
                          
                          
                          34,922
                          
                          
                          
                          154,260
                          
                          
                          
                          
                          
                          42,000
                          
                          
                          
                          
                          
                          231,1822011
                          
                          
                          36,319
                          
                          
                          
                          169,686
                          
                          
                          
                          
                          
                          10,500
                          
                          
                          
                          
                          
                          216,5052012
                          
                          
                          -
                          
                          
                          
                          186,654
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          186,6542013
                          
                          
                          -
                          
                          
                          
                          97,770
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          97,770-
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -$
                          104,820
                          
                          
                          $
                          748,608
                          
                          
                          
                          
                          $
                          94,500
                          
                          
                          
                          
                          $
                          947,928





Litigation





The
Company does not have any litigation at this time.





Fulcrum
Power Agreement





In
January 2007, the Company entered into a three year Energy Management Agreement
with Fulcrum Power Services, L.P. (“Fulcrum”) whereby Fulcrum is to perform as
the Qualified Scheduling Entity for the Company’s power generating
facility.  Per the agreement, the Company is required to pay Fulcrum
$6,000 per month for the first year of the agreement with a 5% escalation in the
fee for each year thereafter.





Entergy
Power Purchase Agreement





In
January 2008, the Company entered into an agreement between Biofuels Power
Corporation and Entergy Texas, Inc., allowing sale of power to
Entergy.





Tolling
Agreement





BPC
entered into a tolling agreement with SRC on September 12, 2006 to process
biodiesel for its power projects for a price of $0.50 per
gallon.  This contract expires on December 31, 2008 but is extendable
for consecutive one-year terms.  During the year ended December 31,
2007, the Company purchased approximately 90% of its biodiesel under this
tolling agreement.





8.           Related
Party Transactions





During
the year ended December 31, 2007, the Company advanced $407,501 to Texoga and
SRC, which are both former affiliates.  These advances were recorded
as receivable from affiliate.  As of December 31, 2007, the Company
has reserved a cumulative total of $664,227 for advances during 2007 and 2006 to
Texoga and SRC as an allowance for doubtful accounts due to the uncertainty of
collection.





During
the year ended December 31, 2007, the Company paid certain affiliated companies
approximately $306,000 for labor and equipment used in the build out of its
electric generator facilities.  In addition, the Company paid
approximately $177,000 to an affiliate for the purchase of
feedstock.




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 purposes of
providing capital expenditures and working capital.





On
October 13, 2008, the Company received $200,000 loan proceeds from one of its
shareholders as part of the $2.5 million loan commitment for the purposes of
providing capital expenditures and working capital.





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 October 2008.




9.           Subsequent
Events





On March
25, 2009, the Company completed the purchase the 79 acre H. O. Clarke site from
NRG Energy.  The cost was $1,350,000 million which was provided from
loans specifically designated for the acquisition.  The facility has a
decommissioned 288 MW steam plant, a connection to the adjacent 500MW
Centerpoint Energy transmission substation, 65,000 bbl above ground fuel storage
tankage, two 6” and one 12” natural gas pipelines previously connected to a
Kinder Morgan high pressure gas pipeline and six turbine pad sites with
connections to a 12K v distribution power line.


F-14


ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





NOT
APPLICABLE





ITEM
9A — CONTROLS AND PROCEDURES





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, and 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 December 31, 2007. 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;·
            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 serve as our Chief
      Financial Officer and to supervise our 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 commenced the search for a qualified full time Chief Financial
      Officer.





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





-24-


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 December 31, 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 December 31, 2008, our internal
control over financial reporting is effective.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary SEC rules that permit us to provide only
management’s report in this annual report on Form 10-K.





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 last fiscal year that materially affected, or is likely to materially
affect, our internal control over financial reporting. Our auditor has not
notified us that any material weakness exists with respect to our internal
financial controls.





PART
III





ITEM
10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Our Board
of Directors presently consists of three directors who are elected to serve for
one-year terms at our annual meeting of stockholders. The following table
identifies our executive officers and directors and specifies their respective
ages and positions.





Name
                Age
                Position
                Term
      ExpiresFred
      O’Connor
                69
                Director,
      Interim CEO
                2009
      Annual MeetingSam
      H. Lindsey, Jr
                63
                Interim
      CFOAlan
      Schaffner
                48
                Independent
      Director
                2009
      Annual MeetingRichard
      DeGarmo
                54
                Independent
      Director
                2009
      Annual Meeting





Fred
O’Connor has served as a director of our company since inception and
presently serves on a part-time basis as our Interim Chief Executive Officer.
Since 2003, Mr. O’Connor has served as the Mayor of the City of Oak Ridge North,
Texas and was instrumental in our decision to locate our first biodiesel fueled
generating facility in that city. Mr. O’Connor was formerly President and CEO of
Process International Inc. performing design, construction, engineering,
commissioning and training for energy, environmental and petrochemical projects
in Libya, Costa Rica, Peru and the United Kingdom.  He was also
formerly Director of MC International out of Syria, specializing in
international business development and diplomatic relations. Mr. O’Connor is a
1960 graduate of The University of Notre Dame where he earned a bachelors degree
in sociology with a minor in business.





Sam H. Lindsey,
Jr.has served as part-time Chief Financial Officer of our company
since March 2008. Mr. Lindsey is a 1971 accounting major graduate of the
University of Houston with a BBA.  Mr. Lindsey passed the CPA exam in
1973 and has been in public accounting and industry since that
time.  During his time in public accounting, Mr. Lindsey served a
managing partner of his accounting firm and acquired extensive experience in
tax, audit, accounting services and management advisory
services.  Since leaving public practice, Mr. Lindsey has served as
CFO for four reporting companies and a large privately held oilfield service
company.





-25-


Alan Schaffner,
Esq.was
appointed to a newly created seat on our Board of Directors in October 2007. Mr.
Schaffner has been self-employed as an independent trader at the Chicago Board
of Trade for 20 years. He has extensive expertise in the agricultural futures
and options markets and specializes in relational derivative strategies and risk
mitigation.  Mr. Schaffner is a 1982 graduate of the University of
Wisconsin where he earned a degree in accounting, and a 1986 graduate of the
Chicago Kent College of Law where he earned a juris doctor degree. Mr. Schaffner
is a certified public accountant and a licensed attorney in
Illinois.





Richard
DeGarmo was appointed to a newly created seat on our Board of Directors
in October 2007. Mr. DeGarmo was appointed chief executive officer of SRC in
February 2008, previously served as chief technical officer of SRC from November
2006 through January 2008, and previously served for two years as SRC’s chief
executive officer. Mr. DeGarmo is a professional process engineer with 25 years
of international experience in design, construction and operation of process
plants, training of personnel, business development, filing of patents,
permitting, computer modeling and financial planning. Before joining SRC in
January 2005, Mr. DeGarmo served for five years as vice president of Global
Resource Recovery Organization, Inc. and was responsible for developing process
solutions for the disposal of organic wastes, biosolids, residual chemicals, and
industrial and agricultural waste. Mr. DeGarmo is a dual degree graduate of Ohio
State University where he earned a bachelors degree in agricultural sciences
(1977) and a Masters degree in agricultural engineering (1981). Mr. DeGarmo is a
registered professional engineer in Texas.





Key
Consultants





Steven S.
McGuire, the president of Texoga, serves as a part-time consultant to our
company. Mr. McGuire has served as Texoga’s chief executive officer since 1996
and was formerly Chairman, CEO or President of three energy and technology
companies that had operations in three countries and over 200 employees. Mr.
McGuire is a 1977 graduate of the University of Illinois, Champaign-Urbana (B.S.
Physics) and an active member of the Society of Petroleum Engineers and the
Society of Professional Well Log Analysts.





Robert
Wilson served as part-time CFO from the inception of the Company until
March 2008, now serves as Vice President, Finance.  Mr. Wilson who
serves as the CFO and Operations Principal for several broker dealer and
investment banking firms.  His duties include compliance with NASD,
SEC and NYSE rules and regulations, the design and implementation of accounting
and operations control procedures, representing firms as an expert witness and
with NASD examinations.  He currently serves as a director and audit
committee chairman for American Security Resources, Inc. and American Enterprise
Development Corporation and as a consultant with The Professional Directors
Institute.  Mr. Wilson is a CPA and has over fifteen years of
experience as the owner of a certified public accounting firm, was previously a
member of the NASD board of Arbitrators and has several NASD and NYSE
licenses.  Mr. Wilson has previously served as operations compliance
manager of the AIM Management Group, Vice President Compliance/Internal Audit of
the Kemper Securities Group and an auditor with Price Waterhouse.  Mr.
Wilson is a 1977 graduate of Houston Baptist University and pursued additional
studies at Georgetown University.





Board
Committees





The Board of Directors has created an
Audit Committee that presently consists of Messrs. Schaffner and DeGarmo. Mr.
Schaffner serves as chairman of the Audit Committee. All members have a basic
understanding of finance and accounting, and are able to read and understand
fundamental financial statements. The board has determined that all members of
our Audit Committee would meet the independence requirements of the American
Stock Exchange if such standards applied to our company. The Board of Directors
has also determined that based on education and work history, Mr. Schaffner
meets the definition of an “Audit Committee Financial Expert” as established by
the Securities and Exchange Commission. The audit committee's responsibilities
include:





·
            appointing,
      approving the compensation of, and assessing the independence of our
      independent auditor;·
            overseeing
      the work of our independent auditor and approving the release of reports
      from our independent auditor;·
            reviewing
      and discussing with management and our independent auditor our annual and
      quarterly financial statements and related disclosures;·
            monitoring
      our internal control over financial reporting, disclosure controls and
      procedures, and code of business conduct and ethics;·
            discussing
      our risk management policies;·
            establishing
      policies regarding hiring employees from our independent auditor and
      procedures for the receipt and retention of accounting related complaints
      and concerns;·
            meeting
      independently with our independent auditor and management;
    and·
            preparing
      the audit committee report required by SEC rules to be included in our
      proxy statements.





All audit
services and all non-audit services, except de minimis non-audit services, must
be approved in advance by the Audit Committee.





-26-


The Board of Directors has created a
Compensation Committee that presently consists of Messrs. Schaffner and DeGarmo.
Mr. DeGarmo serves as chairman of the Compensation Committee. The Board of
Directors has determined that all members of the Compensation Committee meet the
independence requirements of the American Stock Exchange if such standards
applied to our company. The Compensation Committee's responsibilities
include:





·
            annually
      reviewing and approving corporate goals and objectives relevant to
      compensation of our chief executive officer;·
            determining
      the compensation of our chief executive officer;·
            reviewing
      and approving, or making recommendations to our Board of Directors with
      respect to, the compensation of our other executive
    officers;·
            overseeing
      an evaluation of our senior executives;·
            overseeing
      and administering our cash and equity incentive plans;
  and·
            reviewing
      and making recommendations to our board with respect to director
      compensation.




The Board of Directors does not have a
separate nominating committee, and has determined that it is appropriate for the
entire board to serve that function for the time being. Accordingly, Mr.
O’Connor will participate in decisions respecting director nominees until an
independent nominating committee is established. With respect to director
nominees, the Board of Directors will consider nominees recommended by
stockholders that are submitted in accordance with our By-Laws.





Corporate
Governance





Our Board of Directors believes that
sound governance practices and policies provide an important framework to assist
them in fulfilling their duty to stockholders. Our Board of Directors is working
to adopt and implement many "best practices" in the area of corporate
governance, including separate committees for the areas of audit and
compensation, careful annual review of the independence of our Audit and
Compensation Committee members, maintenance of a majority of independent
directors, and written expectations of management and directors, among other
things.





Potential
Conflicts of Interest





Our
officers and directors are not full time employees of our company and are
actively involved in other business pursuits. Accordingly, they may be subject
to a variety of conflicts of interest. Since our officers and directors are not
required to devote any specific amount of time to our business, they will
experience conflicts in allocating their time among their various business
interests.





Our
officers and directors intend to comply with the requirements of Texas law, and
believe they can avoid most potential conflicts of interest.  If our
officers and directors are subjected to an irreconcilable conflict of interest,
they may elect to submit the issue for a vote of the disinterested stockholders,
but they are not required to do so.





Code
of Business Conduct and Ethics





The Board of Directors has adopted a
Code of Business Conduct and Ethics, which has been distributed to all
directors, officers, and employees and will be given to new employees at the
time of hire. The Code of Business Conduct and Ethics contains a number of
provisions that apply principally to our President, Chief Financial Officer and
other key accounting and financial personnel. A copy of our Code of Business
Conduct and Ethics can be found under the "Investor Information" section of our
website at www.biofuelspower.com. We intend to disclose any amendments or
waivers of our Code of Business Conduct and Ethics on our website.





Indemnification
of Officers and Directors





Our
Articles of Incorporation allows us to indemnify our officers and directors to
the fullest extent permitted by Texas law. The indemnification provisions are
sufficiently broad to provide protection against monetary damages for breach or
alleged breach of their duties as officers or directors, other than in cases of
fraud or other willful misconduct. Our Articles of Incorporation also provide
that, subject to specific exclusions required under Texas law, our directors
will not have any personal liability to our company or our stockholders for
monetary damages arising from a breach of fiduciary duty. Our bylaws require us
to indemnify our officers and directors to the maximum extent permitted by Texas
law. In addition, our bylaws require us to advance expenses to our officers and
directors as incurred in connection with proceedings against them for which they
may be indemnified. The SEC believes the indemnification of directors, officers
and control persons for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act and is therefore
unenforceable.





-27-


ITEM
11 — EXECUTIVE COMPENSATION





Employment
Agreements





Fred
O’Connor, our interim CEO and Robert Wilson, our interim Vice President, Finance
are not full time employees and do not have written employment agreements with
our company. Messrs. O’Connor and Wilson are entitled to receive monthly
consulting fees of $6,000 and $4,000, respectively, for the time they devote to
our affairs. Messrs. O’Connor and Wilson are both engaged in other activities
that will limit the amount of time they can devote to our affairs and may face
conflicts of interest in allocating their available time among their
various interests. In addition to their restricted stock grants and monthly
consulting fees, Messrs. O’Connor and Wilson are entitled to such bonuses as the
compensation committee may approve, but are not entitled to receive any other
equity or non-equity incentive compensation, deferred compensation, fringe
benefits or other compensation. We are presently searching for qualified
individuals to assume the positions that are presently occupied by Messrs.
O’Connor and Wilson, but are unable to estimate the amount of time it will
take to identify suitable successors and negotiate appropriate employment
agreements and compensation terms.





Sam H.
Lindsey, Jr., our interim CFO, is not a full-time employee and does not have a
written employment agreement.  Mr. Lindsey provides consulting
services on a per diem basis





The
following table provides summary information on the compensation paid to our
interim CEO and interim Vice President Finance and interim CFO during the year
ended December 31, 2008.





Summary
      Compensation TableName
                Position
                Year
                
                Salary
                
                
                Bonus
                
                
                Vested
                  stock
      awards
                
                
                All
      other
                  compensation
                
                
                Total
                  compensationFred
      O’Connor
                Interim
      CEO
                2008
                
                $
                72,000
                
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                $
                72,000Robert
      Wilson
                Interim
      VP Finance
                2008
                
                $
                48,000
                
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                $
                48,000Sam
      Lindsey
                Interim
                  CFO
                2008
                
                $
                48,000
                
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                $
                48,000





Equity-based
Compensation During 2008 and 2007





We did
not issue any stock options or other equity-based compensation to any of our
officers or directors during the year ended December 31, 2008. On November 1,
2007, we issued a total of 1,250,000 shares of common stock to our directors,
officers, principal consultants and employees. All of stock grants were valued
at $1.25 per share for accounting purposes, an amount that represents our best
estimate of the current fair market value of our shares. Under the terms of the
stock grants, 50% of the grant shares vested immediately and the remaining 50%
vest ratably at the rate of 5% per month over a period of 10 months from the
date of grant. The following table identifies the principal recipients of the
stock grants and summarizes the number and value of grant shares that have
vested at March 31, 2008 and the number and value of grant shares that will vest
over the next five months:





Total
      Grant
            
            
            Vested
      Portion
            
            
            Future
      VestingName
            
            Position
            
            Shares
            
            
            Value
            
            
            Shares
            
            
            Value
            
            
            Shares
            
            
            ValueFred
      O’Connor
            
            Interim
      CEO
            
            
            300,000
            
            
            $
            375,000
            
            
            
            225,000
            
            
            $
            281,250
            
            
            
            75,000
            
            
            $
            93,750Robert
      Wilson
            
            Interim
      VP
            
            
            100,000
            
            
            $
            125,000
            
            
            
            75,000
            
            
            $
            93,750
            
            
            
            25,000
            
            
            $
            31,250Alan
      Schaffner
            
            Director
            
            
            100,000
            
            
            $
            125,000
            
            
            
            75,000
            
            
            $
            93,750
            
            
            
            25,000
            
            
            $
            31,250Richard
      DeGarmo
            
            Director(2)
            
            
            100,000
            
            
            $
            125,000
            
            
            
            75,000
            
            
            $
            93,750
            
            
            
            25,000
            
            
            $
            31,250Robert
      A. Webb
            
            Legal
      counsel
            
            
            100,000
            
            
            $
            125,000
            
            
            
            70,000
            
            
            $
            87,500
            
            
            Balance
      forfeit (1)J.
      Michael McGee
            
            Consultant
            
            
            100,000
            
            
            $
            125,000
            
            
            
            70,000
            
            
            $
            87,500
            
            
            Balance
      forfeit (1)Steven
      McGuire
            
            Consultant
            
            
            100,000
            
            
            $
            125,000
            
            
            
            75,000
            
            
            $
            93,750
            
            
            
            25,000
            
            
            $
            31,250Other
      employees and consultants
            
            
            350,000
            
            
            $
            437,500
            
            
            
            262,500
            
            
            $
            328,125
            
            
            
            87,500
            
            
            $
            109,375





(1)
            Effective
      March 1, 2008, Messrs. Webb and McGee resigned from our board of directors
      and in connection therewith, 30,000 unvested grant shares owned by each of
      them were forfeited.(2)
            Effective
      April 22, 2009, Mr. DeGarmo resigned from our Board of
      Directors.





2009 Executive Compensation
Plan





This section contains a prospective
discussion of the material elements of compensation that will be awarded to,
earned by or paid to our three most highly compensated individuals on a
go-forward basis. These individuals, who have not yet been retained by us, are
referred to as the “Named Executive Officers.”





-28-


Compensation
Decision-Making





The Compensation
Committee Our Compensation Committee exercises the Board of Directors’
authority concerning compensation of the executive management team, non-employee
directors and the administration of our stock-based incentive compensation
plans. The Compensation Committee will typically meet in separate sessions
independently of board meetings. The Compensation Committee will typically
schedule telephone meetings as necessary to fulfill its duties.  The
Chairman will typically establish meeting agendas after consultation with other
committee members and our CEO.





Role of Contracts
Establishing Compensation When we identify individuals to assume the
posts of Chief Executive Officer, Chief Financial Officer and Chief Operating
Officer, we are likely to negotiate formal employment agreements that have terms
of three to four years and contain express provisions relating to annual
salaries, bonuses, equity incentives and other non-cash
compensation.  Our Compensation Committee will bear primary
responsibility for negotiating the terms of such agreements and passing on the
reasonableness thereof.





Role of
Executives in Establishing Compensation We believe that our CEO and other
members of management will regularly discuss our compensation issues with
Compensation Committee members. In general, the Compensation Committee will have
the sole authority to establish salary, bonus and equity incentives for our CEO
in consultation with other members of the management team. Subject to
Compensation Committee review, modification and approval, we believe our CEO
will typically make recommendations respecting bonuses and equity incentive
awards for the other members of the executive management team.








Other
Compensation Policies With the assistance of the Compensation Committee
and our management team, we developed a number of policies and practices that we
plan to implement during 2008.  Consistent with our compensation
philosophies described below, our goal will be to provide executive officers
with a compensation program that is competitive with other opportunities that
were available to them.





We do not have a pre-established policy
or target for the allocation of incentive compensation between cash bonuses and
equity incentive compensation.  The Compensation Committee will review
surveys and other information considered relevant to determine the appropriate
level and mix of incentive compensation for each executive officer and make a
final decision in consultation with the executive officer.  The
portion of an executive’s total compensation that is contingent upon the
Company’s performance will generally tend to increase commensurate with the
executive’s position within the Company.  This approach is
designed to provide more upside potential and downside risk for those senior
positions.





For 2009, we will endeavor to ensure
that a substantial amount of each Named Executive Officer’s total compensation
will be performance-based, linked to the Company’s operating performance, and
over the executive’s tenure, derived its value from the market price of the
Company’s common stock.





Our benefit programs are generally
egalitarian. Our Named Executive Officers will not receive perquisites other
than a monthly car allowance and participation without cost in our standard
employee benefit programs, including medical and hospitalization insurance and
group life insurance. We will attempt to ensure that both cash and equity
components of total compensation are tax deductible, to the maximum extent
possible.





Compensation
Program





Compensation
Program Objectives and Philosophy Our compensation philosophy is to
maintain competitive pay practices that will help us attract, retain and reward
the highest performers who are capable of leading us in achieving our strategic
business objectives. To meet these goals, we use base salaries which are
typically determined by employment contracts, performance-based bonuses and
equity-based incentive awards, as appropriate, to reward and reinforce the
value added contributions and attainment of performance objectives that enable
us to meet our goals and create stockholder value. A significant element of our
executive compensation policy is and will continue to be equity-based in order
to emphasize the link between executive compensation and the creation of
stockholder value as measured by the equity markets.





We do not use external benchmarking
data or comparable peer groups to establish competitive total compensation pay
practices. We evaluate employees’ compensation on an annual basis and make
changes accordingly.  We target the overall pay structures to provide
a reasonable level of assurance that we will be able to retain the services of
our principal executive officers.





Compensation
Program Design Our compensation program is designed to achieve our
objectives of attracting, retaining and motivating employees and rewarding them
for achievement that we believe will bring us success and create stockholder
value. These programs are designed to be competitive with other employment
opportunities that are available to our executives.  A significant
portion of the compensation for our Named Executive Officers includes equity
awards that have extended vesting periods. The purpose of these awards is to
serve as both a retention and incentive mechanism that will encourage recipients
to remain with our Company and create value for both the award recipient and our
stockholders.





Elements
of Compensation





Compensation arrangements for the Named
Executive Officers under our fiscal 2009 compensation program will typically
include four components: (a) a base salary; (b) a cash bonus program; (c) the
grant of equity incentives in the form of non-qualified stock options; and (d)
other compensation and employee benefits generally available to all of our
employees.





-29-


2007
Stock Incentive Plan





Subject
to stockholder approval at our next annual meeting, our Board of Directors has
adopted an incentive stock plan for the benefit of our employees. Under the
terms of the plan, we are authorized to grant incentive awards for up to
2,000,000 shares of common stock. No incentive awards are outstanding at the
date of this annual report on Form 10-K.





The
Compensation Committee will administer the plan; decide which employees will
receive incentive awards; make determinations with respect to the type of award
to be granted; and make determinations with respect to the number of shares
covered by the award. The Compensation Committee will also determine the
exercise prices, expiration dates and other features of awards. The Compensation
Committee will be authorized to interpret the terms of the plan and to adopt any
administrative procedures it deems necessary. All decisions of the Compensation
Committee will be binding on all parties. We will indemnify each member of the
Compensation Committee for good faith actions taken in connection with the
administration of the plan.





All of
the options and restricted shares are subject to vesting requirements and the
company has the right to cancel or repurchase at cost all unvested stock options
or restricted shares at the time the recipient's employment or consulting
relationship with the company is terminated.





Director
Compensation





We expect our Board members to be
actively involved in various aspects of our business ranging from relatively
narrow Board oversight functions to providing hands-on guidance to our
executives with respect to matters within their personal experience and
expertise. We believe that the active involvement of all Board members in our
principal business and policy decisions will increase the Board’s understanding
of our needs and improve the overall quality of our management
decisions.





Only independent directors will be
compensated separately for service as Board members. While each of our directors
received restricted stock grants in November 2007 as described above, none of
our directors received any cash compensation for services rendered in their
capacity as directors during the year ended December 31, 2008. Each of our
independent directors will receive the following compensation for the year ended
December 31, 2009:





•
            A
      basic annual retainer of $10,000 for service as a Board
      member;•
            A
      supplemental retainer of $5,000 for service as Chairman of the Audit
      Committee;•
            A
      supplemental annual retainer of $2,500 for service as a committee member;
      and•
            Reimbursement
      for all reasonable travel, meals and lodging costs incurred on our
      behalf.





ITEM 12
— SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
MATTERS





We had
30,839,594 shares of common stock issued and outstanding on the date of this
annual report on Form 10-K. We have no outstanding convertible securities and no
warrants or options that are presently exercisable or will become exercisable
within 60 days. The following table sets forth information with respect to the
beneficial ownership of our common stock for each of our executive officers and
directors; all of our executive officers and directors as a group; and any other
beneficial owner of more than 5% of our outstanding common stock





Except as indicated by footnotes, and
subject to applicable community property laws, each person identified in the
table possesses sole voting and investment power with respect to all common
stock held by that person. The address of each named beneficial owner, unless
indicated otherwise by footnote, is 25211 Grogans Mill, Suite 465, The
Woodlands, Texas 77380.




Shares
      Beneficially OwnedNumber
                  
                  
                  PercentDavid
      S. Holland, Sr. (1)
                  
                  
                  3,077,500
                  
                  
                  
                  10.1
                  %Dr.
      Mahesh Kanojia (2)
                  
                  
                  1,605,000
                  
                  
                  
                  5.2
                  %Alan
      Schaffner
                  
                  
                  1,161,668
                  
                  
                  
                  3.8
                  %Fred
      O’Connor
                  
                  
                  400,000
                  
                  
                  
                  1.3
                  %Robert
      Wilson
                  
                  
                  255,808
                  
                  
                  
                  0.8
                  %Richard
      DeGarmo
                  
                  
                  100,000
                  
                  
                  
                  0.3
                  %Directors
      and officers as a group
                  
                  
                  1,917,476
                  
                  
                  
                  6.2
                  %





(1)
            David
      S. Holland, Sr. is a retired Pennzoil executive who provided substantial
      equity financing for Texoga in its early stages and ultimately became the
      largest stockholder of that
company.





(2)
            Dr.
      Mahesh Kanojia is the original founder of Texoga and the second largest
      stockholder of that company. From time to time, Dr. Kanojia serves as an
      unpaid consultant to our company.





There are no agreements, arrangements
or understandings that will result in a change in control at any time in the
foreseeable future.





-30-


Section
16(a) beneficial ownership reporting compliance





Based
solely on our review of the reports on Forms 3, 4, and 5 that were filed by our
officers during the year ended December 31, 2006, we have determined that John
L. Petersen, Sally A. Fonner, Rachel A. Fefer and Mark R. Dolan each failed to
file a Form 3 to report their initial beneficial ownership of our shares. Our
founders do not intend to file Form 4 to report their distributions of gift
shares until the entire gift share distribution is completed. At the date of
this report on Form 10-K, our founders have agreed to give a combined total of
224,000 gift shares to 448 family members, friends and business associates
selected by them.





Except as
set forth above, we are not aware of any director, officer or beneficial owner
of more than 10% of any class of our equity securities that failed to file the
forms required by Section 16(a) on a timely basis.





ITEM
13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE




In
November 2006, we agreed to become the general partner of and assume legal and
operational responsibility for TBP-I and TBP-II. Our appointment as successor
general partner of the two partnerships was submitted for the written consent of
the limited partners and subsequently approved by the requisite 2/3 majority of
the holders of limited partner interests on December 8, 2006 and January 12,
2007, respectively. Amended certificates of limited partnership to reflect our
substitution as general partner were filed on January 14, 2007. In connection
with the assignment of Texoga’s general partner interest to us all contracts
necessary for the operation of the Oak Ridge North and Montgomery County
facilities were assigned to us and Texoga has no further interest in those
contracts. While we assumed all of Texoga’s rights and obligations as general
partner of TBP-I and TBP-II, we did not issue any securities or pay any
consideration to Texoga in connection with the assignments.  As general
partner of TBP-I and TBP-II, Texoga acted as the general contractor in
connection with the construction of the Oak Ridge North and Montgomery County
facilities. During 2007, we paid Texoga approximately $306,000 for construction
services, labor and equipment used in connection with the installation of our
Montgomery County facility. We believe the price and other material terms of our
transactions with Texoga were comparable to or more favorable than the price and
terms we could have negotiated with an unaffiliated third party.





In December 2006, we offered to
exchange shares of our common stock for limited partner interests in the
partnerships. In connection with the exchange offering, the partnership
interests were valued at their $1,000 per unit cost to the limited partners and
our common stock was valued at $0.67 per share. Since December 2006, we have
issued 4,444,500 shares of our common stock to purchase 2,963 TBP-I units;
2,925,000 shares of our common stock to purchase 1,950 TBP-II units; and 353,592
shares of common stock upon conversion of $265,200 of notes we issued to
purchase 312 TBP-I units. At the date of this annual report on Form 10-K, we
have acquired all 3,500 units of limited partner interest in TBP-I and dissolved
the partnership. We have also acquired 2,950 units of limited partnership
interest in TBP-II which represents 84.2% of the total outstanding
units.





In
January 2007, we entered into a lease sharing arrangement with Texoga and SRC
that obligates Texoga to contribute $18,940 per month to the cost of the leased
space that houses the executive offices for all three companies and obligates
SRC to contribute an additional $14,680 per month as its share of the costs. In
connection with the sublease, we pledged an $856,000 certificate of deposit as
collateral security for the future rental obligations. During the year ended
December 31, 2007, we received $58,040 from SRC, and the unpaid balances were
carried as advances to Texoga and SRC. Since Texoga and SRC are both related
parties and the collection of the unpaid balances is uncertain, we have fully
impaired $345,400 of unpaid rent reimbursements from Texoga and SRC in our
financial statements for the year ended December 31, 2007. We were able to
negotiate a sublease of the office space that eliminated our future rental
obligations and resulted in the release of the associated security deposit to us
in 2008.





During 2007 we asked SRC to make
additional plant improvements to increase the efficiency of our operations. In
connection therewith, we advanced approximately $62,000 to SRC to pay the cost
of the required changes. Since SRC is a related party and collection of this
advance is uncertain, we have fully impaired these advances to SRC in our
financial statements for the year ended December 31, 2007.




Robert
Wilson is an independent contractor who served as the interim CFO and now serves
as VP-Finance of our company. Mr. Wilson is also a principal of M1-Energy
Capital Securities, LLC, an NASD broker dealer that raised $7,000,000 in capital
for TBP-I and TBP-II, and received $700,000 in cash commissions in connection
therewith. In connection with our partnership exchange offerings and our sales
of common stock for cash, M-1 received aggregate cash compensation of $225,000,
together with 392,446 shares of our common stock, including 55,808 shares that
were subsequently assigned to Mr. Wilson.





M1 Energy
Risk Management LLC is a commodity advisory and brokerage firm that creates and
manages customized commodities hedging programs. In connection with the
commodity hedging activities described herein, M-1 Energy Risk Management
received $107,750 in fees during 2007. While Mr. Wilson has no direct or
indirect interest in M1 Energy Risk Management, the owners of that company are
co-owners with Mr. Wilson of M1-Energy Capital Securities, LLC.





Director
Independence





The Board of Directors has determined
that two of our three directors would meet the independence requirements of the
American Stock Exchange if such standards applied to our company. In the
judgment of the board, Mr. O’Connor does not meet such independence standards.
In reaching its conclusions, the board considered all relevant facts and
circumstances with respect to any direct or indirect relationships between the
company and each of the directors, including those discussed under the caption
"Certain Relationships and Related Transactions." The board determined that any
relationships that exist or existed in the past between the company and each of
the independent directors were immaterial on the basis of the information set
forth in the above-referenced sections.





-31-


ITEM 14. — PRINCIPAL ACCOUNTING FEES
AND SERVICES





Audit and Audit-Related Fees
The aggregate fees billed to our company during 2007 by Ham, Langston &
Brezina LLP for the audit of our financial statements for the years ended
December 31, 2006 and 2005 was $74,000. We were not billed any fees for tax
preparation services in 2006 or 2007. The aggregate fees billed for
other services related to interim financial statements and the filing of various
documents with the SEC provided by Ham, Langston & Brezina LLP in 2006
or 2007 was $37,000.  For 2008 aggregate fees billed for audit fees
were $60,000. Fees billed for other services to interim financial statements and
the filing of various documents with the SEC were $45,158.





ITEM 15. — EXHIBITS, FINANCIAL
STATEMENT SCHEDULES AND REPORTS ON FORM 8-K





(a)(1)           The
following is a list of the financial statements filed as part of this report on
Form 10-K.





Report
      of Independent Registered Public Accountant for the years ended December
      31, 2008 and 2007Balance
      Sheet as of December 31, 2008 and 2007Statement
      of Operations for the years ended December 31, 2008 and
    2007Statement
      of Changes in Stockholders’ Equity for the years ended December 31, 2008
      and 2007Statement
      of Cash Flow for the years ended December 31, 2008 and
2007Notes
      to Financial Statements





(a)(2)           The
following is a list of the financial statement schedules filed as part of this
report on Form 10-K.





None





(a)(3)           The
following is a list of the Exhibits filed as part of this report on Form
10-K:





ExhibitNumber
            Description3.1
            Articles
      of Incorporation of Aegis Products Inc. (currently Biofuels Power
      Corporation) dated January 11, 2004
            *3.2
            First
      Amendment to the Articles of Incorporation of Aegis Products Inc.
      (currently Biofuels Power Corporation)  dated December 1,
      2006
            *3.3
            Curative
      Amendment to the Articles of Incorporation of Biofuels Power Corp. dated
      November 12, 2007
            *3.4
            By-laws
      of Biofuels Power Corporation
            *4.1
            Form
      of Common Stock Certificate
            *4.2
            Form
      of 12.5% Senior Convertible Debenture Due 2011
            *10.1
            2007
      Stock Incentive Plan
            *10.2
            Ground
      Lease for 1/2-half acre parcel in Oak Ridge North Texas
            *10.3
            Ground
      Lease for 1.5 acre parcel in Montgomery County Texas
            *10.4
            Master
      Real Estate Lease for executive offices located at 10003 Woodloch Forest
      Drive, Suite 900, The Woodlands, Texas, 77380
            *10.5
            Rent
      Sharing Agreement for executive offices located at 10003 Woodloch Forest
      Drive, Suite 900, The Woodlands, Texas, 77380
            *10.6
            Limited
      Partnership Agreement of Texoga Biofuels Partners 2006-II, as
      amended
            *10.7
            Power
      Marketing Agreement with Fulcrum Power Services, LP,
            *10.8
            Interconnect
      Agreement With Centerpoint Energy for Oak Ridge North
    facility
            *10.9
            Interconnect
      Agreement With Entergy for Montgomery County facility
            *14.1
            Code
      of Business Conduct and Ethics
            *31.1
            Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)
            Exhibit 31.131.2
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a)
            Exhibit
      31.232.1
            Statement
      of Chief Executive Officer Pursuant to U.S.C. Title 18, Section
      1350
            Exhibit
      32.132.2
            Statement
      of Chief Financial Officer Pursuant to U.S.C. Title 18, Section
      1350
            Exhibit
      32.2


*           Incorporated
by reference to Form 10-SB Registration Statement filed January 11,
2008.









-32-





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the 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





By            /s/
Fred
O’Connor


Fred
O’Connor, Chief Executive Officer and Director


Date
April 15, 2008





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





By:  /s/
      Fred O’Connor
                    Fred
      O’Connor
                  Chief
      Executive Officer and Director
                    (Principal
      Executive Officer)
                  Date
      May 4, 2009By:  /s/
      Sam H. Lindsey, Jr.
                    Sam
      H. Lindsey, Jr.
                  Chief
      Financial Officer
                    (Principal
      Financial Officer and
                    Principal
      Accounting Officer)
                  Date
      May 4, 2009













-33-