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, 2009





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.
            YesX
            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.








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, 2010Common
      Stock, $0.001 Par Value
            
            31,442,760
      Shares





No
documents are incorporated by reference in this Form 10-K.





TABLE
OF CONTENTS





PART
I





ITEM
      1
            Business
            5ITEM
      1A
            Risk
      Factors
            13ITEM
      2
            Properties
            20ITEM
      3
            Legal
      Proceedings
            21ITEM
      4
            Submission
      of Matters to a Vote Of Security Holders
            21





PART
II





ITEM
      5
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            21ITEM
      6
            Selected
      Financial Data
            24ITEM
      7
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            24ITEM
      7A
            Quantitative
      and Qualitative Disclosures About Market Risks
            26ITEM
      8
            Financial
      Statements and Supplementary Data
            27ITEM
      9
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            43ITEM
      9A
            Controls
      And Procedures
            43





PART
III





ITEM
      10
            Directors,
      Executive Officers and Corporate Governance
            45ITEM
      11
            Executive
      Compensation
            48ITEM
      12
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            51ITEM
      13
            Certain
      Relationships and Related Transactions, and Director
      Independence
            52ITEM
      14
            Principal
      Accounting Fees and Services
            53





PART
IV





ITEM
      15
            Exhibits,
      Financial Statement Schedules
            54Signatures
            55








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 incentives 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.








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.





-5-


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 turbine
power 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 turbine power 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 281-364-7590.





Introduction:
The delivery of useful energy to industrial, commercial and residential
buildings in the United States has evolved over many decades into a
complex  system:





·
            Electricity
      for lighting, refrigeration, communications and electrical equipment
      comes  from centralized power plants that serve users;
      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 may favor the use of alternative energy
technologies.





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 were 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.  We have ceased power sales while
we move the required equipment to the H.O. Clarke site.  This site may
require additional fuel storage and piping equipment depending on future
re-development.


-6-


Biodiesel
is a diesel fuel substitute that is made from renewable raw materials such as
plant oils and animal fats and has almost the same energy density as
petroleum-based diesel. Renewable diesel is a broader class of diesel fuel
substitutes that are derived from  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  and glycerin  using conventional
gravity separation; and removing any free methanol and water by passing the
finished biodiesel through a high-temperature evaporator.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 than fossil fuels. 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:





·
            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;  -7-
 ·
            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; built a 3,000 square foot building and control
      room; and installed a biodiesel fueled generating plant that operated
      until late 2008.  This project was decommissioned in early 2009,
      equipment to be used at the H.O. Clarke site has been moved and equipment
      that will not be used has been sold.  Negotiations are ongoing
      to terminate the lease and sell or remove the remaining
      equipment.·
            Leased
      a 1.5 acre industrial site in an unincorporated area of Conroe, Texas;
      built a 2,200 square foot building and control room; and installed a GE
      Frame 5 Turbine generator with a rated capacity of just under 10
      MW.  This project was decommissioned in early 2009 and equipment
      was moved to the H.O. Clarke site.  Certain improvements and
      fixtures were abandoned and these amounts have been written off from our
      asset list.  The lease has been terminated effective May 1,
      2009.·
            Leased
      a 6 acre industrial site in an unincorporated area adjacent to Humble
      Texas that may use a boiler system in conjunction with a Westinghouse
      steam turbine to generate electricity and capture carbon dioxide from the
      exhaust stream.  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. A grant application for this
      project did not achieve funding so this project is on hold.
              
              Purchased
      a 79 acre industrial site in Houston, Texas which was the location of the
      decommissioned H. O. Clarke Power Plant formerly owned by Houston Light
      and Power.  The decommissioned generating plant generated up to
      288 MW from gas fired steam turbines 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 and distribution assets including the 12 kV and 138 kV
      substations adjacent to the site.  Texas Genco installed six GE
      Frame 5 gas-fired combustion turbines providing over 80 MW as peaker units
      into the Centerpoint distribution 12 kV system.  These
      combustion turbines were decommissioned in 2004 but the interconnection
      assets remain intact and the substation is still used
      continuously.  We relocated the Company’s GE Frame 5 turbine
      from the Conroe site and plan to install it at this location to generate
      peaking  power using liquid biofuels.  In addition, we
      plan to acquire an additional gas turbine capable of generating up to 25
      MW using liquid biofuel.  We plan to install a heat recovery
      steam generator (HRSG) acquired [when?] that will capture turbine exhaust
      heat and produce up to 15 MW of additional power through steam
      generation.  The combination of these units could 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.  Significant additional funds are
      required to implement these plans and there is no assurance that we will
      be successful in raising the necessary capital to
  proceed.





Our
planned H.O. Clarke power plant can be configured to use off-spec biodiesel,
renewable diesel natural gas and other petroleum products to generate
electricity and waste heat for steam generation. We believe the ability to burn
a variety of fuels and adjust our fuel mix in response to market conditions will
enhance our ability to access  fuel supplies from a variety of
sources, minimize production costs and maximize gross income from IES
activities.





-8-


In
January 2008, we began commenced operations at our Montgomery County power plant
, which was connected to Entergy’s grid.  This facility was the first
biofuel-fired power plant in the United States to deliver electricity into an
inter-connected transmission network. We operated both the Oak Ridge North and
Montgomery County facilities as “peaking plants,” which means  they
were dispatched during periods of peak demand when prices for electricity
were  higher and idled during low-demand periods when electricity
prices were lower.  In light of damage to the ERCOT and Entergy
transmission networks resulting from Hurricane Ike, high biodiesel and renewable
diesel supply costs, lower power prices and ongoing negotiations to acquire the
79 acre industrial site in Houston, we elected to suspend operations at both Oak
Ridge North and Montgomery County facilities.  Subsequently, we moved
equipment from the Montgomergy County facility to the new 79 acre industrial
site.  For these reasons, we have no revenue from power sales during
2009 and we operated in a cash conservation mode while we attempted to raise
expansion capital.  There is no assurance that sufficient capital can
be raised to continue company operations.





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 are suitable for making transportation fuels. 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.  Federal subsidies for all
biofuels credits expired at the end of 2009 and there’s no assurance that the
Congress will renew them going forward.





Biodiesel
requires approximately eight pounds of feedstock for each gallon of finished
fuel. It also requires ancillary raw materials (principally methanol and lye).
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 margin from power generating activities.





We intend
to purchase off-spec biodiesel and renewable diesel in the open market. Since
there are numerous producers of biodiesel that offering off-spec biodiesel 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 exists among potential suppliers. 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.


-9-


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 numerous power generating companies (“PGCs”) that
own facilities for the generation of electricity; certified retail electric
providers (“REPs”) that sell electricity to end-users; and 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-fired generating units
(which constitute 72% of the generating capacity in ERCOT) are the marginal
supply of electricity 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:




By
suspending operations at the Conroe and Oak Ridge North sites and relocating
equipment to the H. O. Clarke site, we achieved no operating revenue for
2009.  Should we be successful in restoring power generation at the
new site, we hope to derive additional operating revenue and credits 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.  Alternative
      diesel fuel produced from renewable feedstocks (but not classified as
      biodiesel) entitled to a $0.50 per gallon rebate.  As of the
      date of this filing, these rebates have not been extended by the Federal
      government.  There is no assurance that these rebates will be
      extended and, if extended, there is no assurance that the extension will
      continue beyond December 31, 2010.·
            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 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
      it  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.


-10-


·
            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 lower over time as more and more wind assets create
      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 saleable 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 though voluntary programs
      have emerged in the US. 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 CO2 emissions. If CO2 emission standards are adopted,
      biodiesel may become a preferred fuel because it is carbon neutral. It is
      presently impossible to predict whether CO2 reduction 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.




There is
no assurance that our plans to augment any future  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.


-11-


Sales and
Marketing:





Since we
have not sold 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.





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 grid, and a variety of small power producers
including CHP facilities, wind farms and solar power installations. While we
operated our Oak Ridge North and Montgomery County facilities as peak load
plants, we were not able to secure bilateral contracts for sale of our
electricity. Until we are able to sell green electricity under long-term
contracts, we will be forced to 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 flows from power 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..





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
biofuels are non-toxic and biodegradable, and emissions from the combustion of
biofuels can be  lower than emissions from the combustion of
other liquid fuels, we may have lesser costs to ensure compliance with
applicable environmental laws and regulations than petroleum-fueled projects.
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.


-12-


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 four
employees at the date of this annual report on Form 10-K including a
three-member management and business development team and one administrative
employee. We also use part-time independent contractors to perform a variety of
specialized services. We are not subject to any collective bargaining
agreements.  For construction of facilities, the company plans to use
outside construction firms and subcontract labor to supplement our
workforce.





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;  -13-
 ·
            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.





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 CFO,
Robert Wilson and our director Richard DeGarmo are both actively engaged in
other business activities. While our officers or directors aren't 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.


-14-


Over
the long-term, we must obtain a premium price for our green electricity or our
business will fail.





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 any future 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 future 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 generate 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.





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 original 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 have incurred substantial losses as we
suspended these operations and moved equipment to a new site. When and if we
restore power operations, 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 power contract or develop substantial
ancillary revenue from other sources.





-15-


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 power contracts 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 biofuels 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 biofuels business, competition for
available feedstock supplies is expected to increase. There can be no assurances
that any 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 biofuels feedstock
and any material price increases will adversely affect our future 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.




-16-


In
connection with our possible 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
prior tax incentives and other governmental subsidies will be extended; as of
this date they have expired.  There is also no assurance that future
incentives will be comparable with current incentives. Even with the
extension of 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
biofuels as fuel for electric generators can permit users to 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 biofuels 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
biofuels-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.





-17-


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.





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
biofuels 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.


-18-


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.




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.


-19-


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 281-364-7590. 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 power plant that was decommissioned in early
      2009;·
            leased
      a 1.5 acre industrial site in an unincorporated area of Montgomery County
      and installed a biodiesel fueled  turbine power plant that was
      decommissioned in April of 2009;·
            leased
      a 6 acre industrial site in an unincorporated area adjacent to Humble
      Texas for a potential steam turbine power project; 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.




Oak Ridge North
Facility: Our former Oak Ridge North facility was situated on a 1⁄2 acre
parcel of land that we leased from the City of Oak Ridge North in 2007. Our
ground lease provided for a monthly rental of $3,500, an initial term of 44
months but this lease was terminated in November of 2009 and replaced with a
$1000 per month lease for twelve months with Robinson Road LLC.  The
former 5 MW biofueled power plant was decommissioned in early 2009 and the
equipment that will be used at the H. O Clarke power plant has been
relocated.  Remaining equipment that will not be used will be
sold.





Montgomery County
Facility: Our former Montgomery County facility was situated on a
1.5-acre parcel of land that that we leased from an unaffiliated landlord in
2007. Our ground lease provided for a monthly rental of $2,200, an initial term
of 5 years but this plant was decommissioned in early 2009 and the 10 MW Frame 5
turbine and associated equipment was moved to the H. O. Clarke site. The ground
lease was terminated effective May 1, 2009 and all remaining fixtures and site
improvements were written off from the assets list.


Humble
Facility: Our Humble facility is situated on a 6 acres 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.




-20-


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  138 kV 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 and adjacent to Centerpoint Energy distribution
substation.





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 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.





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.


-21-


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 toshareholder
      approval)Equity
      compensation plans
              not
      approved by security holders
            
            
            0
            
            
            
            -
            
            
            
            0Total
            
            
            0
            
            
            
            -
            
            
            2,000,000
      (subject toshareholder
      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.





-22-


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.


-23-


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.





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, 2009
            
            
            December
      31, 2008ASSETSCash
      and cash equivalents
            
            $
            1,696
            
            
            $
            9,691Accounts
      Receivable
            
            
            272,000Other
      current assets
            
            
            5,660
            
            
            
            104,951Property
      and equipment, net
            
            
            3,491,692
            
            
            
            5,181,527Certificate
      of deposit pledged as leasehold securityTotal
      assets
            
            $
            3,771,048
            
            
            $
            5,296,169LIABILITIESCurrent
      Liabilities
            
            
            4,708,704
            
            
            $
            2,067,150Notes
      Payable
            
            
            191,250
            
            
            
            191,250Interests
      of limited partners in TPB-I and TBP-II
            
            
            
            
            
            
            218,504Derivative
      Liability
            
            
            
            
            
            
            8,862Total
      liabilities
            
            $
            5,022,458
            
            
            $
            2,485,766STOCKHOLDERS
      EQUITYCommon
      stock, 30,306,390 outstanding at December 31, 2007 and 30,839,594
      shares outstanding at December 31, 2008
            
            $
            30,860
            
            
            $
            30,828Additional
      paid in capital
            
            
            12,435,090
            
            
            
            12,415,122Unissued
      common stockSubscription
      receivableAccumulated
      other comprehensive incomeDeferred
      compensationRetained
      earnings (deficit)
            
            
            (13,717,859
            )
            
            
            (9,635,547
            )Total
      Stockholders equity
            
            $
            3,771,048
            
            
            $
            2,810,403


-24-


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.  In early 2009 we decommissioned the
Oak Ridge North and Montgomery County.  We consolidated operations at
this site because it allowed for both distribution and transmission grid
connections into ERCOT.





We
acquired the H.O. Clarke power plant site that is adjacent to an active 138 kV
Centerpoint Energy substationinter-connected with ERCOT.  Our site has
four decommissioned gas–fired steam generating units 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 generating
units are six pad sites for gas turbines connected to Centerpoint’s 12kV
distribution system.  We moved the Montgomery County GE Frame 5
turbine to this site during 2009 but did not place it in
operation..  In addition, we purchased a heat recovery steam generator
(HRSG) [when?] that, when installed, can be used to raise steam supplies to
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 15 MW along with related balance
of plant systems, complete project engineering, install the systems and
commission the facilites. We are presently conducting a technical and mechanical
evaluation of equipment that appears suitable for our purposes. Once we purchase
suitable equipment, 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,
commissioning 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. Should we
elect to purchase a companion 25 MW Frame 5P gas turbine to expand the project
to a total of 50 MW into the distribution grid the total cost is expected to
exceed $10 million.  We do not have sufficient financial resources to
complete our planned acquisition and installation of this equipment 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 reestablish power production at this new site..





In
combination, we believe our existing 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 fuel 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 biofuels. 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 has proven to be 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.


-25-


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 the potential
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).





Our
available resources are not sufficient to pay our current operating expenses and
the 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.





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 halt operations.





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.


-26-


ITEM
8?
 
 2038
Lexington
 Houston,
Texas 77098
 (713)
524-8838 (office)
 (713)
942-9175     (fax)
 
 
 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, 2009 and 2008 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 2009 and 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.
 
 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, 2009, 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
 April 14,
2010
 
 -27-


BIOFUELS
      POWER CORPORATION
              CONSOLIDATED
      BALANCE SHEETASSETS
            
            2009
            
            
            2008Current
      AssetsCash
      and cash equivalents
            
            $
            1,696
            
            
            $
            9,691Accounts
      receivable
            
            
            272,000Prepaid
      expenses
            
            
            5,660
            
            
            
            5,660Inventory
            
            
            -
            
            
            
            99,291Total
      Current Assets
            
            
            279,356
            
            
            
            114,642Property
      and equipment, net
            
            
            3,491,692
            
            
            
            5,181,527Total
      Assets
            
            $
            3,771,048
            
            
            $
            5,296,169LIABILITIES
      AND STOCKHOLDERS EQUITYCurrent
      LiabilitiesAccounts
      payable
            
            
            1,317,632
            
            
            
            696,503Deposits
            
            
            25,000
            
            
            
            -Notes
      payable, unsecured
            
            
            30,065Notes
      payable, secured
            
            
            2,812,000
            
            
            
            1,295,000Interest
      payable
            
            
            524,007
            
            
            
            75,647Total
      Current Liabilities
            
            
            4,708,704
            
            
            
            2,067,150Long
      Term DebtNotes
      payable, unsecured
            
            
            191,250
            
            
            
            191,250Derivative
      Liability
            
            
            -
            
            
            
            8,862Total
      Liabilities
            
            
            4,899,954
            
            
            
            2,267,262Stockholders'
      EquityCommon
      stock, $001 par value, 50,000,000 shares authorized;30,859,594
      and 30,839,594 shares issued and outstanding,respectively
            
            
            30,860
            
            
            
            30,828Additional
      paid in capital
            
            
            12,435,089
            
            
            
            12,415,122Minority
      interest
            
            
            122,504
            
            
            
            218,504Accumulated
      deficit
            
            
            (13,717,359
            )
            
            
            (9,635,547
            )Total
      Stockholders Equity
            
            
            (1,128,906
            )
            
            
            3,028,907$
            3,771,048
            
            
            $
            5,296,169See
      accompanying notes to consolidated financial statements






-28-


BIOFUELS
      POWER CORPORATIONUNAUDITED
      CONSOLIDATED STATEMENT OF OPERATIONSFor
      the years ended December 31, 2009 and 2008Year
      Ended December 31,2009
            
            
            2008RevenueSales
            
            $
            -
            
            
            $
            437,324Cost
      of sales
            
            
            -
            
            
            
            1,984,958-
            
            
            
            (1,547,634
            )Selling,
      general and administrative expenses
            
            
            2,631,934
            
            
            
            4,039,751(2,631,934
            )
            
            
            (5,587,385
            )Other
      Income:Interest
      income
            
            
            
            
            
            
            21,186Other
      income, net
            
            
            141,914
            
            
            
            17,306Realized
      loss on sale of marketable securities
            
            
            
            
            
            
            (92,570
            )Change
      in derivative liability
            
            
            8,862
            
            
            
            (8,862
            )Gain
      (loss) on disposition of fixed assets
            
            
            (1,233,384
            )Interest
      expense
            
            
            (463,272
            )
            
            
            (109,655
            )(1,545,880
            )
            
            
            (172,595
            )(4,177,814
            )
            
            
            (5,759,980
            )Minority
      interest
            
            
            96,000
            
            
            
            88,192$
            (4,081,814
            )
            
            $
            (5,671,788
            )Basic
      and diluted net loss per common share
            
            $
            (0.13
            )
            
            $
            (0.18
            )Weighted
      average common shares outstanding -basic
      and diluted
            
            
            30,848,604
            
            
            
            30,791,006See
      accompanying notes to consolidated financial statements






-29-


BIOFUELS
      POWER CORPORATION

              CONSOLIDATED
      STATEMENT OF CASH FLOWS

                For
      the years ended December 31, 2009 and 2008Year
      Ended December 31,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (4,081,814
            )
            
            $
            (5,671,789
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            1,184,797
            
            
            
            1,296,235Expenses
      related to issuance of common stock for limited
partnership
            
            
            
            
            
            
            12,501Stock
      issued for services
            
            
            -
            
            
            
            83,296Change
      in derivative liability
            
            
            
            
            
            
            8,862Realized
      loss on sales of marketable securities
            
            
            -
            
            
            
            92,570Loss
      on abandonment of leasehold inmprovements
            
            
            1,233,384Minority
      interest
            
            
            (96,000
            )
            
            
            (88,192
            )Amortization
      of deferred compensation
            
            
            -
            
            
            
            595,000Bad
      debt expense
            
            
            
            
            
            
            54,668Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (272,000
            )
            
            
            242,260Tax
      rebate rerceivable
            
            
            
            
            
            
            -Prepaid
      expenses
            
            
            
            
            
            
            (5,660
            )Inventory
            
            
            99,291
            
            
            
            302,637Accounts
      payable
            
            
            621,129
            
            
            
            367,081Deposit
            
            
            25,000Accrued
      interest payable
            
            
            448,360
            
            
            
            61,383Accrued
      expenses and other, net
            
            
            718
            
            
            
            93,030(837,134
            )
            
            
            (2,556,118
            )Cash
      flow from investing activities:Purchase
      of property and equipment
            
            
            (1,343,977
            )
            
            
            (686,728
            )Proceed
      from sale of fixed assets
            
            
            618,880Purchase
      of marketable securities
            
            
            
            
            
            
            (806,597
            )Proceeds
      from sale of marketable securities
            
            
            
            
            
            
            200,000Proceeds
      from liquidation of restricted certificate of deposit
            
            
            
            
            
            
            902,149Purchase
      of certificate of deposit
            
            
            (12,829
            )
            
            
            (12,326
            )(737,926
            )
            
            
            (403,502
            )Cash
      flows from financing activities:Net
      proceeds from sale of common stock
            
            
            20,000
            
            
            
            190,003Net
      proceeds from notes
            
            
            1,647,065
            
            
            
            1,690,000Retirement
      of notes
            
            
            (100,000
            )
            
            
            -1,567,065
            
            
            
            1,880,003Net
      increase (decrease) in cash and cash equivalents
            
            
            (7,995
            )
            
            
            (1,079,617
            )Cash
      and cash equivalents, beginning of period
            
            
            9,691
            
            
            
            1,089,308Cash
      and cash equivalents, end of period
            
            $
            1,696
            
            
            $
            9,691See
      accompanying notes to consolidated financial statements






-30-


BIOFUELS
      POWER CORPORATION

              CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY

                For
      the year ended December 31, 2009Common
      Stock
            
            
            Additional
      Paid In
            
            
            Minority
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Interest
            
            
            Deficit
            
            
            TotalBalance
      atDecember
      31, 2008
            
            
            30,839,594
            
            
            $
            30,840
            
            
            $
            12,415,110
            
            
            $
            218,504
            
            
            $
            (9,635,547
            )
            
            $
            3,028,907Issuance
      of commonstock
      for cash
            
            
            20,000
            
            
            
            20
            
            
            
            19,980
            
            
            
            
            
            
            
            
            
            
            
            20,000Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (96,000
            )
            
            
            (4,081,814
            )
            
            
            (4,177,814
            )Balance
      atDecember
      31, 2009
            
            
            30,859,594
            
            
            $
            30,860
            
            
            $
            12,435,090
            
            
            $
            122,504
            
            
            $
            (13,717,360
            )
            
            $
            (1,128,906
            )See
      accompanying notes to consolidated financial statements






-31-


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 ASC Codification Topic 810: Consolidation of Variable Interest
Entities, 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, 2009 and December 31, 2008, 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.


-32-


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 $-0- and $199,650  in Federal credits during 2009 and 2008,
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, 2009 accounts
receivable of $272,000 was due from a contractor to be offset against future
improvements to be made on the newly acquired H O. Clark facility. As of
December 31, 2008 the Company had no trade accounts receivable or Federal
credits receivable.




Inventory





Inventory
is stated at the lower of cost or market.  As of December 31, 2009 the
inventory was written down to reflect the results of litigation settled in the
4th
quarter 2009 pertaining to the leased facility where fuel inventory tanks were
located.  The result of the settlement the fuel tanks remained at the
leased facility and the fuel inventory abandoned.  Fuel inventory as
of December 31, 2008 consisted of 33,744 gallons of unprocessed fuel stock, and
49,285 gallons of processed fuel stock.  Cost is determined using the
first-in first-out (“FIFO”) method.


-33-


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.  Beginning in the third quarter 2009, the Company began
relocating to the newly acquired H. O. Clark facility.  As a result
the remaining un-depreciated value of leasehold improvements at the Oak Ridge
North and Tamina facilities were expensed.  Equipment at the Oak Ridge
North facility that was not relocated, but was sold in the first quarter was
written down to its net realizable value.  A ($1,233,384) loss was
recognized as a result of these write downs.





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, 2009 and 2008, the
Company did not have any potential dilutive securities.





Stock-Based
Compensation





On
January 1, 2006, the Company adopted ASC Codification Topic 718 Compensation:
Stock Based Compensation, 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.


-34-


ASC
Codification Topic 718 Compensation: Stock Based Compensation is a codification
of  SFAS 123(R) which 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, ASC Codification Topic 815, Derivatives and Hedging, 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.




ASC
Codification Topic 820,“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 Codification Topic 820 (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.  Codification Topic 820 (SFAS 157) applies to all
other accounting pronouncements requiring or permitting fair value measurements,
except for Codification Topic 718, share-based payment and related
pronouncements, the practicability exceptions to fair value determinations
allowed by various other authoritative pronouncements, and ASC Codification
Topic 985 (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 Codification Topic 820 will have a material impact on
the Company’s financial condition or results of
operations.





-35-


In
February 2007, the FASB issued ASC Codification Topic 825 (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. ASC Codification Topic 825 (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 ASC
Codification Topic 825 (SFAS 159) is permitted provided the entity also elects
to adopt the provisions as of the early adoption date selected for ASC
Codification Topic 825 (SFAS 159).  The Company has elected not to
adopt the provisions of ASC Codification Topic 825 at this
time.




In
June 2006, FASB issued ASC Codification Topic 740 (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 ASC Codification Topic 740 (FASB 109,“Accounting
for Income Taxes”).Codification Topic 740 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 Codification Topic 740 were 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.




In
December 2007, the FASB issued ASC Codification Topic 805, 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. Codification Topic 805 codifies SFAS 141R
which replaced 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. Codification Topic 805 expanded 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. Codification Topic 805 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.
Codification Topic 805 impact the Company only if it elects to enter into a
business combination subsequent to December 31, 2008.




In
December 2007, the FASB issued ASC Codification Topic 810 (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. This  amended ARB 51 to establish accounting and reporting
standards for noncontrolling interests in subsidiaries and to make certain
consolidation procedures consistent with the requirements of ASC Codification
Topic 805. 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. Codification Topic 810 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.
Codification Topic 810 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. Codification Topic 810 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. Codification Topic 810 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 Codification Topic 810 would have a material effect on its
consolidated financial position, results of operations or cash
flows.


-36-


2. 
Going Concern





During
the years ended December 31, 2009 and 2008, the Company has experienced negative
financial results as follows:





2009
            
            
            2008Net
      loss
            
            $
            (4,081,814
            )
            
            $
            (5,671,788
            )Negative
      cash flows from operations
            
            
            (837,134)
            
            
            
            (2,556,118
            )Accumulated
      deficit
            
            
            (13,717,359)
            
            
            
            (9,635,547
            )





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.




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.


-37-


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





TBF-1Hedge
            
            
            TBF-2Hedge
            
            
            CombinedHedgeHedge
      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:




2009
            
            
            2008Power
      generating equipment
            
            $
            3,531,553
            
            
            $
            5,327,607Buildings
      and improvements
            
            
            951,208
            
            
            
            1,204,750Machinery
      and equipment
            
            
            242,043
            
            
            
            720,729Less
      accumulated depreciation
            
            
            (1,475,155
            )
            
            
            (2,101,559
            )Total
      property and equipment, net
            
            $
            3,491,692
            
            
            $
            5,181,527




Depreciation
expense for the years ended December 31, 2009 and 2008 was $1,184,797 and
$1296,235 of which $-0- and $1,265,499 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.  The agreement was
increased to $3,000,000 and extended to August 19, 2010.   The
Company has received $2,812,000 and $1,295,000  as of December 31,
2009 and 2008 respectively.


-38-


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 ASC
Codification Topic 815 (SFAS 133,“Accounting
for Derivatives and Hedging Activities,”)and
have recorded derivative liabilities of  $-0- as of December 31, 2009
and $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, 2009 and 2008
were as follows:





2009
            
            
            2008Deferred
      tax assets:Receivable
      from affiliate
            
            $
            121,041
            
            
            $
            121,041Net
      operating loss carry-forwards
            
            
            316,788
            
            
            
            220,788Total
      deferred tax assets
            
            
            437,829
            
            
            
            341,829Valuation
      allowance
            
            
            (437,829)
            
            
            
            (341,825
            )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, 2009 and 2008, are as follows:





2009
            
            
            2008Amount
            
            
            %
            
            
            Amount
            
            
            %Benefit
      for income tax at federalstatutory
      rate
            
            $
            (1,200,534
            )
            
            
            (34.0
            )
            
            $
            (1,928,551
            )
            
            
            (34.0
            )Income
      attributable to limited partners
            
            
            122,504
            
            
            
            4.0
            
            
            
            223,588
            
            
            
            4.0Stock
      based compensation
            
            
            
            
            
            
            
            
            
            
            595,000
            
            
            
            10.5Settlement
      expense
            
            
            
            
            
            
            
            
            
            
            194,355
            
            
            
            3.4Increase
      in valuation allowance
            
            
            96,000
            
            
            
            1.2
            
            
            
            70,683
            
            
            
            1.2Other
            
            
            982,030
            
            
            
            28.8
            
            
            
            884,925
            
            
            
            14.9$
            -
            
            
            
            0.0
            
            
            $
            -
            
            
            
            0.0





As of
December 31, 2009, for U.S. federal income tax reporting purposes, the Company
has approximately $9,500,000 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.


-39-


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.
..




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.


-40-


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. Currently the Company in negotiating to terminate
or sublease this property




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.  Under the terms of a settlement agreement this lease was
terminated during the 4thquarter
2009.




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
            
            
            Leases2010
            
            
            -0-
            
            
            
            154,260
            
            
            
            42,000
            
            
            
            196,2602011
            
            
            -0-
            
            
            
            169,686
            
            
            
            10,500
            
            
            
            180,1862012
            
            
            -
            
            
            
            186,654
            
            
            
            -
            
            
            
            186,6542013
            
            
            -
            
            
            
            97,770
            
            
            
            -
            
            
            
            97,770-
            
            
            
            
            
            
            
            -$
            -0-
            
            
            $
            608,370
            
            
            $
            52,500
            
            
            $
            660,870




-41-


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.





During
2009 the Company received an additional $299,500 from shareholder as part of
loan commitment that was renewed and extended for the purposes of providing
capital expenditures and working capital.





9. 
Subsequent Events





In March
2010 the Company sold three generators  for $150,000 and reached an
agreement to sell additional equipment for $350,000.  The assets had a
total cost of $1,474,702 with accumulated depreciation of $1,062,521 resulting
in a write down of $412,180.


-42-


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, 2009. 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.


-43-


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, 2009. 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,
2009, 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.





-44-


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
      ExpiresEric
      Gadd
            54
            Interim
      COO
            2010
      Annual MeetingSam
      H. Lindsey, Jr
            64
            Interim
      CFOAlan
      Schaffner
            49
            Independent
      Director
            2010
      Annual MeetingRichard
      DeGarmo
            55
            Independent
      Director
            2010
      Annual Meeting





Eric Gaddwas appointed interim COO on September 22, 2009.  Mr. Gadd has
over 30 years domestic and international experience in power, natural gas, and
renewable energy and has been involved in the power plant development and
operations around the world.  Prior to his involvement with Biofuels
Power Corporation, Mr. Gadd founded Awelon, LLC in 2006 as a consulting practice
focused on renewable and alternative energy.  Awelon provided
executive experience in developing business strategies to grow early stage
energy businesses.  From 1995-2005, Mr. Gadd held several executive
positions in operating subsidiaries of Enron Corp., including CEO of Enron Wind
Corp, Vice President of Enron Transportation Services, and Vice President of
Enron Europe, Ltd., and served on the board of directors of Enron Renewable
Energy.  Prior to 1995, Mr. Gadd held various positions at Enron Corp.
and Constellation Energy.  Mr. Gadd is a graduate of Virginia Tech (BS
1977) and John Hopkins University (MDA 1987).





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.




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.





-45-


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.


-46-


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.


-47-


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.




ITEM
11 — EXECUTIVE COMPENSATION





Employment
Agreements




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
              compensationEric
      Gadd
            Interim
      COO
            2009
            
            $
            -0-
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            -0-Robert
      Wilson
            Interim
      VP Finance
            2009
            
            $
            -0-
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            -0-Sam
      Lindsey
            Interim
              CFO
            2009
            
            $
            22,000
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            22,000





-48-


Equity-based
Compensation During 2009 and 2008





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, 2009. 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.





2010 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.”




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.


-49-


For 2010,
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.


-50-


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.


-51-


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.


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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.





ITEM 14. — PRINCIPAL ACCOUNTING FEES
AND SERVICES





Audit and Audit-Related Fees
The aggregate fees billed to our company during 2009 by Clay Thomas, PC for
audit fees and services to interim financial statements and filing of various
documents with the SEC were $31,000.





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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, 2009 and 2008Balance
      Sheet as of December 31, 2009 and 2008Statement
      of Operations for the years ended December 31, 2009 and
    2008Statement
      of Changes in Stockholders’ Equity for the years ended December 31, 2009
      and 2008Statement
      of Cash Flow for the years ended December 31, 2009 and
2008Notes
      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.














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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/ Alan
      Schafner
              Alan
      Schafner
            Director
            Date
      April 15, 2010By: /s/
      Rich DeGarmo
              Rich DeGarmo
            Director
            Date
      April 15, 2010By:  /s/ Sam H. Lindsey,
      Jr.
              Sam
      H. Lindsey, Jr.
            Chief
      Financial Officer
              (Principal
      Financial Officer and
              Principal
      Accounting Officer)
            Date
      April 15, 2010








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