You should read the following discussion and analysis of our financial condition and plan of operations together with our financial statements and related notes appearing elsewhere in this Quarterly Report. Various statements have been made in this Quarterly Report on Form 10-Q that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in BlueFire's other reports filed with or furnished to the SEC and in other documents. In addition, from time to time, BlueFire through its management may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from such statements. The words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. BlueFire undertakes no obligation to update or revise any forward-looking statements.

PLAN OF OPERATION

Our primary business encompasses development activities culminating in the design, construction, ownership and long-term operation of cellulosic ethanol production biorefineries utilizing the licensed Arkenol Technology in North America. Our secondary business is providing support and operational services to Arkenol Technology based biorefineries worldwide. As such, we are currently in the development-stage of finding suitable locations and deploying project opportunities for converting cellulose fractions of municipal solid waste and other opportunistic feedstock into ethanol fuels.

Our initial planned biorefineries in North America are projected as follows:

?        A biorefinery that will process approximately 170 tons of
         green waste material annually to produce roughly 3 million
         gallons of ethanol annually. On November 9, 2007, we
         purchased the facility site which is located in Lancaster,
         California for the BlueFire Ethanol Lancaster project
         ("Lancaster Biorefinery"). Permit applications were filed on
         June 24, 2007 to allow for construction of the Lancaster
         Biorefinery. On or around July 23, 2008, the Los Angeles
         Planning Commission approved the use permit for construction
         of the plant. We are currently in the detailed engineering
         and design phase. Although the cost of construction is not
         readily determinable, we estimate the major equipment cost
         to be approximately $30 million for this first plant, with
         the final installation cost to be determined. We are
         currently in discussions with potential sources of financing
         for this facility but no definitive agreements are in place.



?        A biorefinery proposed for development and construction in
         conjunction with the U.S. DOE in Southern California which
         will process approximately 700 metric dry tons of green
         waste and wood waste annually currently being disposed of in
         landfills to produce approximately 17 to 18 million gallons
         of ethanol annually ("DOE Biorefinery"). Preliminary
         engineering and design is in progress and permitting for the
         DOE Biorefinery will commence once all required preliminary
         engineering design is completed. A definitive agreement is
         being finalized for the purchase and sale of the ethanol
         produced from the DOE Biorefinery. We have received an Award
         from the U.S. DOE of up to $40 million for our DOE
         Biorefinery, which will be our second biorefinery in
         Southern California. On or around October 4, 2007, we
         finalized the award with the U.S. DOE for preconstruction

?        Several other opportunities are being evaluated by us in
         North America, although no definitive agreements have been
         reached.

BlueFire's capital requirements strategy for its planned biorefineries are as follows:

?          Obtain additional operating capital from joint venture partnerships,
           debt financing or equity financing to fund our ongoing operations and
           the development of initial biorefineries in North America. Although
           the Company is in discussions with potential financial and strategic
           sources of financing for their planned biorefineries no definitive
           agreements are in place.



?          The Energy Policy Act of 2005 provides for grants and loan guarantee
           programs to incentivize the growth of the cellulosic ethanol market.
           These programs include a Loan Guarantee Program under Title XVII
           which the U.S. DOE could provide loan guarantees up to $250 million
           per qualified project. We have received notice that we are 1 of 16
           pre-applicants invited to submit a formal application for a loan
           guarantee of up to $200 million to support the development of a
           cellulosic biorefinery in a location to be determined.

?          The Energy Policy Act of 2005 created a biorefinery Demonstration
           Project Program under which $384 million or another amount
           appropriated by Congress is available to fund up to three biorefinery
           demonstration projects. Ultimately the U.S.DOE was appropriated $385
           million for the program and granted awards of various sizes to six
           companies of which we are one. In October, 2007, we signed the
           contract for Award 1 for pre-construction activities on our DOE
           Biorefinery (see above) and began to draw down on those funds during
           the third quarter 2008.



?          As available and as applicable to our business plans, applications
           for public funding will be submitted to leverage private capital
           raised by us.



?        The 2008 Farm Bill, Title IX (Energy Title) provides grants
         for demonstration scale Biorefineries, and loan guarantees
         for commercial scale Biorefineries that produce advanced
         Biofuels (i.e., any fuel that is not corn-based). Section
         9003 includes a Loan Guarantee Program under which the
         U.S.D.A. could provide loan guarantees up to $250 million to
         fund development, construction, and retrofitting of
         commercial-scale refineries. Section 9003 also includes a
         grant program to assist in paying the costs of the
         development and construction of demonstration-scale
         biorefineries to demonstrate the commercial viability which
         can potentially fund up to 50% of project costs.

RECENT DEVELOPMENTS IN BLUEFIRE'S BIOREFINERY ENGINEERING AND DEVELOPMENT

During the third quarter in 2008, BlueFire continued to develop the engineering
package for the Lancaster Biorefinery, and finalized the Front-End Loading (FEL)
3 stage of engineering for the Lancaster Biorefinery. FEL is the process for
conceptual development of processing industry projects. This process is used in
the petrochemical, refining, and pharmaceutical industries. Front-End Loading is
also referred to as Front-End Engineering Design (FEED). There are three stages
in the FEL process:

FEL-1                FEL-2                  FEL-3
  * Material Balance   * Preliminary          * Purchase Ready Major
  * Energy Balance   Equipment Design       Equipment Specifications
  * Project Charter    * Preliminary Layout   * Definitive Estimate

In July 2008, BlueFire signed a teaming agreement with Amalgamated Research, Inc. ("ARI") for the exclusive right to use its Simulated Moving Bed Chromatographic Separation ("SMB") technology for the separation of concentrated sulfuric acid and simple sugars. By using ARI's SMB, BlueFire recovers approximately 99% of the entrained sugars in the acid/sugar stream.

In July 2008, BlueFire was granted a conditional-use permit from the County of Los Angeles, Department of Regional Planning, to permit the construction of the Lancaster Biorefinery.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007

Project Development

For the third quarter in 2008, our project development costs were approximately $3,300,000 compared to project development costs of $1,200,000 for the same period during 2007. Included in project development costs in the third quarter of 2008 and 2007, was approximately $2,058,000 and $304,000, respectively of expense incurred from four engineering firms for the design and development of the biorefineries. Included in project development costs in the third quarter of 2008 and 2007, was approximately $374,000 and $404,000, respectively of non-cash share-based compensation expense, incurred in connection with our 2007 and 2006 Stock Option awards. The increase in project development costs is due to the increased activity in the design and engineering development of the biorefineries.

General and Administrative Expenses

General and Administrative Expenses were approximately $1,100,000 for the third quarter of 2008, compared to $766,000 for the same period in 2007. Included in general and administrative expenses in the third quarter of 2008 and 2007, was approximately $408,000 and $305,000, respectively of non-cash share-based compensation expense, incurred in connection with our 2007 and 2006 Stock Option award. The increase in general and administrative costs is mainly due to ramp up of Company personnel and share based compensation.

Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007

Project Development

For the first nine months in 2008, our project development costs were approximately $8,300,000, compared to project development costs of $2,500,000 for the same period during 2007. Included in project development costs in the nine months ended September 30, 2008 and 2007, was approximately $4,225,000 and $563,000, respectively of expenses incurred from four engineering firms for the design and development of the biorefineries. Included in project development costs in the nine months ended September 30, 2008 and 2007, was approximately $1,860,000 and $876,000, respectively, of non-cash share-based compensation expense, incurred in connection with our 2007 and 2006 Stock Option awards. The increase in project development costs is due to the increased activity in the design and engineering development of the biorefineries.

General and Administrative Expenses

General and Administrative Expenses were approximately $3,300,000 for the nine months ended September 30, 2008, compared to $3,600,000 for the same period in 2007. Included in general and administrative expenses in the nine months ended September 30, 2008 and 2007, was approximately $1,421,000 and $1,119,000, respectively, of non-cash share-based compensation expense, incurred in connection with our 2007 and 2006 Stock Option award. The decrease in general and administrative costs is mainly due to our employee's time being utilized for direct project expenses.

Interest Income

Interest income for the third quarter of 2008 was $39,000 related to funds invested. We did not have interest income for the same period in 2007 as we had not completed our offering of common stock during such time period.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity consist of cash and cash equivalents. Historically, we have funded our operations through financing activities consisting primarily of private placements of debt and equity securities with existing shareholders and outside investors. Our principal use of funds has been for the further development of our Biorefinery projects, for capital expenditures and general corporate expenses. As of September 30, 2008, we had cash and cash equivalents of approximately $4,800,000.

We plan to raise additional funds through joint venture partnerships, both project equity and debt financings or through future sales of our common stock, until such time as our revenues are sufficient to meet our cost structure, and ultimately achieve profitable operations. Our consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Management believes that our Company's cash will be sufficient to meet our working capital requirements for the next twelve month period, as well as be sufficient to prepare our Lancaster Biorefinery for construction, at which point further funding will be necessary. As of November 14, 2008, the Company has approximately $3.65 million in cash. If, after utilizing the existing sources of capital available to the Company for further development of its Lancaster Biorefinery, and for its DOE Biorefinery, and the Company is not successful in obtaining additional financing for the construction of the Lancaster Biorefinery, and its DOE Biorefinery, by the end of the first quarter 2009, it may be forced to curtail its existing or planned future operations until additional proceeds are received by the Company.

In addition, as our biorefinery projects develop to the point of construction, we anticipate significant purchases of long lead time item equipment for construction.

The Company is currently in discussions with potential financial and strategic sources of financing for the Lancaster Biorefinery but no definitive agreements are in place.

CRITICAL ACCOUNTING POLICIES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

The methods, estimates, and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined "critical accounting policies" as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates are described below under the heading "Revenue Recognition." We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For additional information see Note 1, "Summary of Organization and Significant Accounting Policies" in the notes to our audited financial statements appearing elsewhere in this quarterly report. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates.

CASH AND CASH EQUIVALENTS

For purpose of the statement of cash flows, we consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

REVENUE RECOGNITION

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

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

PROJECT DEVELOPMENT

Project development costs are either expensed or capitalized. The costs of materials and equipment that will be acquired or constructed for project development activities, and that have alternative future uses, both in project development, marketing or sales, will be classified as property and equipment and depreciated over their estimated useful lives. To date, project development costs include the research and development expenses related to our future cellulose-to-ethanol production facilities. During the three months ended September 30, 2008, we expensed all costs related to the facility development.

INCOME TAXES

The Company accounts for income taxes in accordance with FASB Statement No. 109 "Accounting for Income Taxes." SFAS No. 109 requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carry forwards. We provide a valuation allowance to net deferred tax assets when it is deemed unlikely that we will recover such deferred tax assets.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments approximated their carrying values at September 30, 2008. The financial instruments consist of cash and accounts payable.

LOSS PER COMMON SHARE

The Company presents basic loss per common share ("EPS") and diluted EPS on the face of the consolidated statement of operations. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities. As of September 30, 2008, the Company had outstanding options and warrants to purchase an aggregate of 10,673,853 shares of common stock that were excluded from the calculation of diluted loss per share as their effects would have been anti-dilutive.

CONCENTRATIONS OF CREDIT RISK

The Company regularly maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies.

SHARE-BASED PAYMENTS

In December 2004, the FASB issued a revision of SFAS 123 ("SFAS 123(R)") that requires compensation costs related to share-based payment transactions to be recognized in the statement of operations. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS 123(R) replaces SFAS 123 and was effective as of the first interim period beginning after January 1, 2006. During the period ended December 31, 2006, the Company adopted the provisions of SFAS 123(R). No options were outstanding prior to adoption.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement clarifies fair value as permitted under other accounting pronouncements but does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. The Company will be required to adopt SFAS No. 157 as of January 1, 2008 and is currently in the process of evaluating the impact, if any; the adoption of SFAS No. 157 will have on its financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141(R)"), which replaces FAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is to be applied prospectively to business combinations.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.