**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      period ended September 30, 2008




Or




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




For
      the
      transition period from _______________________ to
      _______________________




Commission
      File Number: 000-25413




**China
      Bio Energy Holding Group Co., Ltd.**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            
            **65-0854589**(State
                or other jurisdiction of incorporation)
            
            (I.R.S.
                Employer Identification No.)Dongxin
                Century Square, 7th Floor
              Hi-Tech
                Development District
              Xi’an,
                Shaanxi Province, People’s Republic of China
            
            710043(Address
                of principal executive offices)
            
            (Zip
                Code)86
                29 8268 9320(Registrant’s
                telephone number, including area code)(Former
                name, former address and former fiscal year, if changed since last
                report)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


x Yes  ̈ No




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2
      of the Exchange Act.




Large
      Accelerated Filer  ̈ Accelerated Filer  ̈ Non-Accelerated
      Filer x Smaller
      Reporting Company x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


 ̈ Yes x No




As
      of
      November 5, 2008, there were 27,159,091 shares of the Registrant’s common stock,
      par value $0.0001 per share, outstanding.









Table
      of
      Contents





PagePART
                I.
            FINANCIAL
                INFORMATION
            1Item
                1
            Financial
                Statements
            1Item
                2
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item
                3
            Quantitative
                and Qualitative Disclosures About Market Risk
            26Item
                4T
            Control
                and Procedures
            26PART
                II.
            OTHER
                INFORMATION
            27Item
                1
            Legal
                Proceedings
            27Item
                1A
            Risk
                Factors
            27Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            27Item
                3
            Defaults
                Upon Senior Securities
            27Item
                4
            Submission
                of Matters to a Vote of Security Holders
            27Item
                5
            Other
                Information
            27Item
                6
            Exhibits
            27









**PART
                I.**
            **FINANCIAL
                INFORMATION**




**Item
      1**  **Financial
      Statements**


**CHINA
        BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **As of September 30,**
              
              **As of December 31,****2008
                  (Unaudited)**
              
              **2007****ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              522,013
              
              $
              1,382,371Restricted
                  cash
              
              
              200,000
              
              
              200,000Accounts
                  receivable
              
              
              6,814,871
              
              
              288,589Other
                  receivables
              
              
              765,567
              
              
              1,548,681Prepaid
                  expenses
              
              
              6,073,631
              
              
              2,896,493Advance
                  to suppliers
              
              
              18,726,762
              
              
              16,546,506Inventories
              
              
              23,008,301
              
              
              12,082,962Due
                  from related party
              
              
              109,012
              
              
              593,696Total
                  current assets
              
              
              56,220,157
              
              
              35,539,298PREPAID
                  EXPENSE - NONCURRENT
              
              
              6,453,505
              
              
              -PROPERTY
                  AND EQUIPMENT, net
              
              
              10,269,554
              
              
              8,166,250TOTAL
                  ASSETS
              
              $
              72,943,216
              
              $
              43,705,548**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              -
              
              $
              179,617Advance
                  from customers
              
              
              3,860,084
              
              
              499,908Taxes
                  payable
              
              
              95,721
              
              
              125,015Other
                  payables
              
              
              3,267,739
              
              
              3,165,677Accrued
                  expenses
              
              
              -
              
              
              67,875Bank
                  loans payable
              
              
              2,200,059
              
              
              1,370,877Auto
                  loans payable - current portion
              
              
              66,889
              
              
              67,287Total
                  current liabilities
              
              
              9,490,492
              
              
              5,476,256AUTO
                  LOANS PAYABLE - NONCURRENT
              
              
              -
              
              
              33,655Total
                  liabilities
              
              
              9,490,492
              
              
              5,509,911COMMITMENT
                  AND CONTINGENCIESSTOCKHOLDERS'
                  EQUITYPreferred
                  stock, $.001 par value; authorized shares 1,000,000; issued and
                  outstanding 1,000,000 shares
              
              
              1,000
              
              
              1,000Common
                  stock, $.0001 par value; authorized shares 80,000,000; issued and
                  outstanding 25,454,545 shares
              
              
              2,545
              
              
              2,545Paid
                  in capital
              
              
              19,611,938
              
              
              19,611,938Statutory
                  reserve
              
              
              2,051,030
              
              
              2,051,030Accumulated
                  other comprehensive income
              
              
              5,509,449
              
              
              2,319,732Retained
                  earnings
              
              
              36,276,762
              
              
              14,209,392Total
                  stockholders' equity
              
              
              63,452,724
              
              
              38,195,637TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              72,943,216
              
              $
              43,705,548
 The accompanying notes are an integral part of these consolidated financial statements
 1
 
 **CHINA
        BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME**
 **(** **UNAUDITED)**
  **For
                    The Nine Months Ended September 30,**
                
                **For
                    The Three Months Ended September 30,****2008**
                
                **2007**
                
                **2008**
                
                **2007**Sales
                
                $
                156,878,997
                
                $
                64,834,695
                
                $
                62,891,345
                
                $
                40,263,868Cost
                    of goods sold
                
                
                134,134,971
                
                
                57,453,443
                
                
                53,740,270
                
                
                35,857,368Gross
                    profit
                
                
                22,744,026
                
                
                7,381,252
                
                
                9,151,075
                
                
                4,406,500General
                    and administrative expenses
                
                
                962,445
                
                
                801,487
                
                
                390,950
                
                
                286,067Income
                    from operations
                
                
                21,781,581
                
                
                6,579,765
                
                
                8,760,125
                
                
                4,120,433Non-operating
                    income (expenses)Interest
                    expenses
                
                
                (93,487
                )
                
                (98,848
                )
                
                (34,264
                )
                
                (24,835
                )Other
                    income
                
                
                381,892
                
                
                -
                
                
                381,892
                
                
                -Other
                    expenses
                
                
                (2,572
                )
                
                -
                
                
                (28
                )
                
                -Financial
                    expenses
                
                
                (46
                )
                
                -
                
                
                -
                
                
                -Total
                    non-operating income (expenses)
                
                
                285,787
                
                
                (98,848
                )
                
                347,600
                
                
                (24,835
                )Net
                    income
                
                
                22,067,368
                
                
                6,480,917
                
                
                9,107,725
                
                
                4,095,598Other
                    comprehensive itemForeign
                    currency translation gain
                
                
                3,189,717
                
                
                505,895
                
                
                401,005
                
                
                145,166Comprehensive
                    Income
                
                $
                25,257,085
                
                $
                6,986,812
                
                $
                9,508,730
                
                $
                4,240,764Basic
                    and diluted weighted average shares outstandingBasic
                
                
                25,454,545
                
                
                23,954,545
                
                
                25,454,545
                
                
                23,954,545Diluted
                
                
                32,584,227
                
                
                23,954,545
                
                
                33,227,052
                
                
                23,954,545Basic
                    and diluted net earnings per share available to common
                    stockholdersBasic
                
                $
                0.87
                
                $
                0.27
                
                $
                0.36
                
                $
                0.17Diluted
                
                $
                0.68
                
                $
                0.27
                
                $
                0.27
                
                $
                0.17
 The
        accompanying notes are an integral part of these
        consolidated financial statements
  2
  **CHINA
        BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOW**
 **(UNAUDITED)**
 
 **For The Nine Months Ended September 30,****2008**
              
              **2007**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              22,067,368
              
              $
              6,480,917Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Depreciation
              
              
              749,501
              
              
              122,332(Increase)
                  decrease in current assets:Accounts
                  receivable
              
              
              (6,352,376
              )
              
              (1,243,832
              )Other
                  receivables
              
              
              (3,079,462
              )
              
              (82,790
              )Prepaid
                  expenses
              
              
              (6,301,017
              )
              
              (44,381
              )Advance
                  to suppliers
              
              
              (999,417
              )
              
              1,223,391Inventories
              
              
              (9,842,506
              )
              
              (4,478,629
              )Due
                  from related party
              
              
              513,752
              
              
              201,850Increase
                  (decrease) in current liabilities:Accounts
                  payable
              
              
              (187,632
              )
              
              (693,621
              )Advance
                  from customers
              
              
              3,246,659
              
              
              (303,158
              )Taxes
                  payable
              
              
              (37,134
              )
              
              (205,522
              )Other
                  payables and accrued expenses
              
              
              (187,315
              )
              
              223,782Net
                  cash provided by (used in) operating activities
              
              
              (409,579
              )
              
              1,200,339CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of property and equipment
              
              
              (1,200,352
              )
              
              (128,400
              )Construction
                  in progress
              
              
              -
              
              
              (2,481,172
              )Net
                  cash used in investing activities
              
              
              (1,200,352
              )
              
              (2,609,572
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Restricted
                  cash
              
              
              -
              
              
              (424,126
              )Short-term
                  loans
              
              
              716,025
              
              
              645,039Proceeds
                  from long-term payables
              
              
              -
              
              
              458,031Repayment
                  of auto loans payable
              
              
              (40,138
              )
              
              -Repayment
                  from shareholder
              
              
              -
              
              
              49,455Net
                  cash provided by financing activities
              
              
              675,887
              
              
              728,399EFFECT
                  OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
              
              
              73,686
              
              
              505,895NET
                  DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (860,358
              )
              
              (174,939
              )CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              1,382,371
              
              
              631,443CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              522,013
              
              $
              456,504Supplemental
                  Cash flow data:Income
                  tax paid
              
              $
              -
              
              $
              -Interest
                  paid
              
              $
              91,278
              
              $
              98,848
 
 The
        accompanying notes are an integral part of these
        consolidated financial statements




3




**CHINA
      BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**




**1.**
            **ORGANIZATION
                AND DESCRIPTION OF
                BUSINESS**




China
      Bio
      Energy Holding Group Co., Ltd. (the “Company” or “CBEH”) was originally
      incorporated in the State of Delaware in July 1998 under the corporate name
“AMS
      Marketing Inc.” and in October 2003, the Company changed its name to
“International Imaging Systems, Inc.” On November 15, 2007, through a merger of
      its newly-formed wholly owned subsidiary, China Bio Energy Holding Group Co.,
      Ltd. (“Merger Sub”), the Company’s name was changed to “China Bio Energy Holding
      Group Co., Ltd.” The separate existence of Merger Sub then ceased after the
      merger. The Company is currently engaged in the development, exploration,
      production and distribution of bio-diesel and wholesale and processing of heavy
      oil and finished oil products through its indirect wholly owned operating
      subsidiary in China.




On
      October 23, 2007, the Company entered into a Share Exchange Agreement, with
      Baorun China Group Limited (“Baorun Group”), a company organized under the laws
      of Hong Kong, and its shareholders Redsky Group Limited (“Redsky Group”), a
      British Virgin Islands company and Princeton Capital Group LLP, a New Jersey
      limited liability partnership, and the Company’s then principal stockholders,
      Castle Bison, Inc. and Stallion Ventures, LLC. Redsky Group and Princeton
      Capital Group owned shares constituting 100% of the issued and outstanding
      ordinary shares of Baorun Group. Pursuant to the terms of the Share Exchange
      Agreement, Redsky Group and Princeton Capital Group transferred all of their
      shares in Baorun Group in exchange for the issuance of 22,454,545 shares of
      the
      Company’s common stock to Redsky Group and 1,500,000 shares of the Company’s
      common stock to Princeton Capital Group. As a result of this share exchange,
      Baorun Group became wholly owned subsidiary of the Company, and Redsky Group
      and
      Princeton Capital Group acquired an aggregate of approximately 94.11% of the
      Company’s outstanding common stock.




Redsky
      Industrial (Xi’an) Co., Ltd. (“Redsky Industrial”), a wholly foreign owned
      entity (“WFOE”) and a subsidiary of Baorun Group in the People’s Republic of
      China (the “PRC”), executed a series of exclusive contractual agreements
      (“Redsky Contracts”) with Xi’an Baorun Industrial Development Co., Ltd. (“Baorun
      Industrial”). These contractual agreements allow Redsky Industrial to, among
      other things, exercise significant rights to influence Baorun Industrial’s
      business operations, policies and management, approve all matters requiring
      shareholder approval, and the right to include 100% of the net income earned
      by
      Baorun Industrial as part of our Consolidated Financial Statements. In addition,
      to ensure that Baorun Industrial and its shareholders perform their obligations
      under these contractual arrangements, Baorun Industrial’s shareholders have
      pledged to Redsky Industrial all of their equity interests in Baorun Industrial.
      At such time that current restrictions under PRC law on foreign ownership of
      Chinese companies engaging in the finished oil industry in China are lifted,
      Redsky Industrial may exercise its option to purchase the equity interests
      in
      Baorun Industrial directly.




Baorun
      Industrial was registered as a privately owned company on November 11, 1999
      in
      the PRC. Its business operations consist of processing and distributing heavy
      oil and finished oil. It also engages in the research and development,
      manufacturing and distribution of bio-diesel. Baorun Industrial distributes
      its
      oil products to clients primarily located in the Shaanxi, Henan, Hunan, Sichuan,
      Hubei, Guizhou, and Xinjiang provinces of the PRC.




As
      Baorun
      Group owns Redsky Industrial, which will effectively control Baorun Industrial,
      Baorun Industrial is deemed a subsidiary of Baorun Group, a legal subsidiary
      of
      the Company. Based on Baorun Industrial’s contractual relationship with Redsky
      Industrial, the Company has determined that a variable interest entity has
      been
      created in accordance with FASB Interpretations - FIN 46(R): Consolidation
      of
      Variable Interest Entities (as amended) (“FIN 46(R)”). Under FIN 46(R),
      subsequent to the Redsky Contract and the Exchange Agreement, Baorun Industrial
      is to be presented as a consolidated subsidiary of the Company.




4




Prior
      to
      the acquisition of Baorun Group, the Company was a non-operating public shell
      corporation. Pursuant to Securities and Exchange Commission rules, the merger
      or
      acquisition of a private operating company into a non-operating public shell
      corporation with nominal net assets is considered a capital transaction in
      substance, rather than a business combination. Accordingly, for accounting
      purposes, the transaction has been treated as a reverse acquisition and a
      recapitalization, and pro-forma information is not presented. Transaction costs
      incurred in the reverse acquisition have been charged to expense.




The
      Company believes that current PRC corporate rules and regulations do not
      preclude Redsky Industrial, and thereby the Company, from exercising effective
      control of Baorun Industrial, the operating entity of the Company. . Pursuant
      to
      the terms of the Business Cooperation Agreement, as amended (“Cooperation
      Agreement”) entered into between Redsky Industrial and Baorun Industrial, Baorun
      Industrial l granted to Redsky Industrial the right to claim 100% of the net
      income, or loss, of Baorun Industrial in consideration for the services provided
      by Redsky Industrial. Under the Cooperation Agreement, Baorun Industrial cannot
      assign its rights under such agreement to a third party without Redsky
      Industrial’s consent. Redsky Industrial must notify Baorun Industrial of its
      intent to assign the agreement to a third party, but does not need the consent
      of Baorun Industrial for such assignment. Under the Cooperation Agreement Redsky
      Industrial is to absorb 100% of the net income, or loss, of Baorun Industrial.
      In addition, Baorun Industrial granted to Redsky Industrial the right to any
      residual returns and dividends from Baorun Industrial. Accordingly, as Redsky
      Industrial is a wholly owned subsidiary of Baorun Group, which is ultimately
      a
      subsidiary of the Company, 100% of Baorun Industrial will be consolidated into
      Redsky Industrial and ultimately the Company. The right to absorb these
      benefits, and expenses, are in place for the entire life of the Cooperation
      Agreement, or until such time that the Cooperation Agreement is voided or
      cancelled.




The
      assets and liabilities of Baorun Industrial are accounted for at their
      historical rate, similar to the manner in which Baorun Group was treated by
      the
      Company in the Share Exchange. Baorun Industrial is not a self-supporting entity
      and requires the support of Redsky Industrial and its related entities. Redsky
      Industrial and its related entities financed Baorun Industrial through the
      issuance of shares of preferred stock by the Company, Redsky Industrial’s
      ultimate parent. This financing enabled Baorun Industrial to pursue bio-energy
      production projects and to expand existing conventional oil/energy projects.




Under
      the
      series of agreements between Redsky Industrial and the shareholders of Baorun
      Industrial, prior to the sale of an equity interest of Baorun Industrial to
      Redsky Industrial, the shareholder of Baorun Industrial selling his or her
      proportional equity interest must inform the other remaining shareholders of
      Baorun Industrial of such a transaction.  Pursuant to the terms of the
      Exclusive Option Agreements among Redsky Industrial, Baorun Industrial and
      all
      three shareholders of Baorun Industrial, the purchase price for the equity
      interest of Baorun Industrial was not established. The purchase price is to
      be
      designated by Redsky Industrial to the extent allowed by relevant laws and
      regulations of the PRC.




The
      unaudited financial statements have been prepared by the Company,
      pursuant to the rules and regulations of the Securities and Exchange
      Commission.  The information furnished herein reflects all adjustments
      (consisting of normal recurring accruals and adjustments) which are, in the
      opinion of management, necessary to fairly present the operating results for
      the
      respective periods. Certain information and footnote disclosures normally
      present in annual financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been omitted
      pursuant to such rules and regulations. These financial statements should
      be read in conjunction with the audited financial statements and footnotes
      included in the Company’s audited financial statements.  The results
      for the nine and three months ended September 30, 2008 are not necessarily
      indicative of the results to be expected for the full year ending December
      31,
      2008.




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




**Principle
      of Consolidation**




The
      accompanying consolidated financial statements include our accounts and the
      accounts of our wholly owned subsidiary, Baorun Group and Redsky Industrial,
      and
      its consolidated subsidiary, Baorun Industrial (collectively, the “Company”).
      All significant inter-company accounts and transactions have been eliminated
      in
      consolidation.




5




**Use
      of Estimates**




In
      preparing the financial statements in conformity with accounting principles
      generally accepted in the United States of America, management makes estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosures of contingent assets and liabilities at the dates of the financial
      statements, as well as the reported amounts of revenues and expenses during
      the
      reporting year. Significant estimates, required by management, include the
      recoverability of long-lived assets and the valuation of inventories. Actual
      results could differ from those estimates.




**Cash
      and Cash Equivalents**




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




As
      of
      September 30, 2008 and December 31, 2007, the Company maintained restricted
      cash
      of $200,000 in an escrow account for the use of the Company’s investment
      relations only. It is presented as restricted cash on the accompanying
      consolidated balance sheets.




**Accounts
      Receivable**




The
      Company’s policy is to maintain reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer credit
      worthiness, current economic trends and changes in customer payment patterns
      to
      evaluate the adequacy of these reserves. Based on historical collection
      activity, no allowance was deemed necessary at September 30, 2008 and December
      31, 2007.




**Inventories**




Inventories
      are valued at the lower of cost or market with cost determined on a moving
      weighted average basis. Cost of work in progress and finished goods comprises
      direct material, direct production cost and an allocated portion of production
      overheads.




**Advances
      from Customers**




Advances
      from customers consist of prepayments to the Company for products that have
      not
      yet been shipped to the customers. Any amounts received prior to satisfying
      the
      Company’s revenue recognition criteria are recorded as deferred revenue or
      advances from customers. The Company will recognize the prepayments from the
      customers as revenue at the time the delivery of goods is made. Advances from
      customers as of September 30, 2008 and December 31, 2007 were $3,860,084 and
      $499,908, respectively.




**Plant,
      Property and Equipment**




Plant,
      property and equipment is stated at the actual cost on acquisition less
      accumulated depreciation and amortization. Depreciation and amortization are
      provided for in amounts sufficient to relate the cost of depreciation assets
      to
      operations over their estimated service lives, principally on a straight-line
      basis. Most property, plant and equipment have a residual value of 5% of actual
      cost. The estimated lives used in determining depreciation are:





YearsBuilding
            
            20Vehicle
            
            5Office
                Equipment
            
            5Production
                Equipment
            
            5




In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
      “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
      examines the possibility of decreases in the value of fixed assets when events
      or changes in circumstances reflect the fact that their recorded value may
      not
      be recoverable.




6




**Impairment
      of Long-Lived Assets**




Long-lived
      assets, which include property, plant and equipment and intangible assets,
      are
      reviewed for impairment whenever events or changes in circumstances indicate
      that the carrying amount of an asset may not be recoverable.




Recoverability
      of long-lived assets to be held and used is measured by a comparison of the
      carrying amount of an asset to the estimated undiscounted future cash flows
      expected to be generated by the asset. If the carrying amount of an asset
      exceeds its estimated undiscounted future cash flows, an impairment charge
      is
      recognized by the amount by which the carrying amount of the asset exceeds
      the
      fair value of the assets. Fair value is generally determined using the asset’s
      expected future discounted cash flows or market value, if readily determinable.
      Based on its review, the Company believes that, as of September 30, 2008 and
      December 31, 2007, there were no significant impairments of its long-lived
      assets.




**Income
      Taxes**




The
      Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.




According
      to the PRC tax regulations, since Baorun Industrial uses the waste gas, water
      and residue to produce the products, the Company is eligible for the exemption
      of income taxes for six years from year 2004 to year 2010.




The
      Company adopted the provisions of FASB Interpretation No. 48, Accounting for
      Uncertainty in Income Taxes, on January 1, 2007. As a result of the
      implementation of FIN 48, the Company made a comprehensive review of its
      portfolio of tax positions in accordance with recognition standards established
      by FIN 48. As a result of the implementation of Interpretation 48, the Company
      recognized no material adjustments to liabilities or stockholders equity. When
      tax returns are filed, it is highly certain that some positions taken would
      be
      sustained upon examination by the taxing authorities, while others are subject
      to uncertainty about the merits of the position taken or the amount of the
      position that would be ultimately sustained. The benefit of a tax position
      is
      recognized in the financial statements in the period during which, based on
      all
      available evidence, management believes it is more likely than not that the
      position will be sustained upon examination, including the resolution of appeals
      or litigation processes, if any. Tax positions taken are not offset or
      aggregated with other positions. Tax positions that meet the
      more-likely-than-not recognition threshold are measured as the largest amount
      of
      tax benefit that is more than 50 percent likely of being realized upon
      settlement with the applicable taxing authority. The portion of the benefits
      associated with tax positions taken that exceeds the amount measured as
      described above is reflected as a liability for unrecognized tax benefits in
      the
      accompanying balance sheets along with any associated interest and penalties
      that would be payable to the taxing authorities upon examination. Interest
      associated with unrecognized tax benefits are classified as interest expense
      and
      penalties are classified in selling, general and administrative expenses in
      the
      statements of income. The adoption of FIN 48 did not have a material impact
      on
      the Company’s financial statements.




**Revenue
      Recognition**




The
      Company’s revenue recognition policies are in compliance with Securities and
      Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”) 104. Sales revenue
      is recognized at the date of shipment to customers when a formal arrangement
      exists, the price is fixed or determinable, the delivery is completed, no other
      significant obligations of the Company exist and collectability is reasonably
      assured. Payments received before all of the relevant criteria for revenue
      recognition are recorded as unearned revenue.




Sales
      revenue represents the invoiced value of goods sold, net of value-added tax
      (“VAT”). All of the Company’s products that are sold in the PRC are subject to
      Chinese value-added tax of 17% of the gross sales price. This VAT may be offset
      by VAT paid by the Company on raw materials and other materials included in
      the
      cost of producing their finished product. The Company recorded VAT payable
      and
      VAT receivable net of payments in the financial statements. The VAT tax return
      is filed offsetting the payables against the receivables.




7




There
      were no sales returns and allowances for the nine and three months ended
      September 30, 2008 and 2007. The Company does not provide unconditional right
      of
      return, price protection or any other concessions to its customers.




**Cost
      of Goods Sold**




Cost
      of
      goods sold consists primarily of material costs, direct labor, manufacturing
      overhead and related expenses, which are directly attributable to the production
      of products.  Write-down of inventory to lower of cost or market is also
      recorded in cost of goods sold.




**Shipping
      Costs**




Shipping
      costs are included in cost of goods sold and totaled approximately $340,000
      and
      $250,000 for the nine months ended September 30, 2008 and 2007; respectively
      and
      approximately $38,000 and $132,000 for the three months ended September 30,
      2008
      and 2007, respectively.




**Concentration
      of Credit Risk**




Financial
      instruments that potentially subject the Company to credit risk consist
      primarily of accounts receivable and other receivables. The Company does not
      require collateral or other security to support these receivables. The Company
      conducts periodic reviews of its clients’ financial condition and customer
      payment practices to minimize collection risk on accounts
      receivable.




The
      operations of the Company are located in the PRC. Accordingly, the Company’s
      business, financial condition, and results of operations may be influenced
      by
      the political, economic, and legal environments in the PRC, as well as by the
      general state of the PRC economy.




**Statement
      of Cash Flows**




In
      accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
      Company’s operations is calculated based upon the local currencies. As a result,
      amounts related to assets and liabilities reported on the statement of cash
      flows may not necessarily agree with changes in the corresponding balances
      on
      the balance sheet.




**Fair
      Value of Financial Instruments**




SFAS
      No.
      107, “Disclosures about Fair Value of Financial Instruments,” requires that the
      Company disclose estimated fair values of financial instruments. The carrying
      amounts reported in the statements of financial position for current assets
      and
      current liabilities qualifying as financial instruments are a reasonable
      estimate of fair value.




**Foreign
      Currency Translation and Comprehensive Income (Loss)**




The
      Company’s functional currency is the Renminbi (“RMB”). For financial reporting
      purposes, RMB has been translated into United States dollars (“USD”) as the
      reporting currency. Assets and liabilities are translated at the exchange rate
      in effect at the balance sheet date. Revenues and expenses are translated at
      the
      average rate of exchange prevailing during the reporting period. Translation
      adjustments arising from the use of different exchange rates from period to
      period are included as a component of stockholders’ equity as “Accumulated other
      comprehensive income”. Gains and losses resulting from foreign currency
      transactions are included in income. There has been no significant fluctuation
      in exchange rate for the conversion of RMB to USD after the balance sheet
      date.




On
      July
      21, 2005, the central government of China allowed the RMB to fluctuate, ending
      its decade old valuation peg to the U.S. dollar. Historically, the Chinese
      government has benchmarked the RMB exchange ratio against the U.S. dollar,
      thereby mitigating the associated foreign currency exchange rate fluctuation
      risk. The Company does not believe that its foreign currency exchange rate
      fluctuation risk is significant, especially if the Chinese government continues
      to benchmark the RMB against the U.S. dollar.




8




This
      fluctuation of the exchange rates does not imply free convertibility of RMB
      to
      other foreign currencies. All foreign exchange transactions continue to take
      place either through the People’s Bank of China or other banks authorized to buy
      and sell foreign currencies at the exchange rate quoted by the People’s Bank of
      China.




The
      Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
      “Reporting Comprehensive Income”. Comprehensive income is comprised of net
      income and all changes to the statements of stockholders’ equity, except those
      due to investments by stockholders, changes in paid-in capital and distributions
      to stockholders. Comprehensive income for the nine and three months ended
      September 30, 2008 and 2007 was included net income and foreign currency
      translation adjustments.




**Basic
      and Diluted Earning per Share (EPS)**




Basic
      EPS
      is computed by dividing income available to common shareholders by the weighted
      average number of common shares outstanding for the period. Diluted EPS is
      computed similar to basic net income per share except that the denominator
      is
      increased to include the number of additional common shares that would have
      been
      outstanding if the potential common shares had been issued and if the additional
      common shares were dilutive. Diluted net earning per share is based on the
      assumption that all dilutive convertible shares and stock options were converted
      or exercised. Dilution is computed by applying the treasury stock method. Under
      this method, options and warrants are assumed to be exercised at the beginning
      of the period (or at the time of issuance, if later), and as if funds obtained
      thereby were used to purchase common stock at the average market price during
      the period. The following table presents a reconciliation of basic and diluted
      earnings per share:





For the Nine
              Months Ended September 30
              (Unaudited)
            
            For the Three Months
              Ended September 30
              (Unaudited)2008
            
            2007
            
            2008
            
            2007Net
                income
            
            $
            22,067,368
            
            $
            6,480,917
            
            $
            9,107,725
            
            $
            4,095,598Weighted
                average shares outstanding - basic
            
            
            25,454,545
            
            
            23,954,545
            
            
            25,454,545
            
            
            23,954,545Effect
                of dilutive securities:Convertible
                preferred stock
            
            
            4,545,455
            
            
            —
            
            
            4,545,455
            
            
            —Unexercised
                warrants
            
            
            2,584,227
            
            
            —
            
            
            3,227,052
            
            
            —Weighted
                average shares outstanding - diluted
            
            
            32,584,227
            
            
            23,954,545
            
            
            33,227,052
            
            
            23,954,545Earnings
                per share - basic
            
            $
            0.87
            
            $
            0.27
            
            
            0.36
            
            
            0.17Earnings
                per share - diluted
            
            $
            0.68
            
            $
            0.27
            
            
            0.27
            
            
            0.17




**Segment
      Reporting**




SFAS
      No.
      131, “Disclosures about Segments of an Enterprise and Related Information”
requires use of the “management approach” model for segment reporting. The
      management approach model is based on the way a company’s management organizes
      segments within the company for making operating decisions and assessing
      performance. Reportable segments are based on products and services, geography,
      legal structure, management structure, or any other manner in which management
      disaggregates a company.




SFAS
      131
      has no effect on the Company’s financial statements as substantially all of the
      Company’s operations are conducted in one industry segment, that of processing
      and distributing finished oil. All of the Company’s assets are located in the
      PRC. All of the Company’s sales are in the PRC and are involved in the
      processing and distribution of finished oil. For the nine months ended September
      30, 2008 and 2007, the Company had sales of approximately $35,798,000 and $0
      from its biodiesel facility, respectively; and $14,758,000 and $0 for the three
      months ended September 30, 2008 and 2007 from its biodiesel facility,
      respectively.




9




**New
      Accounting Pronouncements**




Accounting
      for Financial Guarantee Insurance Contracts




In
      May
      2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
      Insurance Contracts, an interpretation of FASB Statement No. 60.”  The
      scope of this Statement is limited to financial guarantee insurance (and
      reinsurance) contracts, as described in this Statement, issued by enterprises
      included within the scope of Statement 60. Accordingly, this Statement does
      not
      apply to financial guarantee contracts issued by enterprises excluded from
      the
      scope of Statement 60 or to some insurance contracts that seem similar to
      financial guarantee insurance contracts issued by insurance enterprises (such
      as
      mortgage guaranty insurance or credit insurance on trade receivables). This
      Statement also does not apply to financial guarantee insurance contracts that
      are derivative instruments included within the scope of FASB Statement No.
      133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
      will not have an impact on the Company’s financial statements.




The
      Hierarchy of Generally Accepted Accounting Principles




In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.”  This Statement identifies the sources of
      accounting principles and the framework for selecting the principles to be
      used
      in the preparation of financial statements of nongovernmental entities that
      are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy).  This Statement will not have an
      impact on the Company’s financial statements.




Disclosures
      about Derivative Instruments and Hedging Activities




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities an amendment of FASB Statement No. 133.”  This
      Statement changes the disclosure requirements for derivative instruments and
      hedging activities. Entities are required to provide enhanced disclosures about
      (a) how and why an entity uses derivative instruments, (b) how derivative
      instruments and related hedged items are accounted for under Statement 133
      and
      its related interpretations, and (c) how derivative instruments and related
      hedged items affect an entity’s financial position, financial performance, and
      cash flows.  Based on current conditions, the Company does not expect the
      adoption of SFAS 161 to have a significant impact on its results of operations
      or financial position.




Noncontrolling
      Interests in Consolidated Financial Statements - An Amendment of ARB No.
      51




In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
      Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
      160”). SFAS 160 establishes new accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. Specifically, this statement requires the recognition of a
      noncontrolling interest (minority interest) as equity in the consolidated
      financial statements and separate from the parent’s equity. The amount of net
      income attributable to the noncontrolling interest will be included in
      consolidated net income on the face of the income statement. SFAS 160 clarifies
      that changes in a parent’s ownership interest in a subsidiary that do not result
      in deconsolidation are equity transactions if the parent retains its controlling
      financial interest. In addition, this statement requires that a parent recognize
      a gain or loss in net income when a subsidiary is deconsolidated. Such gain
      or
      loss will be measured using the fair value of the noncontrolling equity
      investment on the deconsolidation date. SFAS 160 also includes expanded
      disclosure requirements regarding the interests of the parent and its
      noncontrolling interest. SFAS 160 are effective for fiscal years, and interim
      periods within those fiscal years, beginning on or after December 15, 2008.
      Based on current conditions, the Company does not expect the adoption of SFAS
      160 to have a significant impact on its results of operations or financial
      position.




Business
      Combinations




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
      Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
      for business combinations. Under SFAS 141R, an acquiring entity will be required
      to recognize all the assets acquired and liabilities assumed in a transaction
      at
      the acquisition-date fair value with limited exceptions. SFAS 141R will change
      the accounting treatment for certain specific items, including:




10




·
            Acquisition
                costs will be generally expensed as
                incurred;




·
            Noncontrolling
                interests (formerly known as “minority interests” - see SFAS 160
                discussion below) will be valued at fair value at the acquisition
                date;




·
            Acquired
                contingent liabilities will be recorded at fair value at the acquisition
                date and subsequently measured at either the higher of such amount
                or the
                amount determined under existing guidance for non-acquired
                contingencies;




·
            In-process
                research and development will be recorded at fair value as an
                indefinite-lived intangible asset at the acquisition
                date;




·
            Restructuring
                costs associated with a business combination will be generally expensed
                subsequent to the acquisition date;
                and




·
            Changes
                in deferred tax asset valuation allowances and income tax uncertainties
                after the acquisition date generally will affect income tax
                expense.




SFAS
      141R
      also includes a substantial number of new disclosure requirements. SFAS 141R
      applies prospectively 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. Earlier adoption is prohibited. Accordingly, since
      we are a calendar year-end company we will continue to record and disclose
      business combinations following existing GAAP until January 1,
      2009.  The
      Company expects SFAS 141R will have an impact on accounting for business
      combinations once adopted but the effect is dependent upon acquisitions at
      that
      time.




Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans, an
      Amendment of FASB Statements No. 87, 88, 106, and 132R




In
      September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
      Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
      underfunded or overfunded status of a defined benefit postretirement plan as
      an
      asset or liability in its statement of financial position and to recognize
      changes in the funded status in the year in which the changes occur through
      accumulated other comprehensive income. Additionally, SFAS No. 158 requires
      employers to measure the funded status of a plan as of the date of its year-end
      statement of financial position. The new reporting requirements and related
      new
      footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending
      after December 15, 2006. The Company adopted the provisions of SFAS No. 158
      for
      the year end 2006, and the effect of recognizing the funded status in
      accumulated other comprehensive income was not significant. The new measurement
      date requirement applies for fiscal years ending after December 15,
      2008.




Accounting
      for Nonrefundable Advance Payments for Goods or Services Received for use in
      Future Research and Development Activities




In
      June
      2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
      Nonrefundable Advance Payments for Goods or Services Received for use in Future
      Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
      nonrefundable advance payments for goods or services that used or rendered
      for
      research and development activities should be expensed when the advance payment
      is made or when the research and development activity has been
      performed. Management is currently evaluating the effect of this
      pronouncement on our financial statements.




**3.**
            **CASH
                IN BANK ACCOUNTS**




Cash
      includes cash on hand and demand deposits in accounts maintained with
      state-owned banks within the PRC. Total cash in state-owned banks at September
      30, 2008 and December 31, 2007 amounted to $506,291 and $1,357,256,
      respectively, of which no deposits are covered by insurance. The Company has
      not
      experienced any losses in such accounts and believes it is not exposed to any
      risks on its cash in bank accounts.




11




**4.**
            **PREPAID
                EXPENSES**




Prepaid
      expenses mainly consisted of prepaid rents for the gas stations (see Note 14
      -
      Commitments) and prepayment to Ningxia Yuanshun Petrochemical Co (see Note
      11 -
      Other Payables). At September 30, 2008 and December 31, 2007, the current
      portion of prepaid expenses was $6,073,631 and $2,896,493, respectively. At
      September 30, 2008, the noncurrent portion of prepaid expenses amounting
      $6,453,505 represents the prepaid rents that will be expensed after one
      year.




**5.**
            **INVENTORIES**




Inventories
      consisted of the following:







September
                30,
              2008
              (Unaudited)
            
            December 31,
              2007Petroleum
            
            $
            1,433,131
            
            $
            2,909,158Diesel
            
            
            12,816,092
            
            
            6,079,751Heavy
                Oil
            
            
            1,378,776
            
            
            1,620,487Other
                supplemental material
            
            
            7,380,302
            
            
            1,473,566Total
            
            $
            23,008,301
            
            $
            12,082,962




**6.**
            **OTHER
                RECEIVABLES**




At
      September 30, 2008, other receivables represented deposits made for purchase
      of
      equipments and short term cash advances to third parties in the amount of
      $765,567. At December 31, 2007, other receivables represented deposits for
      diesel oil equipments and three oil mill factories acquisitions in the amount
      of
      $1,548,681.




**7.**
            **PLANT,
                PROPERTY AND EQUIPMENT**




Plant,
      property and equipment is summarized as follows:


September
                  30,
                2008
                (Unaudited)
              
              December 31,
                  2007Building
              
              $
              336,440
              
              $
              314,459Diesel
                  Processing Equipment
              
              
              10,312,209
              
              
              7,500,890Office
                  Equipment
              
              
              118,205
              
              
              98,788Other
                  Equipment
              
              
              27,442
              
              
              25,086Motor
                  Vehicles
              
              
              798,960
              
              
              746,75911,593,256
              
              
              8,685,982Less:
                  Accumulated Depreciation
              
              
              1,323,702
              
              
              519,732Total
              
              $
              10,269,554
              
              $
              8,166,250




Depreciation
      expense for the nine months ended September 30, 2008 and 2007 were approximately
      $749,000 and $122,000, respectively; and approximately $293,000 and $43,000
      for
      the three months ended September 30, 2008 and 2007, respectively.




12




**8.**
            **DUE
                FROM RELATED PARTY**




Due
      from
      related party represents the advance to and prepayment for the purchase of
      oil
      products from a related company that is 40% owned by one of the shareholder
      of
      Baorun Industrial. As of September 30, 2008 and December 31, 2007, due from
      this
      related party was $109,012 and $593,696, respectively. Purchase from this
      related party during nine and three months ended September 30, 2008 and 2007
      were $0.




**9.**
            **MAJOR
                CUSTOMERS AND VENDORS**




Major
      Customers




For
      the
      nine and three months ended September 30, 2007 and 2008, no major customers
      accounted for over 10% of the Company’s total sales.




Major
      Vendors




For
      the
      nine months ended September 30, 2007, one vendor provided approximately 77.67%
      of the Company’s total purchases. For the three months ended September 30, 2007,
      two major vendors provided approximately 72.01% and 14.43% of the Company’s
      total purchases, respectively. For the nine months and three months ended
      September 30, 2008, one vendor provided approximately 43.10% and 41.39% of
      the
      Company’s total purchases, respectively. The accounts payable to this vendor was
      $0 at September 30, 2008.




**10.**
            **TAX
                PAYABLE**




Tax
      payable consisted of the following at September 30, 2008 and December 31,
      2007:





September
                30,
              2008
              (Unaudited)
            
            December
                31,
              2007Value
                added tax payable
            
            $
            89,428
            
            $
            125,015Urban
                maintenance and construction tax payable
            
            
            6,260
            
            
            —Other
                tax payable
            
            
            33
            
            
            —$
            95,721
            
            $
            125,015




**11.**
            **OTHER
                PAYABLES**




Other
      payable mainly consisted of payables for the purchase of equipment, short term
      advances from third parties, and loan of $3,054,662 from Ningxia Yuanshun
      Petrochemical Co. to Baorun Industrial; concurrently, Ningxia Yuanshun received
      $3,054,662 prepayment from Redsky Industrial. At September 30, 2008 and December
      31, 2007, the other payables were $3,267,739 and $3,165,677,
      respectively.




**12.**
            **LOAN
                PAYABLE**




The
      Company is obligated under two short term loans from commercial banks in the
      PRC. The first loan of $1,457,938 (RMB10, 000,000) was entered into on August
      31, 2007 with renewed maturity to August 31, 2009. The principal will be repaid
      at maturity and the interest is payable per quarter with an interest rate of
      8.5905% per annum. This loan is guaranteed by Xi’an City Economic &
Technology Investment Guarantee Co., Ltd. The Company paid them the guarantee
      fee of 2% of the loan principal, and collateralized the Company’s diesel
      processing equipments for the guarantee.




13




The
      second loan of $733,352 (RMB 5,000,000) was entered into on August 31, 2008
      with
      maturity on August 31, 2009. The principal will be repaid at maturity and the
      interest is payable per month with an interest rate of 8.217% per
      annum.




**13.**
            **COMMITMENTS**




Employee
      Agreements




The
      Company entered into an employment agreement with Mr. Gao Xincheng to employ
      him
      as the Chairman, effective as of October 23, 2007. The agreement expires in
      October 22, 2010, but is renewable upon agreement by the parties to the
      agreement, unless earlier terminated by either party. Mr. Gao’s base monthly
      salary is $800. The Company pays premiums for Mr. Gao for social insurance
      schemes such as Pension, Unemployment, Medical Insurance, etc. in accordance
      with relevant PRC laws and regulations. The Company has the right to adjust
      the
      salary and welfare of Mr. Gao. In connection with this agreement, Mr. Gao also
      executed a Confidentiality and Non-competition Agreement with the
      Company.




The
      Company entered into an employment agreement with Ms. Li Gaihong to employ
      her
      as the Chief Financial Officer, effective as of October 23, 2007. The agreement
      expires in October 22, 2010, but is renewable upon agreement by the parties
      to
      the agreement, unless earlier terminated by either party. Ms. Li’s base monthly
      salary is $500. The Company pays premiums for Ms. Li for social insurance
      schemes such as Pension, Unemployment, Medical Insurance, etc. in accordance
      with relevant PRC laws and regulations. The Company has the right to adjust
      the
      salary and welfare of Ms. Li. In connection with this agreement, Ms. Li also
      executed a Confidentiality and Non-competition Agreement with the
      Company.




Lease
      Agreements




The
      Company leased one oil storage facility under a long term, non-cancelable,
      and
      renewable operating lease agreement since 2006 with expiration date on June
      30,
      2008. This lease has been renewed for additional six years with annual lease
      payment of $102,000 (RMB 700,000).




The
      Company leases another two oil storage facilities under one year,
      non-cancelable, and renewable operating lease agreements expiring on December
      31, 2007. One lease agreement has been renewed for one year with expiration
      date
      on December 31, 2008. The other lease agreement has been terminated as lease
      term expired. The Company then entered into a new one year, non-cancelable
      and
      renewable lease agreement for a new oil storage facility with expiration date
      on
      December 31, 2008.




During
      2007, the Company leased one gas station for operation under a long term,
      non-cancelable operating lease agreement with expiration date on December 31,
      2027. The annual lease payment is approximately $17,500 (RMB 125,000) with
      a 5%
      increase every five year. The Company is required to pay in advance 50% of
      the
      sum of the first three year lease payments $53,000 (RMB 375,000) upon receiving
      the operating permits and related documents from the lessor, and pay the
      remaining 50% at the time of officially taking over the operation. The Company
      will pay the 4 th year
      lease payment at the end of the second year of leasing, and pay the rents
      annually thereafter. This lease is classified as operating lease.




During
      the nine months ended September 30, 2008, the Company leased additional four
      gas
      stations for operation under a long term operating lease agreement with an
      initial term expiring on May 31, 2023. The annual lease payment for each gas
      station is approximately $437,000 (RMB 3,000,000). The Company is required
      to
      make the lease payments for all four gas stations in advance in five-year
      increments. The first five year aggregate lease payment of $8,747,631 (RMB
      60,000,000) is due upon receipt of the operating permits and related documents
      from the lessor. This lease is classified as operating lease.




14




These
      operating lease agreements require that the Company pays certain operating
      expenses applicable for the leased premises. Future minimum rental payments
      required under these operating leases are as follows:




Years
                Ending September 30,
            
            Amount2009
            
            $
            207,0002010
            
            
            122,0002011
            
            
            122,0002012
            
            
            122,0002013
            
            
            8,952,000Years
                thereafter
            
            
            8,995,000Total
            
            $
            18,520,000




Total
      rental expense for the nine months ended September 30, 2008 and 2007 amounted
      to
      approximately $724,,000 and $54,000, respectively; and approximately $536,000
      and $0 for the three months ended September 30, 2008 and 2007,
      respectively.




**14.**
            **STATUTORY
                RESERVES**




Pursuant
      to the new corporate law of the PRC effective January 1, 2006, the Company
      is
      required to maintain one statutory reserve by appropriating from its after-tax
      profit before declaration or payment of dividends. The statutory reserve
      represents restricted retained earnings.




Surplus
      reserve fund




The
      Company is required to transfer 10% of its net income, as determined under
      PRC
      accounting rules and regulations, to a statutory surplus reserve fund until
      such
      reserve balance reaches 50% of the Company’s registered capital.




The
      surplus reserve fund is non-distributable, other than during liquidation, and
      can be used to fund previous years’ losses, if any, and may be utilized for
      business expansion or converted into share capital by issuing new shares to
      existing shareholders in proportion to their shareholding or by increasing
      the
      par value of the shares currently held by them, provided that the remaining
      reserve balance after such issue is not less than 25% of the registered
      capital.




Common
      welfare fund




Common
      welfare fund is a voluntary fund that the Company can elect to transfer 5%
      to
      10% of its net income to this fund. This fund can only be utilized on capital
      items for the collective benefit of the Company’s employees, such as
      construction of dormitories, cafeteria facilities, and other staff welfare
      facilities. This fund is non-distributable other than upon
      liquidation.




**15.**
            **STOCKHOLDERS’
                EQUITY**




Reverse
      Merger




On
      October 23, 2007, the Company entered into a Share Exchange Agreement with
      Baorun China, its shareholders Redsky Group Limited and Princeton Capital Group
      LLP, and the Company’s then principal stockholders, Castle Bison, Inc. and
      Stallion Ventures, LLC. Pursuant to the terms of the Share Exchange Agreement,
      Redsky Group and Princeton Capital Group transferred all of their shares
      constituting 100% of the issued and outstanding ordinary shares of Baorun China
      in exchange for the issuance of 22,454,545 shares of the Company’s common stock
      to Redsky Group and 1,500,000 shares of the Company’s common stock to Princeton
      Capital Group. As a result of this share exchange, Baorun China became a
      wholly-owned subsidiary of the Company, and Redsky Group and Princeton Capital
      Group acquired an aggregate of approximately 94.11% of the Company’s outstanding
      common stock.




Prior
      to
      the Share Exchange, Redsky Industrial, a WFOE subsidiary of Baorun China in
      the
      PRC, executed a series of exclusive contractual agreements with Baorun
      Industrial. These contractual agreements allow Redsky Industrial to, among
      other
      things, secure significant rights to influence Baorun Industrial’s business
      operations, policies and management, approve all matters requiring shareholder
      approval, and the right to include 100% of net income earned by Baorun
      Industrial as part of our Consolidated Financial Statements.




15




We
      have
      determined a variable interest entity has been created in accordance with FASB
      Interpretations - FIN 46(R): Consolidation of Variable Interest Entities (as
      amended) (“FIN 46 (R)”). Under FIN 46 (R), as a result of the contractual
      arrangements between Redsky Industrial and Baorun Industrial and the Exchange
      Agreement, Baorun Industrial is presented as our consolidated
      subsidiary.




Series
      A Convertible preferred stock with series A-1 and series A-2 warrants issued
      for
      cash




Concurrently
      with the share exchange, the Company entered into a securities purchase
      agreement (the “Purchase Agreement”) with one accredited investor for the sale
      of securities consisting of (i) 1,000,000 shares of the Company’s Series A
      convertible preferred stock, (ii) a series A-1 warrant to purchase 3,409,091
      shares of the Company’s common stock at an exercise price of US$3.00 per share,
      and (iii) a Series A-2 warrant to purchase 2,272,728 shares of the Company’s
      common at an exercise price of US$4.40 per share (the Series A-1 and Series
      A-2
      warrants, collectively the “Warrants”), for aggregate gross proceeds equal to
      $10,000,000. Net proceeds of $9,774,993 have been received by the
      Company.




Each
      share of preferred stock is convertible into a number of fully paid and
      non-assessable shares of common stock equal to the quotient of the liquidation
      preference amount per share of preferred stock, or $10.00, divided by the
      conversion price, which initially is $2.20 per share, subject to certain
      adjustments, or approximately 4,545,455 shares of common stock if all 1,000,000
      shares of preferred stock converted. No dividend is declared during nine and
      three months ended September 30, 2008.




The
      value
      of warrants mentioned was determined by allocation of principal using the
      Black-Scholes pricing model with the following assumptions: discount rate -
      1.37%; dividend yield - 0%; expected volatility - 30% and term of 5
      years.




Following
      is a summary of the warrant activity:




Outstanding
                as of December 31, 2007
            
            
            5,681,819Granted
            
            
            —Forfeited
            
            
            —Exercised
            
            
            —Outstanding
                as of September 30, 2008
            
            
            5,681,819




**16.**
            **OPERATING
                RISK**




(a)  Country
      risk




Currently,
      the Company’s revenues are mainly derived from sale of oil products in the PRC.
      The Company hopes to expand its operations in the PRC, however, such expansion
      has not been commenced and there are no assurances that the Company will be
      able
      to achieve such an expansion successfully. Therefore, a downturn or stagnation
      in the economic environment of the PRC could have a material adverse effect
      on
      the Company’s financial condition.




(b)  Products
      risk




The
      Company competes with larger companies, who have greater funds available for
      expansion, marketing, research and development and the ability to attract more
      qualified personnel. There can be no assurance that the Company will remain
      competitive with larger competitors.




(c)  Exchange
      risk




The
      Company can not guarantee that the current exchange rate will remain steady,
      therefore there is a possibility that the Company could post the same amount
      of
      profit for two comparable periods and because of a fluctuating exchange rate
      actually post higher or lower profit depending on exchange rate of Chinese
      Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could
      fluctuate depending on changes in the political and economic environments
      without notice.




16




(d)  Political
      risk




Currently,
      the PRC is in a period of growth and is openly promoting business development
      in
      order to bring more business into the PRC. Additionally, the PRC allows a
      Chinese corporation to be owned by a United States corporation. If the laws
      or
      regulations are changed by the PRC government, the Company’s ability to operate
      in the PRC could be affected.




(e)  Key
      personnel risk




The
      Company’s future success depends on the continued services of executive
      management in China. The loss of any of their services would be detrimental
      to
      the Company and could have an adverse effect on business development. The
      Company does not currently maintain key-man insurance on their lives. Future
      success is also dependent on the ability to identify, hire, train and retain
      other qualified managerial and other employees. Competition for these
      individuals is intense and increasing.




**17.**
            **SUBSEQUENT
                EVENT**




On
      October 14, 2008, the Company entered into a securities purchase agreement
      (“Debenture Purchase Agreement”) with an institutional investor for the issuance
      and sale of a non-interest bearing convertible debenture in an aggregate amount
      of $9,000,000, which is convertible into 2,465,753 shares of Series B
      Convertible Preferred Stock at $3.65 per share (the “Financing’).




In
      connection with the Financing, the Company entered into an escrow agreement
      (the
“Escrow Agreement”) with the investor and the majority stockholder of the
      Company, pursuant to which 2,465,753 shares of common stock owned by the
      majority stockholder (the “Escrow Shares”) have been deposited in escrow and
      held as security for the achievement by the Company of (i) $28,000,000 Net
      Income (as defined below), and (ii) fully diluted earnings per share of no
      less
      than $0.73 (the “Performance Thresholds”). If the Company achieves the
      Performance Thresholds, the Escrow Shares will be released to such stockholder.
      If the Company achieves no more than 50% of the Performance Thresholds, the
      Escrow Shares will be disbursed to the investor. If the Company achieves more
      than 50% and less than 100% of the Performance Thresholds, the Escrow Agent
      will
      disburse to the investor that number of Escrow Shares equal to two (2) times
      the
      percentage by which the lowest performance threshold was not achieved.





In
      connection with the Financing, the Company also entered into a Management Escrow
      Agreement with the Investor, pursuant to which $750,000 of the Financing
      proceeds were delivered into an escrow account, which funds will be released
      in
      installments of $250,000 upon the appointment of (i) a new Chief Financial
      Officer, (ii) a Vice President of Investor Relations, and (iii) upon the
      Company’s compliance with NASDAQ’s corporate governance requirements, including
      but not limited to appointing three persons to serve as “independent” directors
      (as such term is defined under the NASDAQ Stock Market rules) on our Board
      of
      Directors and forming the Audit Committee and the Compensation Committee of
      our
      Board of Directors.




The
      Company also received an additional $5,113,638 from the exercise of
      approximately1.7 million issued and outstanding warrants at a strike price
      of
      $3.00.




**Item
      2**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**




The
      following information should be read in conjunction with the financial
      statements and the notes thereto contained elsewhere in this
      report.




17




**Forward
      Looking Statements**




This
      quarterly report on Form 10-Q and other reports filed by the Company from time
      to time with the Securities and Exchange Commission (collectively the “Filings”)
      contain or may contain forward-looking statements and information that are
      based
      upon beliefs of, and information currently available to, the Company’s
      management as well as estimates and assumptions made by Company’s management.
      Readers are cautioned not to place undue reliance on these forward-looking
      statements, which are only predictions and speak only as of the date hereof.
      When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
      expressions as they relate to the Company or the Company’s management identify
      forward-looking statements. Such statements reflect the current view of the
      Company with respect to future events and are subject to risks, uncertainties,
      assumptions, and other factors (including the risks contained in the section
      of
      this report entitled “Risk Factors”) relating to the Company’s industry, the
      Company’s operations and results of operations, and any businesses that the
      Company may acquire. Should one or more of these risks or uncertainties
      materialize, or should the underlying assumptions prove incorrect, actual
      results may differ significantly from those anticipated, believed, estimated,
      expected, intended, or planned.




Although
      the Company believes that the expectations reflected in the forward-looking
      statements are reasonable, the Company cannot guarantee future results, levels
      of activity, performance, or achievements. Except as required by applicable
      law,
      including the securities laws of the United States, the Company does not intend
      to update any of the forward-looking statements to conform these statements
      to
      actual results. Readers are urged to carefully review and consider the various
      disclosures made throughout the entirety of this quarterly report, which attempt
      to advise interested parties of the risks and factors that may affect our
      business, financial condition, results of operations, and
      prospects.




Our
      financial statements are prepared in accordance with accounting principles
      generally accepted in the United States (“GAAP”). These accounting principles
      require us to make certain estimates, judgments and assumptions. We believe
      that
      the estimates, judgments and assumptions upon which we rely are reasonable
      based
      upon information available to us at the time that these estimates, judgments
      and
      assumptions are made. These estimates, judgments and assumptions can affect
      the
      reported amounts of assets and liabilities as of the date of the financial
      statements as well as the reported amounts of revenues and expenses during
      the
      periods presented. Our financial statements would be affected to the extent
      there are material differences between these estimates and actual results.
      In
      many cases, the accounting treatment of a particular transaction is specifically
      dictated by GAAP and does not require management’s judgment in its application.
      There are also areas in which management’s judgment in selecting any available
      alternative would not produce a materially different result.




**Company
      Overview**




We
      are
      engaged in the development, exploration, production and distribution of
      bio-diesel and wholesale distribution and processing of heavy oil and finished
      oil products through certain contractual agreements between our wholly owned
      indirect subsidiary Redsky Industrial and Baorun Industrial. Redsky Industrial,
      a registered WFOE in the People’s Republic of China, is a subsidiary of Baorun
      Group, our direct wholly owned subsidiary.




**Basis
      of Presentations**




Our
      financial statements are prepared in accordance with GAAP and the requirements
      of Regulation S-X promulgated by the Securities and Exchange
      Commission.




**Critical
      Accounting Policies**




**Accounts
      Receivable**




Our
      policy is to maintain reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer credit
      worthiness, current economic trends and changes in customer payment patterns
      to
      evaluate the adequacy of these reserves.




18




**Inventories**




Inventories
      are valued at the lower of cost or market with cost determined on a moving
      weighted average basis. Cost of work in progress and finished goods comprises
      direct material, direct production cost and an allocated portion of production
      overheads.




**Plant,
      Property and Equipment**




Plant,
      property and equipment is stated at the actual cost on acquisition less
      accumulated depreciation and amortization. Depreciation and amortization are
      provided for in amounts sufficient to relate the cost of depreciation assets
      to
      operations over their estimated service lives, principally on a straight-line
      basis. Most property, plant and equipment have a residual value of 5% of actual
      cost. The estimated lives used in determining depreciation are:





Building
            20
                yearsVehicle
            5
                yearsOffice
                Equipment
            5
                yearsProduction
                Equipment
            5
                years




In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
      “Accounting for the Impairment or Disposal of Long-Lived Assets”, we examine the
      possibility of decreases in the value of fixed assets when events or changes
      in
      circumstances reflect the fact that their recorded value may not be
      recoverable.




**Revenue
      Recognition**




Our
      revenue recognition policies are in compliance with Securities and Exchange
      Commission Staff Accounting Bulletin 104. Sales revenue is recognized at the
      date of shipment to customers when a formal arrangement exists, the price is
      fixed or determinable, the delivery is completed, no other significant
      obligations of the Company exist and collectability is reasonably assured.
      Payments received prior to meeting all relevant criteria for revenue recognition
      are recorded as unearned revenue.




**Foreign
      Currency Translation**




Our
      functional currency is the Renminbi (“RMB”). For financial reporting purposes,
      RMB has been translated into United States dollars (“USD”) as the reporting
      currency. Assets and liabilities are translated at the exchange rate in effect
      at the balance sheet date. Revenues and expenses are translated at the average
      rate of exchange prevailing during the reporting period. Translation adjustments
      arising from the use of different exchange rates from period to period are
      included as a component of stockholders’ equity as “Accumulated other
      comprehensive income.” Gains and losses resulting from foreign currency
      transactions are included in income. There has been no significant fluctuation
      in exchange rate for the conversion of RMB to USD after the balance sheet
      date.




**Income
      Tax Recognition**




We
      account for income taxes under Statement of Financial Accounting Standards
      No.
      109, “Accounting for Income Taxes” “SFAS 109.” SFAS 109 requires the recognition
      of deferred tax assets and liabilities for both the expected impact of
      differences between the financial statements and the tax basis of assets and
      liabilities, and for the expected future tax benefit to be derived from tax
      losses and tax credit carry forwards. SFAS 109 additionally requires the
      establishment of a valuation allowance to reflect the likelihood of realization
      of deferred tax assets.




Baorun
      Industrial has obtained income tax abatements for the years ended December
      31,
      2004 through 2010, due to the fact that it uses waste gas, water and residue
      in
      the production of its products. We believe that this abatement is in effect
      for
      all periods presented. Currently, the PRC is in a period of growth and is openly
      promoting business development in order to bring more business into the PRC.
      Tax
      abatements are one of the many methods used to promote such business
      development. If the abatement should be rescinded for future periods, Baorun
      Industrial would be subjected to tax liabilities. Had the abatement for income
      taxes not been effect for Baorun Industrial, we estimate that the pro forma
      financial impact would be as follows:




19




**For the nine months ended**
              **September 30,**
            
            **For the three months ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Net
                income before income taxes**
            
            **$**
            **22,067,368**
            
            **$**
            **6,480,917**
            
            **$**
            **9,107,725**
            
            **$**
            **4,095,598****Tax
                provision**
            
            
            **5,516,842**
            
            
            **2,138,703**
            
            
            **2,276,931**
            
            
            **1,351,547****Net
                income**
            
            **$**
            **16,550,526**
            
            **$**
            **4,342,214**
            
            **$**
            **6,830,794**
            
            **$**
            **2,744,051**




**Results
      of Operations**




**Comparison
      of Nine Months Ended September 30, 2008 and September 30,
      2007.**




The
      following table sets forth the results of our operations for the periods
      indicated as a percentage of net sales:




Nine
                Months Ended September 302008
            
            2007$
            
            %
                of
              Sales
            
            $
            
            %
                of
              SalesSales
            
            
            156,878,997
            
            
            100
            %
            
            64,834,695
            
            
            100
            %Cost
                of Sales
            
            
            134,134,971
            
            
            85.5
            %
            
            57,453,443
            
            
            88.6
            %Gross
                Profit
            
            
            22,744,026
            
            
            14.5
            %
            
            7,381,252
            
            
            11.4
            %General
                & Administrative Expenses
            
            
            962,445
            
            
            0.6
            %
            
            801,487
            
            
            1.24
            %Income
                from Operation
            
            
            21,781,581
            
            
            14
            %
            
            6,579,765
            
            
            10
            %Other
                Income (expenses), net
            
            
            285,787
            
            
            0.18
            %
            
            (98,848
            )
            
            0.15
            %Net
                Income
            
            
            22,067,368
            
            
            14
            %
            
            6,480,917
            
            
            10
            %




*Net
      sales* .
      Net
      sales for the nine months ended September 30, 2008 were approximately $156.9
      million compared to net sales in same period in 2007 of approximately $64.8
      million, an increase in revenues of $92.1 million, or 142%. The increase was
      mainly due to four reasons. First, the production and sale of bio-diesel during
      the first nine months of September 2008 contributed significantly to net sales,
      compared to the same period last year when we had not yet commenced bio-diesel
      production. Second, there was an increase in demand for oil products from our
      customers as their businesses grew and expanded. Third, we had increased revenue
      as the result of the four new leased gas stations. Fourth, we have commenced
      selling of supplementary products during the nine months ended September 30,
      2008, which we were not selling in the comparable period in 2009.




*Cost
      of sales* .
      Cost of
      sales for the nine months ended September 30, 2008 was approximately $134.13
      million compared to the cost of sales in the same period in 2007 of
      approximately $57.45 million, an increase of $76.68 million, or 133%. The
      increase in cost of sales was attributable to an increase in production and
      sales activities during the nine months ended September 30, 2008. Cost of sales
      as a percentage of sales was approximately 85.5% for the nine months ended
      September 30, 2008 and 88.6% for the same period in 2007, respectively. The
      decrease as a percentage of sales was due to lower production costs as a result
      of producing our own bio-diesel since October 2007,compared to the cost of
      purchasing diesel oil products from the market.




*Gross
      profit* .
      Gross
      profit was approximately $22.74 million for the nine months ended September
      30,
      2008 as compared to approximately $7.38 million for the same period in 2007,
      representing gross margins of approximately 14.5% and 11.4% respectively. During
      the nine months ended September 30, 2008, the gross profit margin for making
      and
      selling bio-diesel oil was approximately 30.5% and the gross profit margin
      for
      buying and reselling other oil products like gasoline and diesel oil was
      approximately 10.9%. The improved gross margin is a result of increased market
      demand for our products and also a reduction in costs as a result of supplying
      our own bio-diesel.




20






*General
      and administrative expenses* .
      General
      and administrative expenses for the nine months ended September 30, 2008 were
      $962,445. The general and administrative expenses for the nine months ended
      September 30, 2007 were $801,487, an increase of $160,958 or 20%. This increase
      was due to hiring additional employees in line with the expansion of our
      business for the nine months ended September 30, 2008 and increase in audit,
      legal, consulting and filing expenses in connection with the Company becoming
      public in US in October of 2007. General and administrative expenses as a
      percentage of sales for the nine months ended September 30, 2008 and 2007 is
      approximately 0.6% and 1.24%, respectively. The decrease in percentage of sales
      is due to management successful managing the Company’s operating costs as sales
      increased in 2008.




*Net
      income* .
      The net
      income for the nine months ended September 30, 2008 was $22.07 million as
      compared to $6.48 million for the same period in 2007. It was an increase of
      $15.59 million in net profit or 241%. Management believes that the net income
      increase is the result of the fast and continuing revenue growth, as well as
      controlling costs and operating expenses.




**Comparison
      of Three Months Ended September 30, 2008 and September 30,
      2007.**




The
      following table sets forth the results of our operations for the periods
      indicated as a percentage of net sales:





Three
                Months Ended September 302008
            
            2007$
            
            %
                of
              Sales
            
            $
            
            %
                of
              SalesSales
            
            
            62,891,345
            
            
            100
            %
            
            40,263,868
            
            
            100
            %Cost
                of Sales
            
            
            53,740,270
            
            
            85
            %
            
            35,857,368
            
            
            89
            %Gross
                Profit
            
            
            9,151,075
            
            
            15
            %
            
            4,406,500
            
            
            11
            %General
                & Administrative Expenses
            
            
            390,950
            
            
            0.6
            %
            
            286,067
            
            
            0.7
            %Income
                from Operation
            
            
            8,760,125
            
            
            14
            %
            
            4,120,433
            
            
            10
            %Other
                Income (expenses), net
            
            
            347,600
            
            
            0.06
            %
            
            (24,835
            )
            
            0.06
            %Net
                Income
            
            
            9,107,725
            
            
            14.5
            %
            
            4,095,598
            
            
            10
            %




*Net
      sales* .
      Net
      sales for the three months ended September 30, 2008 were approximately $62.89
      million compared to net sales in the three months ended September 30, 2007
      of
      approximately $40.26 million, which was an increase in revenues of $22.63
      million, or 56%. The increase was mainly due to an increase in demand for oil
      products from our existing and new customers, our ability to meet the continued
      demand for bio-diesel oil as our production increased, increased revenue from
      the new leased gas stations, and commencing the sale of supplementary products
      during 2008.




*Cost
      of sales* .
      Cost of
      sales for the three months ended September 30, 2008 was approximately $53.74
      million compared to cost of sales in the three months ended September 30, 2007
      of approximately $35.86 million, an increase of $17.88 million, or 50%. The
      increase in cost of sales was attributable to the increase of production and
      sales activities in the three months ended September 30, 2008. Cost of sales
      as
      a percentage of sales was approximately 85% for the three months ended September
      30, 2008 and 89% for the three months ended September 30, 2007, respectively.
      The decrease as a percentage of sales was due to relatively low production
      cost
      for bio-diesel oil compared to the purchase price of diesel oil products from
      the market as we commenced our production of bio-diesel since October of
      2007.




*Gross
      profit* .
      Gross
      profit was approximately $9.15 million for the three months ended September
      30,
      2008 as compared to approximately $4.41 million for the three months ended
      September 30, 2007, representing gross margins of approximately 15% and 11%
      respectively. During the three months ended September 30, 2008, the gross profit
      margin for making and selling bio-diesel oil was approximately 31% and the
      gross
      profit margin for buying and reselling other oil products like gasoline and
      diesel oil was approximately 10.6%. The improved gross margin is a result of
      increased market demand and also the lower cost of self-supplied bio-diesel
      products.




*General
      and administrative expenses* .
      General
      and administrative expenses for the three months ended September 30, 2008 were
      $390,950. The general and administrative expenses for the three months ended
      September 30, 2007 were $286,067, an increase of $104,883 or 37%. This increase
      was due to increased sales and production. The percentage of sales for the
      three
      months ended September 30, 2008 and 2007, were 0.6% and 0.7%, respectively.
      The
      slight decrease was due to well managed operating costs by the Company as sales
      increased. .


21




*Net
      income* .
      The net
      income for the three months ended September 30, 2008 was $9.11 million as
      compared to $4.1 million for the three months ended September 30, 2007. It
      was
      an increase of $5.01 million in net profits, or 122%. Management believes that
      the net income increase is a result of the fast and continuing revenue growth,
      as well as controlling costs and operating expenses.




**Liquidity
      and Capital Resources**




As
      of
      September 30, 2008 and December 31, 2007, we had cash and cash equivalents
      of
      approximately $0.5 million and $1.4 million, respectively. At September 30,
      2008, other current assets were approximately $55.7 million and current
      liabilities were approximately $9.49 million, as compared to other current
      assets of approximately $34.2 million and current liabilities of approximately
      $5.5 million at December 31, 2007. Working capital equaled approximately $46.7
      million at September 30, 2008, compared to $30 million at December 31, 2007,
      an
      increase of 55.67%. The ratio of current assets to current liabilities was
      5.9-to-1 at September 30, 2008, compared to 6.5-to-1 at the December 31, 2007.
      The increase in working capital in nine months ended September 30, 2008 was
      primarily due to the increased sales during 2008. The decrease in the current
      ratio in nine months ended September 30, 2008 was primarily related to increase
      in advance from customers and short term bank loans payable.




We
      believe we have sufficient cash to continue our current business through
      September 30, 2009 due to expected increased sales revenue and net income from
      operations. We intend to continue the expansion of our current operations by
      (i)
      acquiring more oil extraction plants; (ii) expanding our 100,000 ton bio-diesel
      manufacturing facility; and (iii) acquiring several additional gas stations
      over
      the next three years. We expect to finance such expansion through bank loans,
      the issuance of debt or equity securities, or a combination thereof. Failure
      to
      obtain such financing could have a material adverse effect on our business
      expansion.




Our
      future capital requirements will depend on a number of factors,
      including:




·
            competing
                technological and market
                developments;




·
            our
                ability to maintain our existing, and establish new collaborative
                relationships; and




·
            the
                development of commercialization activities and
                arrangements.




We
      do not
      anticipate any additional material research and development expenses during
      the
      next 12 months.




The
      following is a summary of cash provided by or used in each of the indicated
      types of activities during nine months ended September 30, 2008 and
      2007:





Nine
                Months Ended
              September
                30,2008
            
            2007Net
                cash provided by (used in):Operating
                Activities
            
            $
            (409,579
            )
            $
            1,200,339Investing
                Activities
            
            
            (1,200,352
            )
            
            (2,609,572
            )Financing
                Activities
            
            $
            675,887
            
            $
            728,399




Net
      cash
      used in operating activities was $(409,579) in the nine months ended September
      30, 2008, compared to $1,200,339 net cash provided by operating activities
      in
      same period of 2007. The decrease in net cash during the nine months ended
      September 30, 2008 compared with same period of 2007 was primarily due to an
      increase in account receivables, other receivables, advances to suppliers,
      inventory, and prepayments of approximately $8,500,000 in rent for the next
      5
      years for our new leased gas stations . At the same time, our other payables
      and
      accrued expenses have decreased.




Net
      cash
      used in investing activities was $1,200,352 during the nine months ended
      September 30, 2008, as compared to net cash used in investing activities of
      $2,609,572 in same period of 2007. The decrease of net cash used in investing
      activities in 2008 was because we invested more in fixed assets during 2007
      compared to 2008. During the nine months ended September 30, 2008, we paid
      $1.2
      million to purchase three oil extraction plants and for further construction
      and
      improvements on these three oil extraction plants, while during the same period
      of 2007, we had paid $2.48 million for construction in progress which was
      completed in 2008.


22




Net
      cash
      provided by financing activities was $675,887 in the nine months ended September
      30, 2008 as compared to net cash provided by financing activities of $728,399
      for same period of 2007. The increase of net cash provided by financing
      activities in 2008 was mainly due to an increase in short term bank
      loans during the nine months ended September 30, 2008.




**Inflation**




We
      do not
      believe that inflation had a significant negative impact on our results of
      operations during the nine months ended September 30, 2008.




**Off-Balance
      Sheet Arrangements**




We
      have
      not entered into any other financial guarantees or other commitments to
      guarantee the payment obligations of any third parties. We have not entered
      into
      any derivative contracts that are indexed to our shares and classified as
      stockholders’ equity or that are not reflected in our consolidated financial
      statements. Furthermore, we do not have any retained or contingent interest
      in
      assets transferred to an unconsolidated entity that serves as credit, liquidity
      or market risk support to such entity. We do not have any variable interest
      in
      any unconsolidated entity that provides financing, liquidity, market risk or
      credit support to us or engages in leasing, hedging or research and development
      services with us.




**Contractual
      Obligations**




Short-term
      loan




The
      Company is obligated under two short term loans from commercial banks in the
      PRC. The first loan of $1,457,938 (RMB10, 000,000) was entered into on August
      31, 2007 and matures on August 31, 2009. The principal will be repaid at
      maturity and the interest is payable per quarter with an interest rate of
      8.5905% per annum. This loan is guaranteed by Xi’an City Economic &
Technology Investment Guarantee Co., Ltd. The Company paid them a guarantee
      fee
      equal to 2% of the loan principal, and used the Company’s diesel processing
      equipments as collateral for the guarantee.




The
      second loan of $733,352 (RMB 5,000,000) was entered into on August 31, 2008
      and
      matures on August 31, 2009. The principal will be repaid at maturity and the
      interest is payable per month with an interest rate of 8.217% per
      annum.




Auto
      loans payable




On
      September 27, 2006 the Company entered into a three year note payable of
      approximately $100,000 for one automobile. This note is collateralized by the
      car with an annualized interest rate of 6.3%. In February, 2007, the Company
      entered into another two notes payable for additional two automobiles. One
      is a
      two year note for the loan amount of approximately $25,500 with 7.56% interest
      rate per annum. The other one is a two year note for the loan amount of $19,800
      with 7.56% annual interest rate. At September 30, 2008, the outstanding auto
      loans balances were $66,889.




Operating
      leases




As
      of
      September 30, 2008, we have three lease agreements for oil storage facilities.
      The first lease agreement, expiring on June 30, 2016, is a long-term operating
      lease agreement. The other two lease agreements expiring on December 31, 2008,
      are short-term renewable agreements. The aggregate payments remaining under
      these three lease agreements approximately equal $737,000.


23




During
      2007, we leased one gas station for operation under a long-term operating lease
      agreement expiring on December 31, 2027. Total rent payments for the gas station
      due during 2008 will equal an aggregate of $20,000.




During
      the nine months ended September 30, 2008, we leased four gas stations for
      operation under a long-term operating lease agreement expiring on May 31, 2023.
      We’ve prepaid five-year lease payment in advance. The aggregate payments
      remaining under this lease agreement approximately equal
      $17,495,000.




**Recently
      Issued Accounting Pronouncements**




Accounting
      for Financial Guarantee Insurance Contracts




In
      May
      2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
      Insurance Contracts, an interpretation of FASB Statement No. 60.”  The
      scope of this Statement is limited to financial guarantee insurance (and
      reinsurance) contracts, as described in this Statement, issued by enterprises
      included within the scope of Statement 60. Accordingly, this Statement does
      not
      apply to financial guarantee contracts issued by enterprises excluded from
      the
      scope of Statement 60 or to some insurance contracts that seem similar to
      financial guarantee insurance contracts issued by insurance enterprises (such
      as
      mortgage guaranty insurance or credit insurance on trade receivables). This
      Statement also does not apply to financial guarantee insurance contracts that
      are derivative instruments included within the scope of FASB Statement No.
      133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
      will not have an impact on the Company’s financial statements.




The
      Hierarchy of Generally Accepted Accounting Principles




In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.”  This Statement identifies the sources of
      accounting principles and the framework for selecting the principles to be
      used
      in the preparation of financial statements of nongovernmental entities that
      are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy).  This Statement will not have an
      impact on the Company’s financial statements.




Disclosures
      about Derivative Instruments and Hedging Activities




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities an amendment of FASB Statement No. 133.”  This
      Statement changes the disclosure requirements for derivative instruments and
      hedging activities. Entities are required to provide enhanced disclosures about
      (a) how and why an entity uses derivative instruments, (b) how derivative
      instruments and related hedged items are accounted for under Statement 133
      and
      its related interpretations, and (c) how derivative instruments and related
      hedged items affect an entity’s financial position, financial performance, and
      cash flows.  Based on current conditions, the Company does not expect the
      adoption of SFAS 161 to have a significant impact on its results of operations
      or financial position.




Noncontrolling
      Interests in Consolidated Financial Statements - An Amendment of ARB No.
      51




In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
      Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
      160”). SFAS 160 establishes new accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. Specifically, this statement requires the recognition of a
      noncontrolling interest (minority interest) as equity in the consolidated
      financial statements and separate from the parent’s equity. The amount of net
      income attributable to the noncontrolling interest will be included in
      consolidated net income on the face of the income statement. SFAS 160 clarifies
      that changes in a parent’s ownership interest in a subsidiary that do not result
      in deconsolidation are equity transactions if the parent retains its controlling
      financial interest. In addition, this statement requires that a parent recognize
      a gain or loss in net income when a subsidiary is deconsolidated. Such gain
      or
      loss will be measured using the fair value of the




noncontrolling
      equity investment on the deconsolidation date. SFAS 160 also includes expanded
      disclosure requirements regarding the interests of the parent and its
      noncontrolling interest. SFAS 160 are effective for fiscal years, and interim
      periods within those fiscal years, beginning on or after December 15, 2008.
      Based on current conditions, the Company does not expect the adoption of SFAS
      160 to have a significant impact on its results of operations or financial
      position.


24




Business
      Combinations




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
      Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
      for business combinations. Under SFAS 141R, an acquiring entity will be required
      to recognize all the assets acquired and liabilities assumed in a transaction
      at
      the acquisition-date fair value with limited exceptions. SFAS 141R will change
      the accounting treatment for certain specific items, including:




·
            Acquisition
                costs will be generally expensed as
                incurred;




·
            Noncontrolling
                interests (formerly known as “minority interests” - see SFAS 160
                discussion below) will be valued at fair value at the acquisition
                date;




·
            Acquired
                contingent liabilities will be recorded at fair value at the acquisition
                date and subsequently measured at either the higher of such amount
                or the
                amount determined under existing guidance for non-acquired
                contingencies;




·
            In-process
                research and development will be recorded at fair value as an
                indefinite-lived intangible asset at the acquisition
                date;




·
            Restructuring
                costs associated with a business combination will be generally expensed
                subsequent to the acquisition date;
                and




·
            Changes
                in deferred tax asset valuation allowances and income tax uncertainties
                after the acquisition date generally will affect income tax
                expense.




SFAS
      141R
      also includes a substantial number of new disclosure requirements. SFAS 141R
      applies prospectively 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. Earlier adoption is prohibited. Accordingly, since
      we are a calendar year-end company we will continue to record and disclose
      business combinations following existing GAAP until January 1,
      2009.  The
      Company expects SFAS 141R will have an impact on accounting for business
      combinations once adopted but the effect is dependent upon acquisitions at
      that
      time.




Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans, an
      Amendment of FASB Statements No. 87, 88, 106, and 132R




In
      September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
      Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
      underfunded or overfunded status of a defined benefit postretirement plan as
      an
      asset or liability in its statement of financial position and to recognize
      changes in the funded status in the year in which the changes occur through
      accumulated other comprehensive income. Additionally, SFAS No. 158 requires
      employers to measure the funded status of a plan as of the date of its year-end
      statement of financial position. The new reporting requirements and related
      new
      footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending
      after December 15, 2006. The Company adopted the provisions of SFAS No. 158
      for
      the year end 2006, and the effect of recognizing the funded status in
      accumulated other comprehensive income was not significant. The new measurement
      date requirement applies for fiscal years ending after December 15,
      2008.




Accounting
      for Nonrefundable Advance Payments for Goods or Services Received for use in
      Future Research and Development Activities




In
      June
      2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
      Nonrefundable Advance Payments for Goods or Services Received for use in Future
      Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
      nonrefundable advance payments for goods or services that used or rendered
      for
      research and development activities should be expensed when the advance payment
      is made or when the research and development activity has been
      performed.  Management is currently evaluating the effect of this
      pronouncement on our financial statements.


25




**Item
      3**  **Quantitative
      and Qualitative Disclosures About Market Risk**




Not
      required.




**Item
      4T**  **Control
      and Procedures**




We
      maintain “disclosure controls and procedures,” as such term is defined under
      Exchange Act Rule 13a-15(e), that are designed to ensure that information
      required to be disclosed in our Exchange Act reports is recorded, processed,
      summarized, and reported within the time periods specified in the SEC’s rules
      and forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding required disclosures. In
      designing and evaluating the disclosure controls and procedures, our management
      recognized that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives and in reaching a reasonable level of assurance our management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures. We have carried out an
      evaluation under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures as of September 30, 2008. Based upon their evaluation and subject
      to
      the foregoing, the Chief Executive Officer and Chief Financial Officer concluded
      that as of September 30, 2008 our disclosure controls and procedures were
      effective in ensuring that material information relating to us, is made known
      to
      the Chief Executive Officer and Chief Financial Officer by others within our
      company during the period in which this report was being prepared.




There
      were no changes in our internal controls or in other factors during the most
      recent quarter that has materially affected, or is reasonably likely to
      materially affect, our internal controls over financial
      reporting.


26




**PART
          II.** **OTHER
          INFORMATION**




**Item
      1**  **Legal
      Proceedings**




None.




**Item1A**  **Risk
      Factors**




As
      a
      smaller reporting company, the Company is not required to make disclosures
      under
      this Item 1A..




**Item
      2**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**




None.




**Item
      3**  **Defaults
      Upon Senior Securities**




None.




**Item
      4**  **Submission
      of Matters to a Vote of Security Holders**




None.




**Item
      5**  **Other
      Information**




None.




**Item
      6**  **Exhibits**





**Exhibit
                No.**
            
            **Description**31.1
            
            Certification
                of the Chief Executive Officer (Principal Executive Officer) pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Chief Financial Officer (Principal Financial Officer) pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002


27




**SIGNATURES**




In
      accordance with the requirements of the Securities Exchange Act of 1934, the
      registrant caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.





China
                Bio Energy Holding Group Co., Ltd.Dated:
                November 7, 2008
            By:
            /s/
              Gao XinchengName:
                Gao XinchengTitle:
                Chief Executive Officer and President


28