**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 June 30, 2008





Or





o
            **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, 7thFloor
              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 o 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 o Accelerated Filer o Non-Accelerated
      Filer o 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).


o Yes x No





As
      of
      August 14, 2008, there were 25,454,545 shares of the Registrant’s common stock,
      par value $0.0001 per share, outstanding.







**TABLE
      OF CONTENTS**




Page**PART
                I.**FINANCIAL
                INFORMATION**Item
                1.**Consolidated Financial Statements (unaudited)
            
            1**Item
                2.**Management’s Discussion and Analysis of Financial Condition and Results of
                Operations
            
            16**Item
                3.**Quantitative and Qualitative Disclosures About Market Risk
            
            24**Item
                4.**Controls and Procedures
            
            24**PART
                II.**OTHER
                INFORMATION**Item
                1.**Legal Proceedings
            
            25**Item
                1A.**Risk Factors
            
            25**Item
                2.**Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            25**Item
                3.**Defaults Upon Senior Securities
            
            25**Item
                4.**Submission of Matters to a Vote of Security Holders
            
            25**Item
                5.**Other Information
            
            25**Item
                6.**Exhibits
            
            25








**PART
      I. FINANCIAL INFORMATION**


**Item
      1. Consolidated Financial Statements**





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


**CONSOLIDATED
      BALANCE SHEETS**





**As
                of June 30,**
              **2008**
            
            **As
                of December 31,**
              **2007****ASSETS**
            
            (Unaudited)CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            2,247,500
            
            $
            1,382,371Restricted
                cash
            
            
            200,000
            
            
            200,000Accounts
                receivable, net
            
            
            7,417,925
            
            
            288,589Other
                receivables
            
            
            308,422
            
            
            1,548,681Prepaid
                expenses
            
            
            6,030,947
            
            
            2,896,493Advance
                to suppliers
            
            
            18,102,681
            
            
            16,546,506Inventories
            
            
            12,475,820
            
            
            12,082,962Due
                from related party
            
            
            677,380
            
            
            593,696Total
                current assets
            
            
            47,460,675
            
            
            35,539,298PREPAID
                EXPENSE - NONCURRENT
            
            
            6,852,311
            
            
            —PROPERTY
                AND EQUIPMENT, net
            
            
            10,347,168
            
            
            8,166,250TOTAL
                ASSETS
            
            $
            64,660,154
            
            $
            43,705,548**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            417,625
            
            $
            179,617Advance
                from customers
            
            
            5,091,561
            
            
            499,908Tax
                payable
            
            
            498,089
            
            
            125,015Other
                payables
            
            
            3,120,399
            
            
            3,165,677Accrued
                expenses
            
            
            50,165
            
            
            67,875Loan
                payable
            
            
            1,457,938
            
            
            1,370,877Long
                term notes payable - current portion
            
            
            65,743
            
            
            67,287Total
                current liabilities
            
            
            10,701,520
            
            
            5,476,256LONG
                TERM LIABILITIES
            
            
            14,642
            
            
            33,655Total
                liabilities
            
            
            10,716,162
            
            
            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
            
            
            5,108,444
            
            
            2,319,732Retained
                earnings
            
            
            27,169,035
            
            
            14,209,392Total
                stockholders' equity
            
            
            53,943,992
            
            
            38,195,637TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            64,660,154
            
            $
            43,705,548




**See
        accompanying notes to the unaudited consolidated financial
        statements.**





1




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


**CONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME**


(Unaudited)





**For
                The Six Months Ended June 30,**
            
            **For
                The Three Months Ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Sales
            
            $
            93,987,652
            
            $
            25,276,379
            
            $
            58,426,812
            
            $
            13,717,654Cost
                of goods sold
            
            
            80,394,701
            
            
            22,318,179
            
            
            49,847,038
            
            
            11,873,889Gross
                profit
            
            
            13,592,951
            
            
            2,958,200
            
            
            8,579,774
            
            
            1,843,765General
                and administrative expenses
            
            
            571,495
            
            
            514,636
            
            
            251,689
            
            
            387,535Income
                from operations
            
            
            13,021,456
            
            
            2,443,564
            
            
            8,328,085
            
            
            1,456,230Non-operating
                income (expenses)Interest
                income (expenses)
            
            
            (59,223
            )
            
            (62,033
            )
            
            (30,952
            )
            
            (42,066
            )Other
                income (expenses)
            
            
            (2,544
            )
            
            —
            
            
            (2,474
            )
            
            —Financial
                expenses
            
            
            (46
            )
            
            —
            
            
            79
            
            
            4,444Total
                non-operating expenses
            
            
            (61,813
            )
            
            (62,033
            )
            
            (33,347
            )
            
            (37,622
            )Net
                income
            
            
            12,959,643
            
            
            2,381,531
            
            
            8,294,738
            
            
            1,418,608Other
                comprehensive itemForeign
                currency translation gain
            
            
            2,788,712
            
            
            360,729
            
            
            1,548,300
            
            
            185,542Comprehensive
                Income
            
            $
            15,748,355
            
            $
            2,742,260
            
            $
            9,843,038
            
            $
            1,604,150Basic
                and diluted weighted average shares outstandingBasic
            
            
            25,454,545
            
            
            23,954,545
            
            
            25,454,545
            
            
            23,954,545Diluted
            
            
            32,891,850
            
            
            23,954,545
            
            
            32,685,185
            
            
            23,954,545Basic
                and diluted net earnings per share available to common
                stockholdersBasic
            
            $
            0.51
            
            $
            0.10
            
            $
            0.33
            
            $
            0.06Diluted
            
            $
            0.39
            
            $
            0.10
            
            $
            0.25
            
            $
            0.06





**See
      accompanying notes to the unaudited consolidated financial
      statements.**




2




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


**CONSOLIDATED
      STATEMENTS OF CASH FLOW**


(Unaudited)





**For
                The Six Months Ended June 30,****2008**
            
            **2007**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            12,959,643
            
            $
            2,381,531Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
            
            
            457,061
            
            
            79,406(Increase)
                decrease in current assets:Accounts
                receivable
            
            
            (6,910,513
            )
            
            (5,111,137
            )Other
                receivables
            
            
            266,582
            
            
            (101,877
            )Prepaid
                expenses
            
            
            (8,378,790
            )Advance
                to suppliers
            
            
            (491,096
            )
            
            718,813Inventories
            
            
            363,945
            
            
            (2,272,693
            )Due
                from related party
            
            
            —
            
            
            (108,206
            )Increase
                (decrease) in current liabilities:Accounts
                payable
            
            
            220,212
            
            
            1,582,843Advance
                from customers
            
            
            4,431,338
            
            
            2,466,295Taxes
                payable
            
            
            354,840
            
            
            224,088Other
                payables and accrued expenses
            
            
            (1,408,412
            )
            
            179,122Net
                cash provided by operating activities
            
            
            1,864,810
            
            
            38,185CASH
                FLOWS FROM INVESTING ACTIVITIES:Acquisition
                of property and equipment
            
            
            (1,038,203
            )
            
            (97,252
            )Construction
                in progress
            
            
            —
            
            
            (320,995
            )Net
                cash used in investing activities
            
            
            (1,038,203
            )
            
            (418,247
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Restricted
                cash
            
            
            —
            
            
            (400,814
            )Short-term
                loans, net
            
            
            —
            
            
            (678,238
            )Proceeds
                from long-term notes payable
            
            
            —
            
            
            41,050Repayment
                of long-term notes payable
            
            
            (26,208
            )
            
            (20,214
            )Notes
                payables - trade / related party
            
            
            —
            
            
            685,213Repayment
                from / (Advance to) shareholder
            
            
            (44,683
            )
            
            26,484Net
                cash used in financing activities
            
            
            (70,891
            )
            
            (346,519
            )EFFECT
                OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
            
            
            109,410
            
            
            360,729NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            865,128
            
            
            (365,852
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            1,382,372
            
            
            631,443CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            2,247,500
            
            $
            265,591Supplemental
                Cash flow data:Income
                tax paid
            
            $
            —
            
            $
            —Interest
                paid
            
            $
            61,680
            
            $
            62,033




**See
      accompanying notes to the unaudited 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, 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.




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 shall 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,. In addition, Baorun Industrial granted to Redsky
      Industrial the right to any residual returns and dividends from Baorun
      Industrial.




4




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 their related entities. Redsky
      Industrial and its related entities were required to finance Baorun Industrial
      through the issuance of shares of preferred stock by the Company, Redsky
      Industrial’s ultimate parent. The financing of the Company, concurrent with the
      Share Exchange Agreement, was entered into to enable Baorun Industrial to pursue
      bio-energy production projects, and to expand existing conventional oil/energy
      projects. Bio-energy production and the marketing of their products is an
      industry with limited operating history, and might require additional financing
      above what Redsky Industrial, the Company and its related entities have
      currently advanced to Baorun Industrial.




Under
      the
      Cooperation Agreement, Baorun Industrial cannot assign its rights under such
      agreement to another third party without Redsky Industrial’s consent. Under the
      agreement, Redsky Industrial must notify Baorun Industrial of its intent to
      assign the agreement to a third party but does not need the consent of Boarun
      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.




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 six and three months ended June 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





**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.




5





**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
      June 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 June 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 June 30, 2008 and December 31, 2007 were $5,091,561 and
      $499,908, respectively.





**Property
      and Equipment**





Plants
      and equipments are 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.





**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 June 30, 2008 and December
      31, 2007, there were no significant impairments of its long-lived
      assets.




6




**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, 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.





There
      were no sales returns and allowances for the six and three months ended June
      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 $300,000
        and
        $155,000 for the six months ended June 30, 2008 and 2007; respectively and
        approximately $123,000 and $37,000 for the three months ended June 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.




7







**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.





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 six and three months ended June
      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 Six
              Months
                Ended June 30
              (Unaudited)
            
            For
                the Three Months
              Ended
                June 30
              (Unaudited)2008
            
            2007
            
            2008
            
            2007Net
                income
            
            $
            12,959,643
            
            $
            2,381,531
            
            $
            8,294,738
            
            $
            1,418,608Weighted
                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
            
            
            2,891,850
            
            
            —
            
            
            2,685,185
            
            
            —Weighted
                average shares outstanding - diluted
            
            
            32,891,850
            
            
            23,954,545
            
            
            32,685,185
            
            
            23,954,545Earnings
                per share - basic
            
            $
            0.51
            
            $
            0.10
            
            
            0.33
            
            
            0.06Earnings
                per share - diluted
            
            $
            0.39
            
            $
            0.10
            
            
            0.25
            
            
            0.06





**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 six months ended June
      30,
      2008 and 2007, the Company had sales of approximately $21,115,000 and $0 from
      its biodiesel facility, respectively; and $14,469,000 and $0 for the three
      months ended June 30, 2008 and 2007 from its biodiesel facility,
      respectively.







8


**New
        Accounting Pronouncements**
 
 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:





·
            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.




9





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 June 30,
      2008 and December 31, 2007 amounted to $2,213,478 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.





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





Prepaid
      expenses mainly consisted of prepaid rents for the gas stations (see Note 14
      -
      Commitments) and prepayment to Ningxin Yuanshun Petrochemical Co (see Note
      11 -
      Other Payables). At June 30, 2008 and December 31, 2007, the current portion
      of
      prepaid expenses was $6,030,947 and $2,896,493, respectively. At June 30, 2008,
      the noncurrent portion of prepaid expenses amounting $6,852,311 represents
      the
      prepaid rents that will be expensed after one year.





**5.**  **INVENTORIES**





Inventories
      consisted of the following:




June
                30,
              2008
              (Unaudited)
            
            
            December 31,
              2007Petroleum
            
            $
            3,225,455
            
            $
            2,909,158Diesel
            
            
            6,280,386
            
            
            6,079,751Heavy
                Oil
            
            
            1,552,795
            
            
            1,620,487Other
            
            
            1,417,184
            
            
            1,473,566Total
            
            $
            12,475,820
            
            $
            12,082,962





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





At
      June
      30, 2008, other receivables represented deposits made for purchase of equipments
      and short term cash advances to third parties in the amount of $308,422. 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
      AND EQUIPMENT**




Plant
      and
      Equipment are summarized as follows:




June
                30,
              2008
              (Unaudited)
            
            December 31,
              2007Building
            
            $
            334,429
            
            $
            314,459Diesel
                Processing Equipment
            
            
            8,136,815
            
            
            7,500,890Office
                Equipment
            
            
            109,306
            
            
            98,788Other
                Equipment
            
            
            1,995,495
            
            
            25,086Motor
                Vehicles
            
            
            794,185
            
            
            746,75911,370,230
            
            
            8,685,982Less:
                AccumulatedDepreciation
            
            
            1,023,062
            
            
            519,732Total
            
            $
            10,347,168
            
            $
            8,166,250




10




Depreciation
      expense for the six months ended June 30, 2008 and 2007 were approximately
      $457,000 and $79,000, respectively; and approximately $232,000 and $43,000
      for
      the three months ended June 30, 2008 and 2007, respectively.




**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 June 30, 2008 and December 31, 2007, due from this
      related party was $677,380 and $593,696, respectively. Purchase from this
      related party during six and three months ended June 30, 2008 and 2007 were
      $0.





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





Major
      Customers





For
      the
      six and three months ended June 30, 2007, one major customer accounted for
      approximately 13% of the Company’s total sales. For the six and three months
      ended June 30, 2008, no major customers accounted for over 8% of the Company’s
      total sales.




Major
      Vendors




For
      the
      six and three months ended June 30, 2007, one vendor provided approximately
      73%
      of the Company’s total purchases. For the six months ended June 30, 2008, two
      major vendors provided approximately 44% and 12% of the Company’s total
      purchases, and these same vendors provided approximately 52% and 14% of the
      Company’s total purchases for the three months ended June 30, 2008,
      respectively. The accounts payable to these two vendors were $0 at June 30,
      2008.




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





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





June
                30,
              2008
              (Unaudited)
            
            December
                31,
              2007Value
                added tax payable
            
            $
            465,483
            
            $
            125,015Urban
                maintenance and construction tax payable
            
            
            32,583
            
            
            —Other
                tax payable
            
            
            23
            
            
            —$
            498,089
            
            $
            125,015





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





Other
      payable mainly consisted of payables for the purchase of equipment and short
      term advances from third parties, and loan from Ningxia Yuanshun Petrochemical
      Co. in which Ningxia Yuanshun in the amount of $2,496,965; Ningxia Yuanshun
      received $3,036,402 as prepaid expenses from Redsky Industrial. At June 30,
      2008
      and December 31, 2007, the other payables were $3,120,399 and $3,165,677,
      respectively.





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




The
      Company is obligated under a short term loan from a commercial bank in the
      PRC
      for the amount of $1,457,938 (RMB10, 000,000). This loan was entered into on
      August 31, 2007 with maturity on August 30, 2008. The principal will be repaid
      at maturity and the interest is payable per quarter with an interest rate of
      8.073% 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.**  **LONG-TERM
      LIABILITIES**




Long-term
      liabilities are the loans payable for the automobiles. On September 27, 2006
      the
      Company entered into a three year note payable for approximately $100,000.
      This
      note is collateralized by the car with an annualized interest rate of 6.3%.
      At
      June 30, 2008 and December 31, 2007, the outstanding loan balance for this
      car
      is $56,060 and $70,325, respectively.





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
      June 30, 2008 and December 31, 2007, the outstanding loan balances for these
      two
      automobiles were $24,324 and $30,617, respectively. At June 30, 2008 and
      December 31, 2007, $65,743 and $67,287, respectively, of the total outstanding
      loan balance was reclassified to current portion of the liabilities that are
      payable within one year.




11





**14.**  **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 three months ended June 30, 2008, the Company leased an 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.




12





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 June 30,
            
            Amount2009
            
            $
            207,0002010
            
            
            122,0002011
            
            
            122,0002012
            
            
            122,0002013
            
            
            8,952,000Years
                thereafter
            
            
            9,226,000Total
            
            $
            18,751,000




13




Total
      rental expense for the six months ended June 30, 2008 and 2007 amounted to
      approximately $261,000 and $97,000, respectively; and approximately $231,000
      and
      $97,000 for the three months ended June 30, 2008 and 2007, respectively.




**15.**  **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.





**16.**  **STOCKHOLDERS’
      EQUITY**





**Reverse
      Merger**





On
      October 23, 2007, the Company entered into a Share Exchange Agreement with
      Baorun China, its shareholders Redsky Group Limited, Princeton Capital Group
      LLP
      and Castle Bison, Inc. and Stallion Ventures, LLC, the Company’s then principal
      stockholders. 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.





At
      the
      same time, 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.





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.




14





**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 six and
      three months ended June 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 June 30, 2008
            
            
            5,681,819





**17.**  **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.




(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.




15




**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.




**Forward
      Looking Statements**




This
      quarterly report on Form 10-Q and other reports filed by 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, 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 Company or Company’s management identify forward-looking statements.
      Such statements reflect the current view of 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 Company’s industry, Company’s operations and results of
      operations, and any businesses that 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
      Company believes that the expectations reflected in the forward-looking
      statements are reasonable, 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.




16




**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.




**Property
      and Equipment**




Plants
      and equipment are 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.




17




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:




**For
                the six months ended**
              **June
                30,**
            ****
            ****
            **For
                the three months ended**
              **June
                30,**
            ********
            **2008**
            
            
            **2007**
            
            
            **2008**
            
            
            **2007****Net
                income before income taxes**
            
            **$**
            **12,959,643**
            ****
            **$**
            **2,381,531**
            ****
            **$**
            **8,294,738**
            ****
            **$**
            **1,418,608**
            ******Tax
                provision**
            ****
            ****
            **3,239,911**
            ****
            ****
            **785,905**
            ****
            ****
            **2,073,685**
            ****
            ****
            **468,141**
            ******Net
                income**
            ****
            **$**
            **9,719,732**
            ****
            **$**
            **1,595,626**
            ****
            **$**
            **6,221,053**
            ****
            **$**
            **950,467**




**Results
      of Operations**




**Comparison
      of Six Months Ended June 30, 2008 and June 30, 2007.**




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


Six
                  Months Ended June 302008
              
              
              2007$
              
              
              %
                  of
                Sales
              
              
              $
              
              
              %
                  of
                SalesSales
              
              
              93,987,652
              
              
              100
              %
              
              25,276,379
              
              
              100
              %Cost
                  of Sales
              
              
              (80,394,701
              )
              
              86
              %
              
              (22,318,179
              )
              
              88
              %Gross
                  Profit
              
              
              13,592,951
              
              
              14
              %
              
              2,958,200
              
              
              12
              %General
                  & Administrative Expenses
              
              
              (571,495
              )
              
              0.6
              %
              
              (514,636
              )
              
              2
              %Income
                  from Operation
              
              
              13,021,456
              
              
              14
              %
              
              2,443,564
              
              
              10
              %Other
                  Income (expenses), net
              
              
              (61,813
              )
              
              0.07
              %
              
              (62,033
              )
              
              0.25
              %Net
                  Income
              
              
              12,959,643
              
              
              14
              %
              
              2,381,531
              
              
              9
              %


*Net
      sales* .
      Net
      sales for six month ended June 30, 2008 were approximately $93.99 million
      compared to net sales in same period in 2007 of approximately $25.28 million,
      an
      increase in revenues of $68.71 million, or 272%. The increase was mainly due
      to
      two reasons. First, during the six months ended June 30, 2008, we used
      military-use railroad routes to sell and deliver our oil products to the
      customers in the provinces of China that commercial railroads cannot directly
      connect to. The advantage to delivering oil through military railroad stations
      and routes, is that we were able to strengthen and extend our sales network
      to
      provinces that we were unable to directly connect to before, which increased
      our
      sales. Second, there was an increase in our production of bio-diesel which
      also
      helped to increase our sales.




*Cost
      of sales* .
      Cost of
      sales for six month ended June 30, 2008 was approximately $80.39 million
      compared to cost of sales in same period in 2007 of approximately $22.32
      million, an increase of $58.08 million, or 260%. The increase in cost of sales
      was attributable to the increase of production and sales activities during
      the
      six month ended June 30, 2008. Cost of sales as a percentage of sales was
      approximately 86% for six month ended June 30, 2008 and 88% for the same period
      in 2007, respectively. The decrease as a percentage of sales was due to the
      lower production cost through our self-supplied bio-diesel than the purchase
      price of diesel oil products from the market as we increased our production
      of
      bio-diesel during the six months ended June 30, 2008 comparing with same period
      in 2007.




*Gross
      profit* .
      Gross
      profit was approximately $13.59 million for six month ended June 30, 2008 as
      compared to approximately $2.96 million for same period in 2007, representing
      gross margins of approximately 14% and 12% respectively. During the six month
      ended June 30, 2008, the gross profit margin for making and selling Bio-diesel
      oil was approximately 30% and the gross profit margin for buying and reselling
      gasoline was approximately 11%. The improved gross margin is a result of
      increased market demand and also the lower cost of self-supplied bio-diesel
      products.




18




*General
      and administrative expenses* .
      General
      and administrative expenses for the
      six
      month ended June 30, 2008 were
      $571,495. The general and administrative expenses for the six month ended June
      30, 2007 were $514,636, an increase of $56,859 or 11%. This increase was due
      to
      increased sales and productions for the six month ended June 30, 2008 and
      increase in audit, legal, consulting and filing expenses in connection with
      the
      Company of being public in US since October of 2007. The percentage of sales
      for
      the six month ended June 30, 2008 and 2007 is about 0.6% and 2%, respectively.
      The decrease in percentage of sales is due to the well managed operating cost
      by
      the company as sales increased in 2008.




*Net
      income* .
      The net
      income for the six month ended June 30, 2008 was $12.96 million as compared
      to
      $2.38 million for the same period in 2007. It was an increase of $10.58 million
      in net profit or 444%. The management believed that the net income increase
      is a
      result of the fast and continuing revenue growth and well control on cost and
      operating expenses.









**Comparison
      of Three Months Ended June 30, 2008 and June 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 June 302008
              
              
              2007$
              
              
              %
                  of
                Sales
              
              
              $
              
              
              %
                  of
                SalesSales
              
              
              58,426,812
              
              
              100
              %
              
              13,717,654
              
              
              100
              %Cost
                  of Sales
              
              
              (49,847,038
              )
              
              85
              %
              
              (11,873,889
              )
              
              87
              %Gross
                  Profit
              
              
              8,579,774
              
              
              15
              %
              
              1,843,765
              
              
              13
              %General
                  & Administrative Expenses
              
              
              (251,689
              )
              
              0.4
              %
              
              (387,535
              )
              
              3
              %Income
                  from Operation
              
              
              8,328,085
              
              
              14
              %
              
              1,456,230
              
              
              11
              %Other
                  Income (expenses), net
              
              
              (33,347
              )
              
              0.06
              %
              
              (37,622
              )
              
              0.27
              %Net
                  Income
              
              
              8,294,738
              
              
              14
              %
              
              1,418,608
              
              
              10
              %




*Net
      sales* .
      Net
      sales for second quarter of 2008 were approximately $58.43 million compared
      to
      net sales in second quarter of 2007 of approximately $13.72 million, an increase
      in revenues of $44.71 million, or 326%. The increase was mainly due to increase
      in our new customers, ability to meet the demand for bio-diesel oil as we
      increased manufacturing of bio-diesel, and increased revenue from new leased
      gas
      stations in June.




*Cost
      of sales* .
      Cost of
      sales for second quarter of 2008 was approximately $49.85 million compared
      to
      cost of sales in second quarter of 2007 of approximately $11.87 million, an
      increase of $37.97 million, or 320%. The increase in cost of sales was
      attributable to the increase of production and sales activities in second
      quarter of 2008. Cost of sales as a percentage of sales was approximately 85%
      for second quarter, 2008 and 87% for second quarter, 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 increased our production of bio-diesel during the second quarter
      of
      2008 comparing with same period of 2007.




*Gross
      profit* .
      Gross
      profit was approximately $8.58 million for second quarter of 2008 as compared
      to
      approximately $1.84 million for second quarter of 2007, representing gross
      margins of approximately 15% and 13% respectively. During the second quarter
      of
      2008, the gross profit margin for making and selling Bio-diesel oil was
      approximately 31% and the gross profit margin for buying and reselling gasoline
      was approximately 10%. The improved gross margin is a result of increased market
      demand and also the lower cost of self-supplied bio-diesel
      products.




19




*General
      and administrative expenses* .
      General
      and administrative expenses for the second quarter of 2008 were $251,689. The
      general and administrative expenses for the second quarter of 2007 were
      $387,535, a decrease of $135,846 or 35%. The percentage of sales for the second
      quarter of 2008 and 2007 are 0.4% and 3%, respectively, which was due to well
      managed operating cost by the company as sales increases in second quarter
      of
      2008.




*Net
      income* .
      The net
      income for the second quarter of 2008 was $8.29 million as compared to $1.42
      million for the second quarter in 2007. It was an increase of $6.88 million
      in
      net profit or 485%. The management believed that the net income increase is
      a
      result of the fast and continuing revenue growth and well control of the cost
      and operating expenses.




**Liquidity
      and Capital Resources**




**Comparison
      of Six Months Ended June 30, 2008 and** **December** **31, 2007.**




As
      of
      June 30, 2008 and December 31, 2007, we had cash and cash equivalents of
      approximately $2.2 million and $1.4 million, respectively. At June 30, 2008,
      other current assets were approximately $46.9 million and current liabilities
      were approximately $10.7 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 $38.5
      million at June 30, 2008, compared to $30 million at December 31, 2007, an
      increase of 28%. The ratio of current assets to current liabilities was 4.6-to-1
      at June 30, 2008, compared to 6.5-to-1 at the December 31, 2007. The increase
      in
      working capital in six months ended June 30, 2008 was primarily due to the
      increased sales during 2008. The decrease in the current ratio in six months
      ended June 30, 2008 was primarily related to increase in current liabilities
      of
      advance from customers.




We
      believe we have sufficient cash to continue our current business through June
      30, 2009 due to expected increased sales revenue and net income from operations.
      We intend to expand our current operations through (i) our completed acquisition
      of three oil extraction plants; (ii) expansion of our 100,000 ton bio-diesel
      manufacturing facility; and (iii) the acquisition of 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:




·
            the
                cost of filing, prosecuting, defending, and enforcing patent claims
                and
                other intellectual property rights;




·
            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.




We
      do not
      believe that inflation had a significant negative impact on our results of
      operations during the year ended June 30, 2009.




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




Six
                Months Ended
              June
                30,2008
            
            
            2007Net
                cash provided by (used in):Operating
                Activities
            
            $
            1,864,812
            
            $
            38,185Investing
                Activities
            
            
            (1,038,203
            )
            
            (418,247
            )Financing
                Activities
            
            $
            (70,891
            )
            $
            (346,519
            )





20




Net
      cash
      provided by operating activities was $1,864,812 in six months ended June 30,
      2008, as compared to $38,185 net cash provided by operating activities in same
      period of 2007. The increase in net cash during the six months ended June 30,
      2008 comparing with same period of 2007 was mainly due to rapid increase in
      net
      income and advances from customers, but at the same time, our accounts
      receivables have increased and we’ve prepaid next 5 years rents for four new
      leased gas stations of approximately $8,500,000, which held back our cash
      inflows.




Net
      cash
      used in investing activities was $1,038,203 during the six months ended June
      30,
      2008, as compared to net cash used in investing activities of $418,247 in same
      period of 2007. The increase of net cash used in investing activities in 2008
      was mainly due to the amounts paid for purchasing three oil extraction plants
      and further construction and improvements on these three oil extraction
      plants.




Net
      cash
      used in financing activities was $70,891 in the six months ended June 30, 2008
      as compared to net cash used in financing activities of $346,519 for same period
      of 2007. The decrease of net cash flow used by financing activities in 2008
      was
      mainly due to paying off most of our loans during the six months ended June
      30,
      2007.




**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 a short term loan from a commercial bank in the
      PRC
      for the amount of $1,457,938 (RMB10, 000,000). This loan was entered into on
      August 31, 2007 with maturity on August 30, 2008. The principal will be repaid
      at maturity and the interest is payable per quarter with an interest rate of
      8.073% 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.




Long-term
      liabilities





Long-term
      liabilities are the loans payable for the automobiles. On September 27, 2006
      the
      Company entered into a three year note payable for approximately $100,000.
      This
      note is collateralized by the car with an annualized interest rate of 6.3%.
      At
      June 30, 2008, the outstanding loan balance for this car is
      $56,061.





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
      June 30, 2008, the outstanding loan balances for these two automobiles were
      $24,324. At June 30, 2008, $65,743 of the total outstanding loan balance has
      been reclassified to current portion of the liabilities that are payable within
      one year.




Operating
      leases




As
      of
      June 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.




21




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 quarter ended June 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**





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:





·
            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;




22




·
            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.




23




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.





**ITEM
      3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




Not
      required.





**ITEM
      4T—CONTROL AND PROCEDURES**




24




**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings**




None.




**Item
      1A. Risk Factors**




Not
      required.




**Item
      3. Defaults Upon Senior Securities**




Not
      applicable.




**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
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.




25





**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:
                August 14, 2008
            By:
            /s/ Gao
              XinchengName:
                Gao XinchengTitle:
                Chief Executive Officer and
                President