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 QUARTERLY PERIOD ENDED March 31,
  2010.




 ̈
            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: 0-52549





RINO
International Corporation


(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)





NEVADA
              
              41-1508112(STATE
      OR OTHER JURISDICTION OF
              
              (I.R.S.
      EMPLOYER IDENTIFICATION NO.)INCORPORATION
      OR ORGANIZATION




11
Youquan Road, Zhanqian Street, Jinzhou District


Dalian,
People’s Republic of China 116100


(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)





REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:+86-411-87661222





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. Yes x  No  ̈ .





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes  ̈  No  ̈





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




Large
      accelerated filer ̈
              Accelerated
      filer ̈Non-accelerated
      filer ̈
              Smaller
      reporting companyx




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




The
number of shares of Common Stock of the Registrant, par value $.0001 per share,
outstanding on May 14, 2010 was 28,603,321.










RINO
INTERNATIONAL CORPORATION





INDEX
TO MARCH 31, 2010 FORM 10-Q




Page
                    NumberPart
      I - Financial InformationItem
      1 - Financial Statements
                  
                  F-1Consolidated
      Balance Sheets as of March 31, 2010 (unaudited) and December 31,
      2009
                  
                  F-1Consolidated
      Statements of Income and Other Comprehensive Income for the Three Months
      ended March 31, 2010 and 2009 (unaudited)
                  
                  F-2Consolidated
      Statement of Shareholders’ Equity (unaudited)
                  
                  F-3Consolidated
      Statements of Cash Flows for theThree Months ended March 31, 2010 and 2009
      (unaudited)
                  
                  F-4Notes
      to the Consolidated Financial Statements (unaudited)
                  
                  F-5Item
      2 - Management's Discussion and Analysis of Results of Operations and
      Financial Condition
                  
                  3Item
      4 - Controls and Procedures
                  
                  15Part
      II - Other InformationItem
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
                  
                  17Item
      6 - Exhibits
                  
                  17Signature
      Page
                  
                  18




2




PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS OF
MARCH 31, 2010 AND DECEMBER 31, 2009
 
 2010
                          
                          
                          2009(UNAUDITED)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          97,659,037
                          
                          
                          $
                          134,487,611Restricted
      cash
                          
                          
                          3,806,131
                          
                          
                          
                          -Notes
      receivable
                          
                          
                          539,929
                          
                          
                          
                          440,100Loan
      to shareholders
                          
                          
                          3,074,748
                          
                          
                          
                          3,005,386Accounts
      receivable, trade, net of allowance for doubtful accounts of $477,303 and
      $273,446 as of March 31, 2010 and December 31, 2009,
      respectively
                          
                          
                          52,257,896
                          
                          
                          
                          57,811,171Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                          
                          
                          24,417,688
                          
                          
                          
                          3,258,806Inventories
                          
                          
                          2,217,412
                          
                          
                          
                          5,405,866Advances
      for inventory purchases
                          
                          
                          84,358,237
                          
                          
                          
                          34,056,231Other
      current assets and prepaid expenses
                          
                          
                          1,457,815
                          
                          
                          
                          629,506Total
      current assets
                          
                          
                          269,788,893
                          
                          
                          
                          239,094,677PLANT
      AND EQUIPMENT, NET
                          
                          
                          12,881,407
                          
                          
                          
                          12,265,389OTHER
      ASSETSInvestment
      in unconsolidated affiliate
                          
                          
                          440,100
                          
                          
                          
                          -Advances
      for non current assets
                          
                          
                          14,257,458
                          
                          
                          
                          6,570,378Intangible
      assets, net
                          
                          
                          1,131,759
                          
                          
                          
                          1,144,796Total
      other assets
                          
                          
                          15,829,317
                          
                          
                          
                          7,715,174Total
      assets
                          
                          $
                          298,499,617
                          
                          
                          $
                          259,075,240LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                          
                          $
                          10,894,287
                          
                          
                          $
                          4,281,353Short
      term bank loans
                          
                          
                          3,667,500
                          
                          
                          
                          1,467,000Notes
      payable
                          
                          
                          3,806,131
                          
                          
                          
                          -Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                          
                          
                          5,499,543
                          
                          
                          
                          -Customer
      deposits
                          
                          
                          5,587,565
                          
                          
                          
                          4,984,801Liquidated
      damages payable
                          
                          
                          20,147
                          
                          
                          
                          20,147Taxes
      payable
                          
                          
                          8,048,485
                          
                          
                          
                          4,003,709Other
      payables and accrued liabilities
                          
                          
                          461,686
                          
                          
                          
                          496,411Total
      current liabilities
                          
                          
                          37,985,344
                          
                          
                          
                          15,253,421Long-term
      loan
                          
                          
                          8,068,500
                          
                          
                          
                          -Warrant
      Liabilities
                          
                          
                          4,986,916
                          
                          
                          
                          15,172,712REDEEMABLE
      COMMON STOCK ($0.0001 par value, 5,464,357 shares issued with conditions
      for redemption outside the control of the company)
                          
                          
                          24,480,319
                          
                          
                          
                          24,480,319COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITYPreferred
      Stock ($0.0001 par value, 50,000,000 shares authorized, none issued and
      outstanding)
                          
                          
                          -
                          
                          
                          
                          -Common
      Stock ($0.0001 par value, 10,000,000,000 shares authorized, 28,603,321
      shares issued and outstanding as of March 31, 2010 and December 31,
      2009)
                          
                          
                          2,860
                          
                          
                          
                          2,860Additional
      paid-in capital
                          
                          
                          107,155,089
                          
                          
                          
                          107,135,593Retained
      earnings
                          
                          
                          96,760,779
                          
                          
                          
                          78,983,794Statutory
      reserves
                          
                          
                          12,634,833
                          
                          
                          
                          11,755,312Accumulated
      other comprehensive income
                          
                          
                          6,424,977
                          
                          
                          
                          6,291,229Total
      shareholders' equity
                          
                          
                          222,978,538
                          
                          
                          
                          204,168,788Total
      liabilities and shareholders' equity
                          
                          $
                          298,499,617
                          
                          
                          $
                          259,075,240
 
 The
accompanying notes are an integral part of these consolidated
statements.
  F-1
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
 FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)
 
 2010
                        
                        
                        2009REVENUESContracts
                        
                        $
                        47,767,567
                        
                        
                        $
                        35,366,136Services
                        
                        
                        91,680
                        
                        
                        
                        241,98347,859,247
                        
                        
                        
                        35,608,119COST
      OF SALESContracts
                        
                        
                        30,975,052
                        
                        
                        
                        19,125,496Services
                        
                        
                        -
                        
                        
                        
                        323,918Depreciation
                        
                        
                        184,675
                        
                        
                        
                        208,06731,159,727
                        
                        
                        
                        19,657,481GROSS
      PROFIT
                        
                        
                        16,699,520
                        
                        
                        
                        15,950,638OPERATING
      EXPENSESSelling,
      general and administrative expenses
                        
                        
                        6,812,674
                        
                        
                        
                        3,370,724Stock
      compensation expense
                        
                        
                        19,496
                        
                        
                        
                        -TOTAL
      OPERATING EXPENSES
                        
                        
                        6,832,170
                        
                        
                        
                        3,370,724INCOME
      FROM OPERATIONS
                        
                        
                        9,867,350
                        
                        
                        
                        12,579,914OTHER
      INCOME (EXPENSES), NETOther
      expense, net
                        
                        
                        (3,215
                        )
                        
                        
                        (9,650
                        )Change
      in fair value of warrants
                        
                        
                        10,185,796
                        
                        
                        
                        23,611Interest
      income (expense), net
                        
                        
                        70,282
                        
                        
                        
                        (118,959
                        )TOTAL
      OTHER INCOME (EXPENSES), NET
                        
                        
                        10,252,863
                        
                        
                        
                        (104,998
                        )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                        
                        
                        20,120,213
                        
                        
                        
                        12,474,916PROVISION
      FOR INCOME TAXES
                        
                        
                        1,463,707
                        
                        
                        
                        -NET
      INCOME
                        
                        
                        18,656,506
                        
                        
                        
                        12,474,916OTHER
      COMPREHENSIVE INCOME (LOSS):Foreign
      currency translation adjustment
                        
                        
                        133,748
                        
                        
                        
                        (127,620
                        )COMPREHENSIVE
      INCOME
                        
                        $
                        18,790,254
                        
                        
                        $
                        12,347,296WEIGHTED
      AVERAGE NUMBER OF SHARES:Basic
                        
                        
                        28,603,321
                        
                        
                        
                        25,040,000Diluted
                        
                        
                        28,603,321
                        
                        
                        
                        25,040,000EARNINGS
      PER SHARE:Basic
                        
                        $
                        0.65
                        
                        
                        $
                        0.50Diluted
                        
                        $
                        0.65
                        
                        
                        $
                        0.50
 
 The
accompanying notes are an integral part of these consolidated
statements.
  F-2
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
 
 Common StockPar Value $0.0001
                            
                            
                            Additional
                            
                            
                            Retained Earnings
                            
                            
                            Accumulated otherNumber
                            
                            
                            Common
                            
                            
                            Paid-in
                            
                            
                            Unrestricted
                            
                            
                            Statutory
                            
                            
                            comprehensiveof shares
                            
                            
                            stock
                            
                            
                            capital
                            
                            
                            earnings
                            
                            
                            reserve
                            
                            
                            income
                            
                            
                            TotalsBALANCE,
      December 31, 2008
                            
                            
                            25,040,000
                            
                            
                            $
                            2,504
                            
                            
                            $
                            25,924,007
                            
                            
                            $
                            28,570,948
                            
                            
                            $
                            6,196,478
                            
                            
                            $
                            6,221,943
                            
                            
                            $
                            66,915,880Cumulative
      effect of reclassification of warrants
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,058,702
                            )
                            
                            
                            (420,070
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,478,772
                            )Imputed
      interest on advances from a shareholder
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            5,375
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            5,375Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            12,474,916
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            12,474,916Allocation
      to statutory reserve
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,275,607
                            )
                            
                            
                            1,275,607
                            
                            
                            
                            
                            
                            
                            
                            -Foreign
      currency translation loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (127,620
                            )
                            
                            
                            (127,620
                            )BALANCE,
      March 31, 2009 (Unaudited)
                            
                            
                            25,040,000
                            
                            
                            $
                            2,504
                            
                            
                            $
                            24,870,680
                            
                            
                            $
                            39,350,187
                            
                            
                            $
                            7,472,085
                            
                            
                            $
                            6,094,323
                            
                            
                            $
                            77,789,779Shares
      issued to settle liquidated damage payable
                            
                            
                            48,438
                            
                            
                            
                            5
                            
                            
                            
                            216,999
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            217,004Stock
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            38,425
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            38,425Stock
      issued for service
                            
                            
                            2,000
                            
                            
                            
                            -
                            
                            
                            
                            8,960
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            8,960Imputed
      interest on advances from a shareholder
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            8,182
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            8,182Non
      cash exercise of warrant at $5.38
                            
                            
                            260,851
                            
                            
                            
                            26
                            
                            
                            
                            5,881,081
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            5,881,107Stock
      issuance for cash for $30.75
                            
                            
                            3,252,032
                            
                            
                            
                            325
                            
                            
                            
                            76,111,266
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            76,111,591Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            43,916,834
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            43,916,834Allocation
      to statutory reserve
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,283,227
                            )
                            
                            
                            4,283,227
                            
                            
                            
                            
                            
                            
                            
                            -Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            196,906
                            
                            
                            
                            196,906BALANCE,
      December 31, 2009
                            
                            
                            28,603,321
                            
                            
                            $
                            2,860
                            
                            
                            $
                            107,135,593
                            
                            
                            $
                            78,983,794
                            
                            
                            $
                            11,755,312
                            
                            
                            $
                            6,291,229
                            
                            
                            $
                            204,168,788Stock
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            19,496
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            19,496Net
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            18,656,506
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            18,656,506Allocation
      to statutory reserve
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (879,521
                            )
                            
                            
                            879,521
                            
                            
                            
                            
                            
                            
                            
                            -Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            133,748
                            
                            
                            
                            133,748BALANCE,
      March 31, 2010 (Unaudited)
                            
                            
                            28,603,321
                            
                            
                            $
                            2,860
                            
                            
                            $
                            107,155,089
                            
                            
                            $
                            96,760,779
                            
                            
                            $
                            12,634,833
                            
                            
                            $
                            6,424,977
                            
                            
                            $
                            222,978,538
 
 The
accompanying notes are an integral part of these consolidated
statements.
  F-3
  RINO INTERNATIONAL CORPORATION AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)
 
 2010
                          
                          
                          2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                          
                          $
                          18,656,506
                          
                          
                          $
                          12,474,916Adjustments
      to reconcile net income to cash (used in) provided by operating
      activities:Depreciation
                          
                          
                          226,768
                          
                          
                          
                          256,334Amortization
                          
                          
                          13,033
                          
                          
                          
                          16,682Allowance
      for bad debt
                          
                          
                          203,788
                          
                          
                          
                          -Imputed
      interest on advances from shareholders
                          
                          
                          -
                          
                          
                          
                          5,375Amortization
      of long term prepaid expenses
                          
                          
                          19,577
                          
                          
                          
                          3,663Stock
      compensation expense and shares placed in escrow
                          
                          
                          19,496
                          
                          
                          
                          -Change
      in fair value of warrants
                          
                          
                          (10,185,796
                          )
                          
                          
                          (23,611
                          )Changes
      in operating assets and liabilities:Notes
      receivable
                          
                          
                          (99,795
                          )
                          
                          
                          (325,709
                          )Accounts
      receivable
                          
                          
                          5,347,594
                          
                          
                          
                          12,355,675Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                          
                          
                          (21,151,670
                          )
                          
                          
                          -Inventories
                          
                          
                          3,187,367
                          
                          
                          
                          (114,388
                          )Advances
      for inventory purchases
                          
                          
                          (50,284,861
                          )
                          
                          
                          (3,311,177
                          )Other
      current assets and prepaid expenses
                          
                          
                          (828,027
                          )
                          
                          
                          (47,284
                          )Accounts
      payable
                          
                          
                          6,610,680
                          
                          
                          
                          (2,570,517
                          )Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                          
                          
                          5,497,669
                          
                          
                          
                          -Customer
      deposits
                          
                          
                          602,559
                          
                          
                          
                          6,272,826Taxes
      payable
                          
                          
                          4,043,397
                          
                          
                          
                          2,915,291Other
      payables and accrued liabilities
                          
                          
                          (34,713
                          )
                          
                          
                          (337,742
                          )Net
      cash (used in) provided by operating activities
                          
                          
                          (38,156,428
                          )
                          
                          
                          27,570,334CASH
      FLOWS FROM INVESTING ACTIVITIESPayment
      for investment in unconsolidated affiliate
                          
                          
                          (440,100
                          )
                          
                          
                          -Purchase
      of equipment
                          
                          
                          (822,503
                          )
                          
                          
                          (20,789
                          )Advances
      for non current assets
                          
                          
                          (7,704,037
                          )
                          
                          
                          -Net
      cash used in investing activities
                          
                          
                          (8,966,640
                          )
                          
                          
                          (20,789
                          )CASH
      FLOWS FROM FINANCING ACTIVITIESChange
      in restricted cash
                          
                          
                          (3,804,834
                          )
                          
                          
                          1,030,317Proceeds
      from notes payable - banks
                          
                          
                          3,804,834
                          
                          
                          
                          -Proceeds
      from short-term bank loans
                          
                          
                          2,199,750
                          
                          
                          
                          -Proceeds
      from long-term loan
                          
                          
                          8,065,750
                          
                          
                          
                          -Payment
      to shareholders
                          
                          
                          (291,234
                          )
                          
                          
                          (380,650
                          )Proceeds
      from shareholder
                          
                          
                          221,844
                          
                          
                          
                          -Net
      cash provided by financing activities
                          
                          
                          10,196,110
                          
                          
                          
                          649,667EFFECT
      OF EXCHANGE RATE ON CASH
                          
                          
                          98,384
                          
                          
                          
                          (28,747
                          )(DECREASE)
      INCREASE IN CASH AND CASH EQUIVALENTS
                          
                          
                          (36,828,574
                          )
                          
                          
                          28,170,465CASH
      AND CASH EQUIVALENTS, beginning
                          
                          
                          134,487,611
                          
                          
                          
                          19,741,982CASH
      AND CASH EQUIVALENTS, ending
                          
                          $
                          97,659,037
                          
                          
                          $
                          47,912,447SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for Interest expense
                          
                          $
                          19,468
                          
                          
                          $
                          111,509Cash
      paid for income taxes
                          
                          $
                          73,256
                          
                          
                          $
                          203,016
 
 The
accompanying notes are an integral part of these
consolidated statements.
  F-4
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 NOTE
1 – NATURE OF BUSINESS
 
 RINO
International Corporation (the “Company” or “RINO”) was originally incorporated
in 1984 as Applied Biometrics, Inc. in accordance with the laws of the State of
Minnesota. On December 27, 2006, the shareholders of the Company approved a
proposal to re-domicile the Company from the State of Minnesota to the State of
Nevada. The Company through its 100% owned subsidiaries and Variable Interest
Entities (“VIEs”), engages in designing, developing, manufacturing, and
installation of environmental protection and energy saving industrial equipments
in the People’s Republic of China (PRC).
 
 Current
Development
 
 On March
9, 2010, Dalian Rino Environment Engineering Science and Technology Co., Ltd.
(“Dalian RINO”) and three other unrelated Chinese based companies formed Dalian
Environmental Exchange Center (“DEEC”) under the laws of the PRC. Dalian RINO
invested approximately $440,100 (RMB 3 million) in cash which is accounted for
as its 30% uncontrolling interest of the total registered capital of $1,467,000
(RMB 10 million). The company provides services in environmental protection and
energy saving, services in connection with comprehensive trading of the
technologies of environmental protection, energy saving, and greenhouse gases
(carbon dioxide). DEEC also offers services in project consulting, design
planning and project value evaluations, providing management, information and
technology for project investments. See Note 8 for investment in unconsolidated
affiliate.
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
accompanying consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America and reflect the activities of the following
subsidiaries and VIEs.  All material intercompany transactions
and balances have been eliminated in the consolidation.
 
 Place
                        incorporated
                      
                      Ownership
                        percentageInnomind
      Group Limited (“Innomind”)
                      
                      BVI
                      
                      100%Dalian
      Innomind Environment Engineering Co., Ltd. (“Dalian
    Innomind”)
                      
                      Dalian,
      China
                      
                      100%Rino
      Investment (Dalian) Co., Ltd. (“Dalian Investment”)
                      
                      Dalian,
      China
                      
                      100%Dalian
      RINO Heavy Industry Co., Ltd. (“Dalian Rino Heavy)
                      
                      Dalian,
      China
                      
                      100%Dalian
      Rino Environment Engineering Science and Technology Co., Ltd. (“Dalian
      Rino”)
                      
                      Dalian,
      China
                      
                      VIERino
      Technology Corporation (“Rino Technology)
                      
                      Nevada,
      USA
                      
                      VIEDalian
      Rino Environmental Engineering Project Design Co., Ltd. (“Dalian Rino
      Design”)
                      
                      Dalian,
      China
                      
                      VIEDalian
      Rino Environmental Construction & Installation Project Co., Ltd.
      (“Dalian Rino Installation”)
                      
                      Dalian,
      China
                      
                      VIE
 
 In
accordance with the interpretation of Generally Accepted Accounting Principles
(GAAP), VIEs are generally entities that lack sufficient equity to finance their
activities without additional financial support from other parties or whose
equity holders lack adequate decision making ability.  All VIEs with
which the Company is involved must be evaluated to determine the primary
beneficiary of the risks and rewards of the VIE. The primary beneficiary is
required to consolidate the VIE for financial reporting
purposes.
 
 ASC 810
addresses whether certain types of entities referred to as VIEs, should be
consolidated in a company’s consolidated financial
statements.  Pursuant to an Entrusted Management Agreement by and
between Dalian Innomind and Dalian Rino, dated October 3, 2007, Dalian Rino and
its shareholders agreed to entrust the operations and management of the Business
to Dalian Innomind and Dalian Innomind is entitled to Dalian Rino’s net profit
as an entrusted management fee. In accordance with the provisions of ASC
810, the Company has determined that Dalian Rino and its 100% owned
subsidiaries Dalian Rino Design, Rino Technology and Dalian Rino
Installation are VIEs and that the Company is the primary beneficiary, and
accordingly, the financial statements of Dalian Rino, Dalian Rino Design, Rino
Technology and Dalian Rino Installation are consolidated into the financial
statements of the Company.
  F-5
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 The
carrying amount of the VIEs’ assets and liabilities are as follows:
 
 March 31, 2010
                    
                    
                    December 31, 2009(Unaudited)Current
      assets
                    
                    $
                    169,481,799
                    
                    
                    $
                    145,870,479Plant
      and equipment
                    
                    
                    11,076,365
                    
                    
                    
                    11,270,034Other
      noncurrent assets
                    
                    
                    7,779,382
                    
                    
                    
                    7,713,576Total
      assets
                    
                    
                    188,337,546
                    
                    
                    
                    164,854,089Total
      liabilities
                    
                    
                    170,736,941
                    
                    
                    
                    150,218,805Net
      assets
                    
                    $
                    17,600,605
                    
                    
                    $
                    14,635,284
  The
interim unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
or GAAP, for interim financial information and with the instructions to
Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC
Regulation S-X and consistent with the accounting policies stated in the
Company’s 2009 Annual Report on Form 10-K. Certain information and note
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and regulations.
Therefore, these financial statements should be read in conjunction with our
audited consolidated financial statements and notes thereto for the year ended
December 31, 2009, included in our Annual Report on Form 10-K filed with the
SEC.
 
 The
interim consolidated financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments that, in the
opinion of management, are necessary to present fairly our consolidated
financial position as of March 31, 2010, and our consolidated results of
operations and cash flows for the three months ended March 31, 2010 and 2009.
The results of operations for the three ended March 31, 2010 are not
necessarily indicative of the results to be expected for future quarters or
the full year.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions about future events. These estimates and the
underlying assumptions affect the reported amounts of assets, liabilities,
revenue and expenses, and disclosures about contingent assets and
liabilities. Such estimates and assumptions by management affect accrued
expenses, the valuation of accounts receivable, inventories, and long-lived
assets, legal contingencies, lives of plant and equipment, lives of intangible
assets, calculation of warranty accruals, taxes, share-based compensation and
others. Management believes that the estimates used in preparing its financial
statements are reasonable and prudent. Actual results could differ from those
estimates.
 
 Foreign Currency
Transactions
 
 The
reporting currency of the Company is the US dollar. The functional currency is
the Chinese Renminbi (”RMB”). The Company’s PRC subsidiaries and
VIEs conduct business in RMB, and maintain their accounting records in RMB.
Innomind Group Limited, the Company’s 100% owned BVI subsidiary headquartered in
Hong Kong, maintains its accounting records in its local currency, Hong Kong
Dollars.
 
 The
financial statements of the Company’s PRC subsidiaries and VIEs are translated
into US dollars using period-end exchange rates of $0.14670 at March
31, 2010 and December 31, 2009 as to assets and liabilities and weighted
average exchange rates for the periods of $0.14665 and $0.14651 for the three
months ended March 31 2010 and 2009, respectively, as to the income and
cash flow statement. The financial statements of the Company’s Hong
Kong subsidiary are translated into US dollars using period-end exchange rates
of $0.12880 and $0.12900 at March 31, 2010 and December 31, 2009, respectively,
as to assets and liabilities and weighted average exchange rates of $0.12882 and
$0.12897 for the three months ended March 31, 2010 and 2009,
respectively. The equity accounts are translated at their historical
exchange rates.  Resulting translation adjustments are recorded as a
component of accumulated other comprehensive income within
shareholders’ equity. The resulting translation gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as
incurred. Translation adjustments resulting from this process amounted to
$133,748, and $(127,620) for the three months ended March 31, 2010 and 2009,
respectively.
 
 GAAP
requires cash flows from the Company's operations calculated based upon the
local currencies using the weighted average translation rate. As a result,
amounts related to assets and liabilities reported on the consolidated
statements of cash flows will not necessarily agree with changes in the
corresponding balances on the consolidated balance sheets.
  F-6
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations for the periods
presented. For the three months ended March 31, 2010 and 2009, no material
transaction gains and losses occurred.
 
 Concentration and
Risks
 
 Cash in
Bank
 
 The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes.  Cash includes cash on hand and demand
deposits in accounts maintained with state owned banks within the PRC, Hong
Kong and the United States.
 
 The
Company maintains balances at financial institutions which, from time to time,
may exceed Hong Kong Deposit Protection Board insured limits for the banks
located in Hong Kong.  Balances at financial institutions or state
owned banks within the PRC are not covered by insurance.  As of March
31, 2010 and December 31, 2009, the Company has $96,917,495 and $134,070,387
cash balances not covered by FDIC insurance in the United States,
respectively.  The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risks on its cash in
bank accounts.
 
 Major
Customers
 
 During
the three months ended March 31, 2010, four customers accounted for 54% of the
Company’s total sales, with each customer individually accounting for 21%,
12%, 11% and 10%, respectively. During the three months ended March 31, 2009,
three customers accounted for 42% of the Company’s total sales, with each
customer individually accounting for 18%, 14% and 10%, respectively.  
Accounts receivable from those four customers totaled $7,658,936 as of March 31,
2010 and from those four customers totaled $4,527,516 as of December 31, 2009,
respectively.
 
 Major
Suppliers
 
 Two major
suppliers provided approximately 93% of the Company’s purchases of raw materials
for the three months ended March 31, 2010, with each supplier individually
accounting for 47% and 46%, respectively. Two major suppliers provided
approximately 94% of the Company’s purchases of raw materials for the three
months ended March 31, 2009, with each supplier individually accounting for 81%
and 13%, respectively.  Advances to these suppliers as of March 31,
2010 and December 31, 2009 amounted to $83,324,297 and $33,046,907,
respectively.
 
 PRC
Risks
 
 The
Company's operations are carried out 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, and by the general state
of the economy in the regions where the Company’s customers are located. The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
 
 The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the
PRC.  Under existing PRC foreign exchange regulations, payment of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies
without prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements.  However, approval
from appropriate governmental authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses, such as the repayment of bank loans denominated in foreign
currencies.  The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.
  Restricted
Cash
  The
Company records cash deposits in banks or other institutions subject to
restrictions on the withdrawal or use of the funds as restricted
cash.
  F-7
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Notes
Receivable
 
 Notes
receivable represent trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the notes.  This
amount is non-interest bearing and is normally paid within three to six
months.  The Company has the ability to submit requests for payment to
the customers’ bank earlier than the scheduled payment date, but will incur an
interest charge and a processing fee when it submits an early payment
request.  The Company had $539,929 and $440,100 in notes receivable as
of March 31, 2010 and December 31, 2009, respectively.
 
 Accounts
Receivable
 
 Accounts
receivable are presented net of an allowance for doubtful accounts. The Company
maintains reserves for potential credit losses on accounts receivable. The
Company grants credit to customers without collateral. Accounts receivable
balances are considered past due if payment has not been received within the
payment terms established on the sales contracts or granted by the Company,
typically up to one year. 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 reverses. The estimated loss rate is
based on our historical loss experience and also contemplates current market
conditions. Delinquent account balances are written-off after management has
determined that the likelihood of collection is not probable, and known bad
debts are written off against allowance for doubtful accounts when identified.
The Company’s allowance for doubtful accounts amounted to $477,303 and $273,446
as of March 31, 2010 and December 31, 2009, respectively.
  Cost and Estimated Earnings
in Excess of Billings on Uncompleted Contracts
 
 Costs and
estimated earnings in excess of billings on uncompleted contracts represent
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize contract
revenue.
 
 Billings in Excess of Cost
and Estimated Earnings on Uncompleted Contracts
 
 Billings
in excess of costs and estimated earnings on uncompleted contracts represent
billings in excess of revenues recognized pursuant to the
percentage-of-completion method.
 
 Inventories
 
 Inventories
consist of raw materials and low cost consumption supplies used in the
manufacturing process and work in process. Inventories are valued at the lower
of cost or market, as determined on a first-in, first-out basis, using the
weighted average cost method. Management reviews its inventories periodically to
determine if any reserves are necessary for potential obsolescence or if write
downs are necessary due to the carrying value exceeding its net
realizable value.  Based upon managements’ review, there were no
provisions for obsolete or slow moving inventories as of March 31,
2010.
 
 Plant and
Equipment
 
 Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When assets are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of plant and equipment is
provided using the straight-line method for substantially all assets with
estimated lives as follows:
 
 Buildings
                  30
      YearsEquipment
      and machinery
                  15
      YearsMotor vehicles
                  10
      YearsFurniture
      and office equipment
                  5
      Years
 
 Construction
in progress represents direct costs of construction as well as acquisition and
design fees and interest expense incurred. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until construction is completed and the asset is
ready for its intended use. Maintenance, repairs and minor renewals are
charged directly to expense as incurred. Major additions and betterments to
buildings and equipment are capitalized.
  F-8
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 The
Company recognizes an impairment loss when estimated cash flows generated by
those assets are less than the carrying amounts of the asset. Based on
management review, the Company believes that there were no impairments as of
March 31, 2010.
 
 Investment in Unconsolidated
Affiliate
 
 Equity
method investments are recorded at original cost and adjusted to recognize the
Company’s proportionate share of the investee’s net income or losses and
additional contributions made and distributions received. The Company recognizes
a loss if it is determined that other than temporary decline in the value of the
investment exists. A subsidiary in which the Company has the ability to
exercise significant influence, but does not have a controlling interest is
accounted for using the equity method. Significant influence is generally
considered to exist when the Company has an ownership interest in the voting
stock between 20% and 50%, and other factors, such as representation on the
Board of Directors, voting rights and the impact of commercial arrangements, are
considered in determining whether the equity method of accounting is
appropriate.
 
 Intangible
Assets
 
 Intangible
assets consist of land use rights and patents. Land use rights are stated at
cost, less accumulated amortization and are amortized over the term of the
relevant rights of 50 years from the date of acquisition. Patent A and patent B
are stated at cost, less accumulated amortization and are amortized over patent
terms of 15 and 10 years, respectively.
 
 Certain
identifiable intangible assets are reviewed for impairment, at least annually
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. As of March 31, 2010, the Company expected all
of its intangible assets to be fully recoverable.
 
 Accounting for Long-Lived
Assets
 
 Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. We assess
the recoverability of the assets based on the undiscounted future cash flow the
assets are expected to generate and recognize an impairment loss when estimated
undiscounted future cash flow expected to result from the use of the asset plus
net proceeds expected from disposition of the asset, if any, are less than the
carrying value of the asset. When we identify an impairment, we reduce the
carrying amount of the asset to its estimated fair value based on a discounted
cash flow approach or, when available and appropriate, to comparable market
values.  As of March 31, 2010, management believes there were no
impairments on the Company’s long-lived assets.
 
 Fair Valueof Financial
Instruments
 
 On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:
  ·
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value.
  Effective
January 1, 2009, warrants to purchase 382,500 shares of the Company’s
common stock previously treated as equity pursuant to the derivative treatment
exemption are no longer afforded equity treatment because the strike price of
the warrants is denominated in the U.S. dollar, a currency other than the
Company’s functional currency, the Chinese Renminbi.  As a
result, the warrants are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised
or expired.
  F-9
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to a liability, as if these warrants were treated as a
derivative liability since their issuance in October, 2007 (“2007 Warrants”). On
January 1, 2009, the Company reclassified $1,058,702 from additional
paid-in capital, as a cumulative effect adjustment, $420,070 from beginning
retained earnings and $1,478,772 to warrant liabilities to recognize the fair
value of such warrants. The fair value of the warrants was $1,455,160 on March
31, 2009.  Therefore, the Company recognized a $23,611 gain from the
change in fair value of these warrants for the three months ended March 31,
2009.  In July, August and October of 2009, warrants to purchase
382,500 shares of the Company’s common stock were exercised through cashless
conversion.
 
 On
December 7, 2009, the Company sold 3,252,032 shares of its common stock; Series
A Common Stock Warrants, which are exercisable within six months of the closing
date; to purchase up to an aggregate of 1,138,211 shares of Common Stock at an
exercise price of $34.50 per Warrant (the “2009 Series A Warrants”); and Series
B Common Stock Warrants, which are exercisable beginning on the six month one
day anniversary of the closing date until the one year one day anniversary of
the closing date, to purchase up to an aggregate of 1,138,211 shares of Common
Stock at an exercise price of $34.50 per Warrant (the “2009 Series B
Warrants”).  These warrants were treated as a derivative
liability because the strike price of the warrants is denominated in the
U.S. dollar, a currency other than the Company’s functional currency, the
Chinese Renminbi.  As a result, the warrants are not considered
indexed to the Company’s own stock, and as such, all future changes in the
fair value of these warrants will be recognized currently in earnings until such
time as the warrants are exercised or expired. The fair value of the warrants on
grant date, December 31, 2009 and March 31, 2010 amounted to $18,743,862,
$15,172,712 and $4,986,916, respectively. Therefore, the company recognized a
$10,185,796 gain from the change in fair value of warrants for the three months
ended March 31, 2010 on these warrants.
  Warrants
referred to in the preceding paragraphs do not trade in an active securities
market, and as such, the Company estimates the fair value of these warrants
using the Black-Scholes option pricing model using the following
assumptions:
 
 2009SeriesAWarrants
                              
                              March31,
                                2010
                              
                              
                              Issuance
                                Date(Unaudited)Annual
      dividend yield
                              
                              
                              -
                              
                              
                              
                              -Expected
      life (years)
                              
                              
                              0.19
                              
                              
                              
                              0.50Risk-free
      interest rate
                              
                              
                              0.17
                              %
                              
                              
                              0.16
                              %Expected
      volatility
                              
                              
                              70.21
                              %
                              
                              
                              68.56
                              %
 
 2009SeriesBWarrants
                              
                              March31,
                                2010
                              
                              
                              IssuanceDate(Unaudited)Annual
      dividend yield
                              
                              
                              -
                              
                              
                              
                              -Expected
      life (years)
                              
                              
                              0.69
                              
                              
                              
                              1.00Risk-free
      interest rate
                              
                              
                              0.30
                              %
                              
                              
                              0.55
                              %Expected
      volatility
                              
                              
                              87.89
                              %
                              
                              
                              131.16
                              %
 
 Expected
volatility is based on the Company’s historical stock pricing data (adjusting
for stock splits and dividends).  The Company-specific volatility is
computed annually by taking the base-10 logarithm of each daily stock closing
price divided by the previous stock closing price (adjusted for stock
splits and dividends).  The logarithm smoothes the daily results so
that percentage differences are computed and tailed.  Each annual
volatility calculation is weighted along with the other (non-excluded) annual
volatility result to produce the average historical volatility for the selected
period.    The Company believes this method produces an
estimate that is representative of the Company’s expectations of future
volatility over the expected term of these warrants. The expected life is based
on the remaining term of the warrants. The risk-free interest rate is based
on U.S. Treasury securities according to the remaining term of the
warrants.
  The
following table sets forth by level within the fair value hierarchy of the
Company’s financial assets and liabilities that was accounted for at fair value
on a recurring basis as of March 31, 2010.
  Carrying Value at
                                                    March 31,
                                                  
                                                  
                                                  Fair Value Measurement at
                                                    March 31, 20102010
                                                  
                                                  
                                                  Level 1
                                                  
                                                  
                                                  Level 2
                                                  
                                                  
                                                  Level 3(Unaudited)Warrant
      liability
                                                  
                                                  $
                                                  4,986,916
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  $
                                                  4,986,916
                                                  
                                                  
                                                  
                                                  -
  F-10
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the balance sheet at fair value.
  Revenue
Recognition
 
 Contracts. The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method.  Under the
percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred to date as a percentage of
the total estimated costs to the customer. When total cost estimates exceed
revenues, the Company accrues for the estimated losses immediately. The use of
the percentage-of-completion method requires significant judgment in estimating
total contract revenues and costs, including assumptions relative concerning the
length of time to complete the project, the nature and complexity of the work to
be performed, and anticipated changes in estimated costs. Estimates of total
contract revenues and costs are continuously monitored during the term of the
contract, and recorded revenues and costs are subject to revision as the
contract progresses. When revisions in estimated contract revenues and costs are
determined, such adjustments are recorded in the period in which they are first
identified.
 
 Services.In addition to
the Company’s specialty equipment sales, the Company uses heavy machining
equipment to perform machining services for third parties. These engagements,
numbering several hundred per year, are essentially piecework and are completed
in usually less than one month. Each machining engagement is governed by a
separate contract, indicating existence of an arrangement.  Revenue is
recognized when service is performed, which is usually concurrent with delivery
to the customer, the contract price is set by contract, and collectability is
reasonably assured.
 
 The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.
  Enterprise Wide
Disclosure
 
 The
Company’s chief operating decision-makers (i.e. chief executive officer and his
direct reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by business lines for
purposes of allocating resources and evaluating financial performance. The
Company is engaged in designing, developing, manufacturing, and installing
environmental protection and energy saving equipment for the Chinese iron and
steel industry and no other business segment. There are no segment managers
who are held accountable for operations, operating results and plans for
levels or components below the consolidated unit level. Based on qualitative and
quantitative criteria established by “Disclosures about Segments of an
Enterprise and Related Information,” the Company considers itself to be
operating within one reportable segment.
 
 Government
Grant
 
 The
Dalian municipal government approved grants to the Company to encourage
high-technology industry research and development. The grants are netted with
research and development expenses upon receipt from the local government. The
Company did not receive any grant during the three months ended March 31, 2010
and 2009, respectively.
 
 Research and Development
Costs
 
 Research
and development (“R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs. Under the guidance of
GAAP, the Company expenses the costs associated with the R&D activities when
incurred.  No R&D expenses incurred during the three months ended
March 31, 2010 and 2009, respectively.
 
 Shipping and
Handling
 
 Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling costs incurred for shipping of finished products to
customers are included in selling expenses. Shipping and handling expenses
included in selling expense for the three months ended March 31, 2010 and 2009,
amounted to $5,715 and $132,283, respectively.
  F-11
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Stock-based
Compensation
 
 We are
required to estimate the fair value of share-based awards on the date of grant.
The value of the award is principally recognized as expenses ratably over the
requisite service periods. The fair value of our restricted stock units is based
on the closing market price of our common stock on the date of grant. We have
estimated the fair value of stock options and stock purchase rights as of the
date of grant or assumption using the Black-Scholes option pricing model, which
was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected
volatility of our stock price. We evaluate the assumptions used to value
stock options and stock purchase rights on a quarterly basis. The fair values
generated by the Black-Scholes model may not be indicative of the actual fair
values of our equity awards, as it does not consider other factors important to
those awards to employees, such as continued employment, periodic vesting
requirements and limited transferability.
  The
Company is required to measure the costs of the equity instruments issued in
exchange for the receipt of goods or services from other than employees at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably determinable.
The value of equity instruments issued for consideration other than
employee services is determined on the earlier of a performance commitment or
completion of performance by the provider of goods or services.
 
 Stock
compensation expense is recognized based on awards expected to
vest.  GAAP requires forfeitures to be estimated at the time of grant
and revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates.  There were no estimated forfeitures as the
Company has a short history of issuing options.
 
 Income
Taxes
 
 The
Company reports income taxes pursuant to FASB’s accounting standard for income
taxes. Under  the asset and liability method of accounting for income taxes
as required by this accounting standard, deferred taxes are determined based on
the temporary differences between the financial statement and tax basis of
assets and liabilities using tax rates expected to be in effect during the years
in which the basis differences reverse. A valuation allowance is recorded when
it is more likely than not that some of the deferred tax assets will not be
realized.  FASB’s accounting standard for accounting for uncertainty
in income taxes 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. As of January 1, 2007,
income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. A tax position is recognized as a benefit only if it is
“more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded.
 
 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.  No material deferred tax amounts were recorded at March 31,
2010 and December 31, 2009. Penalties and interest incurred related to
underpayment of income tax are classified as income tax expense in the year
incurred.  No significant penalties or interest relating to income taxes
have been incurred during the three months ended March 31, 2010 and 2009. 
GAAP also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transition.
 
 The
charge for taxation is based on the results for the reporting period as adjusted
for items, which are non-assessable or disallowed.  It is calculated
using tax rates that have been enacted or substantively enacted by the balance
sheet date.
 
 The
Company and its VIE Rino Technology were incorporated in the United States
and has incurred net operating losses for income tax purposes for the three
months ended March 31, 2010 and 2009. The Company had estimated loss carry
forwards of approximately $1.69 million and $1.49 million as of March 31, 2010
and December 31, 2009, respectively, for U.S. income tax purposes, available for
offset against future taxable U.S. income expiring in 2028. Management believes
that the realization of the benefits from the loss carry forward appears
uncertain due to the Company’s historical operating income and continuing
losses. Accordingly, a 100% valuation allowance has been provided and no
deferred tax asset benefit has been recorded. The valuation allowance at March
31, 2010 and December 31, 2009 was approximately $574,000 and $505,000,
respectively. The net change in the valuation allowance was an increase of
approximately $69,000.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries and VIE’s
of approximately $97,375,236 as of March 31, 2010 which is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations.  Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
  F-12
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 US Income
Taxes
 
 The
Company and its VIE Rino Technology are incorporated in the State of Nevada
in the U.S., and are subject to a gradual U.S. federal corporate income tax of
15% to 35%. The State of Nevada does not impose any corporate state income
tax.
 
 Hong Kong Income
Taxes
 
 The
Company’s subsidiary, Innomind is incorporated in BVI and its office is located
in Hong Kong. Innomind did not earn any income that was derived in Hong Kong for
the three months ended March 31, 20010 and 2009 and therefore was not subject to
Hong Kong Profit Tax.
 
 China Income
Taxes
 
 The
Company conducts all its operating business through its operating subsidiaries
and VIEs, Dalian Innomind, Dalian Rino, Dalian Rino Design, Dalian Rino
Installation, Dalian Rino Heavy and Dalian Investment in China. The operating
subsidiaries and VIEs are governed by the income tax laws of the PRC and do not
have any deferred tax assets or deferred tax liabilities under the income tax
laws of the PRC because there are no temporary differences between
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
 
 The
Company’s subsidiaries and VIEs are governed by the Income Tax Law of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws.
 
 Starting
January 1, 2008, under new EIT law, Dalian Rino was subject to the new standard
EIT rate of 25%.  On December 10, 2008, Dalian Rino was approved for a
reduced tax rate at 15% for being qualified as an entity operating with high
technology.
 
 Dalian
Innomind is in the environmental protection industry, and is qualified for a tax
exemption for two years and a 50% reduction for the following three years. As a
result, Dalian Innomind enjoys a 100% tax exemption for the years 2008 through
2009 and a 50% income tax reduction for the years 2010 through
2012.
 
 Pursuant
to an Entrusted Management Agreement by and between Dalian Innomind and Dalian
Rino, dated October 3, 2007, Dalian Rino and its shareholders agreed to entrust
the operations and management of the Business to Dalian Innomind and Dalian
Innomind is entitled to Dalian Rino’s net profit as an entrusted management fee,
which resulted in no income tax provision for Dalian Rino.
 
 Dalian
Investment, Dalian Rino Heavy, Dalian Rino Installation and Dalian Rino Design
are subject to an income tax rate of 25%.
 
 The
Company’s subsidiaries and VIEs were paying the following tax rate for the three
months ended March 31:
 
 2010
                      
                      
                      2009Subsidiaries and VIEs
                      
                      Income
                        Tax
                        Exemption
                      
                      
                      Effective
                        Income
                        Tax Rate
                      
                      
                      Income
                        Tax
                        Exemption
                      
                      
                      Effective
                        Income
                        Tax RateDalian
      Innomind
                      
                      
                      12.5
                      %
                      
                      
                      12.5
                      %
                      
                      
                      25
                      %
                      
                      
                      0
                      %Dalian
      Investment
                      
                      
                      0
                      %
                      
                      
                      25
                      %
                      
                      
                      n/a
                      
                      
                      
                      n/aDalian
      Rino Heavy
                      
                      
                      0
                      %
                      
                      
                      25
                      %
                      
                      
                      n/a
                      
                      
                      
                      n/aDalian
      Rino
                      
                      
                      10
                      %
                      
                      
                      15
                      %
                      
                      
                      10
                      %
                      
                      
                      15
                      %Dalian
      Rino Installation
                      
                      
                      0
                      %
                      
                      
                      25
                      %
                      
                      
                      0
                      %
                      
                      
                      25
                      %Dalian
      Rino Design
                      
                      
                      0
                      %
                      
                      
                      25
                      %
                      
                      
                      0
                      %
                      
                      
                      25
                      %
 
 The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate to income before income taxes.
The following table reconciles the statutory rates to the Company’s effective
tax rate for the three months ended March 31, 2010 and 2009:
  F-13
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 2010
                    
                    
                    2009U.S.
      Statutory rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Foreign
      income not recognized in U.S.
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )China
      income taxes
                    
                    
                    25.0
                    
                    
                    
                    25.0China
      income tax exemption
                    
                    
                    (10.6
                    )
                    
                    
                    (25.0
                    )Other
      items (a)
                    
                    
                    (7.1
                    )
                    
                    
                    -Effective
      income tax rate
                    
                    
                    7.3
                    %
                    
                    
                    0.0
                    %
 
 (a)  The
(7.1)% represents the $10,126,899 of income and expenses incurred by the Company
that are not subject to income tax for the three months ended March 31,
2010.
 
 The
estimated tax savings for the three months ended March 31, 2010 and 2009
amounted to $1,101,022 and $3,189,019, respectively. The net effect on earnings
per share had the income tax been applied would decrease basic and diluted
earnings per share from $0.65 to $0.61 in 2010 and $0.50 to $0.37
in 2009, respectively.
 
 Value Added
Tax
 
 Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, or VAT, in
accordance with Chinese laws. The VAT standard rate is 17% of the gross sales
price. A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on sales of the finished
product.
 
 VAT on
sales and VAT on purchases amounted to $11,585,981 and $7,635,108 for the three
months ended March 31, 2010, respectively. VAT on sales and VAT on purchases
amounted to $11,561,292 and $8,859,036 for the three months ended March 31,
2009, respectively.  Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent because the VAT taxes are not
impacted by the income tax holiday. As of March 31, 2010 and December 31, 2009,
the VAT payable amounted to $5,850,671 and $3,260,613,
respectively.
 
 Comprehensive
income
 
 GAAP
establishes standards for reporting and display of comprehensive income and its
components in financial statements. It requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in financial statements that are displayed with the same
prominence as other financial statements.
  Earnings Per
Share
 
 GAAP
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock using the treasury
method.
 
 Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the calculation
date.
 
 Recently Adopted Accounting
Standards
 
 In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have impact on the
Company’s consolidated financial statements.
  F-14
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No.
51.” If an entity has previously adopted SFAS No. 160 as of the date the
amendments in this update are included in the Accounting Standards Codification,
the amendments in this update are effective beginning in the first interim or
annual reporting period ending on or after December 15, 2009. The amendments in
this update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
 
 In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level
3 fair value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU, however, the
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.
 
 In
February 2010, FASB issued ASU No. 2010-9 – Amendments to Certain
Recognition and Disclosure Requirements. This update addresses certain
implementation issues related to an entity’s requirement to perform and disclose
subsequent-events procedures, removes the requirement that public companies
disclose the date of their financial statements in both issued and revised
financial statements. According to the FASB, the revised statements include
those that have been changed to correct an error or conform to a retrospective
application of U.S. GAAP. The amendment is effective for interim and annual
reporting periods in fiscal year ending after June 15, 2010. The Company does
not expect the adoption of this ASU to have a material impact on the Company’s
consolidated financial statements.
 
 In March
2010, FASB issued ASU No. 2010-10 – Amendments for Certain Investment
Funds. This update defers the effective date of the amendments to the
consolidation requirements made by FASB Statement 167 to a reporting entity’s
interest in certain types of entities. The deferral will mainly impact the
evaluation of reporting enterprises’ interests in mutual funds, private equity
funds, hedge funds, real estate investment entities that measure their
investment at fair value, real estate investment trusts, and venture capital
funds. The ASU also clarifies guidance in Statement 167 that addresses whether
fee arrangements represent a variable interest for all service providers
and decision makers. The ASU is effective for interim and annual reporting
periods in fiscal year beginning after November 15, 2009. The adoption of this
ASU did not have a material impact on the Company’s consolidated financial
statements.
 
 In March
2010, FASB issued ASU No. 2010-11 – Scope Exception Related to Embedded
Credit Derivatives. Embedded credit-derivative features related only to the
transfer of credit risk in the form of subordination of one financial instrument
to another are not subject to potential bifurcation and separate accounting as
clarified by recently issued FASB guidance. Other embedded credit-derivative
features are required to be analyzed to determine whether they must be accounted
for separately. This update provides guidance on whether embedded
credit-derivative features in financial instruments issued by structures such as
collateralized debt obligations (CDOs) and synthetic CDOs are subject to
bifurcation and separate accounting. The guidance is effective at the beginning
of a company’s first fiscal quarter beginning after June 15, 2010. The Company
does not expect the adoption of this ASU to have a material impact on the
Company’s consolidated financial statements.
  F-15
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Reclassifications
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
 
 Note
3 – ACCOUNTS RECEIVABLE
 
 Accounts
receivable consisted of the following:
 
 March 31,
                                
                                
                                December 31,2010
                                
                                
                                2009(Unaudited)Accounts
      receivable
                                
                                $
                                52,735,199
                                
                                
                                $
                                58,084,617Less:
      allowance for bad debts
                                
                                
                                (477,303
                                )
                                
                                
                                (273,446
                                )Accounts
      receivable, net
                                
                                $
                                52,257,896
                                
                                
                                $
                                57,811,171
 
 The
following table consists of allowance for doubtful accounts:
 
 Allowance
      for doubtful accounts at January 1, 2009
                          
                          $
                          -Additional
      reserves
                          
                          
                          -Accounts
      receivable write off
                          
                          
                          -Effect
      of foreign currency translation
                          
                          
                          -Allowance
      for doubtful accounts at March 31, 2009 (Unaudited)
                          
                          
                          -Additional
      reserves
                          
                          
                          273,446Accounts
      receivable write off
                          
                          
                          -Effect
      of foreign currency translation
                          
                          
                          -Allowance
      for doubtful accounts at December 31, 2009
                          
                          
                          273,446Additional
      reserves
                          
                          
                          203,788Accounts
      receivable write off
                          
                          
                          -Effect
      of foreign currency translation
                          
                          
                          69Allowance
      for doubtful accounts at March 31, 2010 (Unaudited)
                          
                          $
                          477,303
 
 NOTE
4 – COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
 
 Costs and
estimated earnings in excess of billings on uncompleted contracts represent
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize contract
revenue.  As of March 31, 2010 and December 31, 2009, the Company had
$24,417,688 and $3,258,806 of cost and estimated earnings in excess of billings,
respectively.
  Costs and
estimated earnings in excess of billings consist of the following:
  March31,
                                  2010
                                
                                
                                December31,
                                  2009(Unaudited)Cost
      incurred on uncompleted contracts
                                
                                $
                                22,461,702
                                
                                
                                $
                                3,173,870Estimated
      earnings
                                
                                
                                17,120,783
                                
                                
                                
                                2,090,778Contract
      costs incurred plus estimated earnings to date
                                
                                
                                39,582,485
                                
                                
                                
                                5,264,648Less:
      progress billings
                                
                                
                                (15,164,797
                                )
                                
                                
                                (2,005,842
                                )Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                                
                                $
                                24,417,688
                                
                                
                                $
                                3,258,806
  F-16
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 NOTE
5 – INVENTORIES
 
 Inventories
consisted of the following raw material, work-in-process and
supplies:
 
 March 31,
                              2010
                            
                            
                            December 31,
                              2009(Unaudited)Raw
      material
                            
                            $
                            237,609
                            
                            
                            $
                            246,798Work-in-process
                            
                            
                            1,922,420
                            
                            
                            
                            5,101,685Low
      cost consumption supplies
                            
                            
                            57,383
                            
                            
                            
                            57,383Total
                            
                            $
                            2,217,412
                            
                            
                            $
                            5,405,866
 
 For the
three months ended March 31, 2010 and 2009, no provision for obsolete
inventories was recorded by the Company.
 
 NOTE
6 – ADVANCES FOR INVENTORY PURCHASES
 
 The
Company makes advances to certain suppliers for inventory purchases and
subcontracting fees. Most of the Company’s vendors require advances to them
as a guarantee that the Company will receive their purchase on a timely
basis. The advances on inventory purchases amounted to $84,358,237 and
$34,056,231 as of March 31, 2010 and December 31, 2009,
respectively.
 
 NOTE 7 –
PLANT AND EQUIPMENT
 
 The
following is a summary of plant and equipment at March 31, 2010 and December 31,
2009:
 
 March31,
                                2010
                              
                              
                              December31,
                                2009(Unaudited)Buildings
                              
                              $
                              3,936,775
                              
                              
                              $
                              3,936,775Equipment
      and machinery
                              
                              
                              9,508,465
                              
                              
                              
                              9,508,465Motor
      vehicles
                              
                              
                              1,736,731
                              
                              
                              
                              1,647,515Furniture
      and office equipment
                              
                              
                              471,984
                              
                              
                              
                              447,229Construction
      in progress
                              
                              
                              735,659
                              
                              
                              
                              6,768Total
                              
                              
                              16,389,614
                              
                              
                              
                              15,546,752Less:
      accumulated depreciation
                              
                              
                              3,508,207
                              
                              
                              
                              3,281,363Plant
      and equipment, net
                              
                              $
                              12,881,407
                              
                              
                              $
                              12,265,389
  Depreciation
expense for the three months ended March 31, 2010 and 2009 was $226,768 and
$256,334, respectively. For the three months ended March 31, 2010 and 2009, no
interest was capitalized into construction in progress.
 
 NOTE
8 – INVESTMENT IN UNCONSOLIDATED AFFILIATE
  On March
9, 2010, the Company invested $440,100 (RMB 3,000,000) for 30% noncontrolling
interests in DEEC, for which the Company neither has substantive control over
the ventures nor is the primary beneficiary. Therefore, the Company does not
consolidate the results of operations and financial position of these entities,
but rather accounts for its noncontrolling ownership interest as equity method
investments.
  The
following tables represent summarized combined financial information of the
Company’s unconsolidated affiliates accounted for under the equity
method:
 
 ThreeMonthsEndedMarch31,2010
                                
                                
                                2009(Unaudited)
                                
                                
                                (Unaudited)Net
      revenue
                                
                                $
                                -
                                
                                
                                $
                                n/aIncome
      from operations
                                
                                $
                                -
                                
                                
                                $
                                n/aNet
      income
                                
                                $
                                -
                                
                                
                                $
                                n/a
 
  F-17
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 March 31,
                                
                                
                                December 31,2010
                                
                                
                                2009(Unaudited)
                                
                                
                                (Unaudited)Current
      assets
                                
                                $
                                1,398,661
                                
                                
                                $
                                n/aLong-term
      assets
                                
                                $
                                68,339
                                
                                
                                $
                                n/aCurrent
      liabilities
                                
                                $
                                -
                                
                                
                                $
                                n/aLong-term
      liabilities
                                
                                $
                                -
                                
                                
                                $
                                n/a
 
 NOTE
9 – ADVANCES ON NON CURRENT ASSETS
 
 Advances to
Suppliers
 
 The
Company makes advances to certain suppliers for construction
projects.  The advances on equipment and construction were
$5,668,473 and $5,550,966 as of March 31, 2010 and December 31, 2009,
respectively.
  Prepayment for Land Use
Right
 
 As of
March 31, 2010 and December 31, 2009, the Company prepaid $8,389,122 and
$799,965, respectively, for purchase of land use rights, but had not
obtained the title to the land use right. Therefore, as of March 31, 2010 and
December 31, 2009, the amount has been recorded as a prepayment for land use
right in other assets.
 
 Long term prepaid
expenses
 
 As of
March 31, 2010 and December 31, 2009, the Company prepaid $199,863 and
$219,447 for more than one year expenses. The Company amortizes the
prepayment based on the terms, for the three months ended March 31, 2010 and
2009, accumulated amortization expense for long term prepayment amounted to
$19,577 and $3,663, respectively.
 
 For the
period ended March 31, amortization schedule for the following period amounted
to:
 2011
                    
                    
                    78,3382012
                    
                    
                    78,3382013
                    
                    
                    30,5872014
                    
                    
                    12,600Thereafter
                    
                    
                    -Total
                    
                    
                    199,863
 
 NOTE
10 – INTANGIBLE ASSETS
 
 The
following is a summary of intangible assets:
 
 March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(Unaudited)Land
      use rights
                    
                    $
                    651,136
                    
                    
                    $
                    651,136Patents
      and licenses
                    
                    
                    733,500
                    
                    
                    
                    733,500Total
      intangible assets
                    
                    
                    1,384,636
                    
                    
                    
                    1,384,636Less:
      accumulated amortization
                    
                    
                    252,877
                    
                    
                    
                    239,840Total
      intangible assets, net
                    
                    $
                    1,131,759
                    
                    
                    $
                    1,144,796
 
 Amortization
expense for the three months ended March 31, 2010 and 2009, amounted to
$13,033 and $16,682, respectively.
  F-18
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 NOTE
11 – BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
 
 Billings
in excess of costs and estimated earnings on uncompleted contracts represent
amounts billed in excess of revenues recognized pursuant to the
percentage-of-completion method used to recognize contract
revenue.  As of March 31, 2010 and December 31, 2009, the Company had
$5,499,543 and $0 of cost and estimated earnings in excess of billings,
respectively.
  Billings
in excess of costs and estimated earnings consist of the following:
  March 31,
                                    2010
                                  
                                  
                                  December31,
                                    2009(Unaudited)Progress
      billings
                                  
                                  $
                                  14,017,638
                                  
                                  
                                  $
                                  -Less:
      cost incurred on uncompleted contracts
                                  
                                  
                                  (4,266,342
                                  )
                                  
                                  
                                  -Less:
      estimated earnings
                                  
                                  
                                  (4,251,753
                                  )
                                  
                                  
                                  -Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                                  
                                  $
                                  5,499,543
                                  
                                  
                                  $
                                  -
 
 NOTE
12 – SHORT TERM BANK LOANS
 
 Short
term bank loans consisted of the following:
 
 March 31,
                              
                              
                              December 31,2010
                              
                              
                              2009(Unaudited)Due
      to Shanghai Pudong Development Bank,  interest at 5.31%, due in
      November 2010, secured by certain equipments
                              
                              $
                              1,467,000
                              
                              
                              $
                              1,467,000Due
      to Shanghai Pudong Development Bank  interest at 5.841%, due in
      February 2011, secured by certain equipments and guaranteed by
      shareholder
                              
                              
                              2,200,500
                              
                              
                              
                              -Total
      short term bank loans
                              
                              $
                              3,667,500
                              
                              
                              $
                              1,467,000
 
 Long term
bank loans consisted of the following:
 
 March 31,
                              
                              
                              December 31,2010
                              
                              
                              2009(Unaudited)Due
      to Shanghai Pudong Development Bank,  interest at 6.912%, due in
      installments from March 2012 to March 2014, secured by manufacturing
      plants and office buildings
                              
                              $
                              8,068,500
                              
                              
                              $
                              -Total
      long term bank loans
                              
                              $
                              8,068,500
                              
                              
                              $
                              -
 
 Total
interest expense on the bank loans for the three months ended March 31, 2010 and
2009, amounted to $19,468 and $115,417, respectively.
 
 The above
loans are secured by the Company's equipments, buildings and land use rights
located within PRC, with carrying net value as follows:
  March31,
                                2010
                              
                              
                              December31,
                                2009(Unaudited)Equipment
      & Machinery in Dalian, China
                              
                              $
                              8,373,413
                              
                              
                              $
                              6,965,057Buildings
      in Dalian, China
                              
                              
                              3,390,031
                              
                              
                              
                              -Land
      use rights in Dalian, China
                              
                              
                              563,297
                              
                              
                              
                              -Total
      assets pledged as collateral for bank loans
                              
                              $
                              12,326,741
                              
                              
                              $
                              6,965,057
  F-19
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 NOTE
13 –TAXES PAYABLE
  Taxes
Payable consisted of the following at:
 March 31,
                                
                                
                                December 31,2010
                                
                                
                                2009(Unaudited)Income
      taxes payable
                                
                                $
                                2,191,261
                                
                                
                                $
                                716,795VAT
      payable
                                
                                
                                5,850,671
                                
                                
                                
                                3,260,613Other
      miscellaneous taxes
                                
                                
                                6,553
                                
                                
                                
                                26,301Total
      taxes payable
                                
                                $
                                8,048,485
                                
                                
                                $
                                4,003,709
 
 NOTE
14 – RELATED PARTY TRANSACTIONS
 
 Loan toshareholders
 
 On
December 7, 2009, the Company provided a loan to the major shareholders in the
amount of $3.5 million.  The loan is short term and due on May 10,
2010, which has an annual interest rate of 5.25%. Principal and interest
are due in full on maturity date. On May 7, 2010, the Company received principal
of $3,200,000 from the shareholders for the payment of the loan. On May 10,
2010, the remaining principle and interest was paid to the Company for the
amount of $377,527.
 
 As of
March 31, 2010 and December 31, 2009, the Company’s major shareholder advanced
$425,252 and $494,614, respectively, to the Company for operational purposes.
These advances are unsecured, noninterest bearing and payable on
demand.
 
 NOTE
15 – REDEEMABLE COMMON STOCK
 
 On
October 5, 2007, the Company received $24,480,319 (or $21,253,722 net proceeds
after deducting the offering expenses) from a group of accredited investors and
issued 5,464,357 shares of restricted common stock at $4.48 per share. The
Securities Purchase Agreement contained a transferrable provision such that if
any governmental agency in the PRC takes action that adversely affects the
Restructuring Agreements or the Share Exchange Agreement entered into in
connection with the Securities Purchase Agreement and the Company doesn’t
mitigate the adverse effect to the investors’ reasonable satisfaction within 60
days of the PRC action, then the Company is required to pay liquidated damages
in an amount equal to the initial investment without interest and the
shareholder must return the shares acquired under the Securities Purchase
Agreement. Consequently, the total amount of the gross proceeds has been
excluded from permanent equity and recorded as redeemable common stock in
accordance with Rule 5-02.28 of Regulation S-X and Section 211 of the
Codification of Financial Reporting Policies. Although there is no fixed
redemption requirement in any of the next five years, the entire amount of
$24,480,319 could become redeemable in any of the next five years. These shares
are included as outstanding common stock for purposes of earnings per
share.
  NOTE
16 – COMMON STOCK AND OTHER SHAREHOLDERS’ EQUITY
 
 Statutory
Reserves
 
 The
Company is required to make appropriations to the statutory surplus reserve
based on the after-tax net income determined in accordance with the laws and
regulations of the PRC.  Prior to January 1, 2006 the appropriation to
the statutory surplus reserve should be at least 10% of the after tax
net income determined in accordance with the laws and regulations of the
PRC until the reserve is equal to 50% of the entities’ registered
capital.  Appropriations to the statutory public welfare fund are at
5% to 10% of the after tax net income determined by the Board of
Directors.  Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 % of net income after tax
per annum, such contributions not to exceed 50% of the respective company’s
registered capital.  As of March 31, 2010 and December 31, 2009, the
remaining reserve needed to fulfill the 50% registered capital requirement
totaled $86.2 million and $84.5 million, respectively.
 
 The
statutory reserve funds are restricted for use to offset against prior period
losses, expansion of production and operation, or for the increase in the
registered capital of the Company. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in
liquidation.
  F-20
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Common Stock and
Warrants
 
 Issuance of Common
Stock
 
 On
December 7, 2009, the Company closed sales of 3,252,032 shares of its common
stock; Series A Common Stock Warrants, which are exercisable within six months
of the closing date; to purchase up to an aggregate of 1,138,211 shares of
Common Stock at an exercise price of $34.50 per Warrant (the “2009 Series A
Warrants”); and Series B Common Stock Warrants, which are exercisable beginning
on the six month one day anniversary of the closing date until the one year one
day anniversary of the closing date, to purchase up to an aggregate of 1,138,211
shares of Common Stock at an exercise price of $34.50 per Warrant (the “2009
Series B Warrants”).  These warrants were treated as a derivative
liability because the strike price of the warrants is denominated in the
U.S. dollar, a currency other than the Company’s functional currency, the
Chinese Renminbi.  As a result, the warrants are not considered
indexed to the Company’s own stock, and as such, all future changes in the fair
value of these warrants will be recognized currently in earnings until such time
as the warrants are exercised or expired. The purchase price for each
common share together with Series A Warrants exercisable into 0.35 of a common
share and Series B Warrants exercisable into 0.35 of a common share is $30.75,
and the gross proceeds of the sale were $99,999,984.  The following
table represents the allocation of the fair value of warrants and also common
stock on issuance date:
 
 Total
      Proceeds
                        
                        $
                        99,999,984Direct
      expenses
                        
                        
                        (5,144,531
                        )Fair
      value of warrants
                        
                        
                        (18,743,862
                        )Allocation
      to common stock and APIC
                        
                        $
                        76,111,591
 
 On
October 5, 2007, in connection with the Private Financing and pursuant to the
Engagement Agreement Providing for Investment Banking Services, by and between
the Company and a placement agent for the Private Financing, as amended, the
placement agent received the following compensation: (i) $80,000 cash as an
engagement and documentation fee; (ii) $1,750,000 as a placement
commission; (iii) 875,000 shares of Common Stock, and (iv) warrants to purchase
382,500 shares of Common Stock at an exercise price of $5.376 per share,
exercisable within 6 years of the date of issuance. The exercise price of the
warrants is subject to adjustment under certain circumstances and the warrants
permit cashless exercise by the holders. This expense is recorded as additional
paid-in capital in the accompanying financial statements.
 
 The
warrants issued to the placement agent, initially qualify as permanent equity,
the value of such warrants has created offsetting debit and credit entries to
additional paid-in capital.
 
 Effective
January 1, 2009, 382,500 warrants previously treated as equity pursuant to
the derivative treatment exemption are no longer afforded equity treatment
because the strike price of the warrants is denominated in the U.S. dollar, a
currency other than the Company’s functional currency, the Chinese
Renminbi.  As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
 
 In
connection with the Private Financing, 250,000 shares of the Company’s common
stock were issued to a consultant for advisory services. This expense is
recorded as additional paid-in capital in the accompanying financial
statements.
 
 A
discussion of the valuation techniques used to measure fair value for the
warrant liabilities listed above and activity for these liabilities for the
three months ended March 31, 2010 is provided elsewhere in this footnote and in
Note 2.
 
 Warrants
 
 Following
is a summary of the warrant activity:
 Number of
                      SharesOutstanding
      as of January 1, 2009
                    
                    
                    382,500Granted
                    
                    
                    -Forfeited
                    
                    
                    -Exercised
                    
                    
                    -Outstanding
      as of March31, 2009 (Unaudited)
                    
                    
                    382,500Granted
                    
                    
                    2,276,422Forfeited
                    
                    
                    -Exercised
                    
                    
                    (382,500
                    )Outstanding
      as of December 31, 2009
                    
                    
                    2,276,422Granted
                    
                    
                    -Forfeited
                    
                    
                    -Exercised
                    
                    
                    -Outstanding
      as of March 31, 2010 (Unaudited)
                    
                    
                    2,276,422
  F-21
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Following
is a summary of the status of warrants outstanding at March 31, 2010
(Unaudited):
 
 Outstanding Warrants
                                              
                                              Exercisable WarrantsExercise
                                                Price
                                              
                                              Number of
                                                Shares
                                              
                                              Average
                                                Remaining
                                                Contractual
                                                Life
                                              
                                              Average
                                                Exercise
                                                Price
                                              
                                              
                                              Number of
                                                Shares
                                              
                                              Average
                                                Remaining
                                                Contractual
                                                Life$
                                              34.50
                                              
                                              
                                              2,276,422
                                              
                                              0.43
      years
                                              
                                              $
                                              34.50
                                              
                                              
                                              
                                              1,138,211
                                              
                                              0.19
      yearsTotal
                                              
                                              
                                              2,276,422
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,138,211
 
 Stock
Options
 
 On June
30, 2009, pursuant to an Employment Agreement, the Company granted to Yi (Jenny)
Liu, the Chief Financial Officer, a non-qualified stock option to purchase
50,000 shares of its Common Stock at an exercise price of $6.15 per share,
vesting in 3 equal annual installments beginning on June 30, 2010, with a
term life of five years.
 
 The fair
values of stock options granted to the executive were estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
  Expected
                                            
                                            
                                            Expected
                                            
                                            
                                            Dividend
                                            
                                            
                                            Risk Free
                                            
                                            
                                            Grant DateLife
                                            
                                            
                                            Volatility
                                            
                                            
                                            Yield
                                            
                                            
                                            Interest Rate
                                            
                                            
                                            Fair ValueExecutives
                                            
                                            
                                            3.3
      yrs
                                            
                                            
                                            
                                            121.7
                                            %
                                            
                                            
                                            0
                                            %
                                            
                                            
                                            1.64
                                            %
                                            
                                            $
                                            9.80
 
 Volatility:
In light of the Company’s thin stock trading history, expected volatility is
based on historical stock pricing data (adjusting for stock splits and
dividends) of six publicly traded peer companies and the Company’s own
data.  The Company-specific volatility is computed annually by taking
the base-10 logarithm of each daily stock closing price divided by the previous
stock closing price (adjusted for stock splits and dividends).  The
logarithm smoothes the daily results so that percentage differences are computed
and tailed.  Each annual volatility calculation is weighted along with
the other (non-excluded) annual volatility result to produce the average
historical volatility for the selected period.    The
Company believes this method produces an estimate that is representative of the
Company’s expectations of future volatility over the expected term of these
warrants.
 
 Dividend
Yield: The expected dividend yield is zero. The Company has not paid a cash
dividend and does not anticipate paying cash dividends in the foreseeable
future.
 
 Risk Free
Rate: Risk-free interest rate of 1.64% was used. The risk-free interest rate was
based on U.S. Treasury yields with a remaining term that corresponded to the
expected term of the option calculated on the granted date.
 
 Expected
Life: Because the Company has no historical share option exercise experience to
estimate future exercise patterns, the expected life was determined using the
simplified method as these awards meet the definition of "plain-vanilla" options
under the rules prescribed by GAAP.
 
 Stock
compensation expense is recognized based on awards expected to vest. There were
no estimated forfeitures as the Company has a short history of issuing options.
GAAP requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates.
 
 The
50,000 options granted in 2009 had fair value of approximately $397,222. The
Company recognized $19,496 compensation expense in general and administrative
expenses for the three months ended March 31, 2010.
 
 As of
March 31, 2010, the total compensation cost related to stock options not yet
recognized was $339,301 and will be recognized over the weighted average life of
3 years.
  F-22
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 The
following is a summary of the stock options activity:
  Number of
                                      Options
                                      Outstanding
                                    
                                    
                                    Weighted-
                                      Average
                                      Exercise
                                      Price
                                    
                                    
                                    Aggregate
                                      Intrinsic
                                      ValueBalance, January
      1, 2009
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Granted
                                    
                                    
                                    -Forfeited
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -Balance, March
      31, 2009 (Unaudited)
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Granted
                                    
                                    
                                    50,000
                                    
                                    
                                    
                                    6.15
                                    
                                    
                                    
                                    182,500Forfeited
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -Balance,
      December 31, 2009
                                    
                                    
                                    50,000
                                    
                                    
                                    $
                                    6.15
                                    
                                    
                                    $
                                    1,075,000Granted
                                    
                                    
                                    -Forfeited
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -Balance,
      March 31, 2010 (Unaudited)
                                    
                                    
                                    50,000
                                    
                                    
                                    $
                                    6.15
                                    
                                    
                                    $
                                    879,000
 
 Following
is a summary of the status of options outstanding at March 31, 2010
(Unaudited):
  Outstanding Options
                                                      
                                                      Exercisable OptionsExercise
                                                        Price
                                                      
                                                      Number
                                                      
                                                      Average
                                                        Remaining
                                                        Contractual Life
                                                      
                                                      Average
                                                        Exercise
                                                        Price
                                                      
                                                      
                                                      Number
                                                      
                                                      
                                                      Average
                                                        Remaining
                                                        Contractual
                                                        Life$
                                                      6.15
                                                      
                                                      
                                                      50,000
                                                      
                                                      4.25 yrs
                                                      
                                                      
                                                      N/A
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Total
                                                      
                                                      
                                                      50,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
 
 NOTE
17 - EARNINGS PER SHARE
 
 The
following sets forth the calculation of earnings per share for three months
ended March 31, 2010 and 2009 (Unaudited):
  2010
                              
                              
                              2009Net
      income
                              
                              $
                              18,656,506
                              
                              
                              $
                              12,474,916Adjustments
      for diluted EPS calculation
                              
                              
                              -
                              
                              
                              
                              -Adjusted
      net income for calculating EPS-diluted
                              
                              $
                              18,656,506
                              
                              
                              $
                              12,474,916Weighted
      average number of common stock – Basic
                              
                              
                              28,603,321
                              
                              
                              
                              25,040,000Effect
      of dilutive securities:Warrants
                              
                              
                              -
                              
                              
                              
                              -Weighted
      average number of common stock – Diluted
                              
                              
                              28,603,321
                              
                              
                              
                              25,040,000Earnings
      per share:Basic
                              
                              $
                              0.65
                              
                              
                              $
                              0.50Diluted
                              
                              $
                              0.65
                              
                              
                              $
                              0.50
  F-23
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 For the
three months ended March 31, 2010, a total of 2,276,422 warrants were excluded
from the diluted earnings per share due to its anti-dilutive effect, and 50,000
options were excluded from the diluted earnings per share since none was vested
as of March 31, 2010.
 
 NOTE
18 – COMMITMENTS AND CONTINGENCIES
 
 Employee
Benefits
 
 The full
time employees of the Company are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and pension benefits
through a Chinese government mandated multi-employer defined contribution plan.
The Company is required to accrue for those benefits based on certain
percentages of the employees’ salaries and make contributions to the plans
out of the amounts accrued for medical and pension benefits.  The
total provisions and contributions made for such employee benefits were $39,947
and $26,621 for the three months ended March 31, 2010 and 2009,
respectively. The Chinese government is responsible for the medical
benefits and the pension liability to be paid to these employees.
 
 Lease
Commitments
 
 The
Company recognizes lease expense on a straight-line basis over the term of the
lease in accordance to FASB’s accounting standard regarding leases. The Company
entered into vehicle leases and property leases. The minimum future payment for
leases is as follows:
 
 Year
      ending March 31, 2011
                      
                      $
                      13,260Year
      ending March 31, 2012
                      
                      
                      6,660Year
      ending March 31, 2013
                      
                      
                      6,660Year
      ending March 31, 2014
                      
                      
                      2,220Thereafter
                      
                      
                      -Total
                      
                      $
                      28,800
 
 Purchase Commitments
 
 As of
March 31, 2010 and December 31, 2009, the Company had firm purchase commitments
for capital projects in progress of $93 million and $101 million,
respectively.
 
 Register Capital
Commitments
 
 In
December 2009, RINO increased its investment to Dalian Innomind from
$20 million to $80 million, Dalian Innomind received $20 million
on December 18, 2009, the remaining $40 million is to be paid by RINO in
two years from December 18, 2009.
 
 In
November 2009, RINO founded Dalian Investment with registered capital of
$98 million. As of March 31, 2010, Dalian Investment received $70 million;
the remaining $ 28 million is to be paid by RINO in two years from November
2009.
 
 NOTE 19–SUBSEQUENT EVENT
 
 On May 7,
2010, the Company received principal of $3,200,000 from shareholders
for the repayment of a loan. On May 10, 2010, the remaining principal and
interest was paid to the Company in the amount of $377,527.
  The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions.
  F-24




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





Disclaimer
Regarding Forward-looking Statements





Certain
statements made in this report, and other written or oral statements made by or
on behalf of RINO International Corporation and its direct and indirect
subsidiaries and controlled affiliates (collectively, the “Company”), may
constitute “forward-looking statements” under the Private Securities Litigation
Reform Act of 1995, which represent the expectations or beliefs of the Company.
Such “forward-looking statements” include, but are not limited to, statements
concerning the operations, performance, financial condition and growth of the
Company. For this purpose, any statements contained in this report that are not
statements of historical fact may be deemed forward-looking statements. Without
limiting the generality of the foregoing, when used in this report, the word
“believes,” “expects,” “estimates,” “intends,” “will,” “may,” “anticipate,”
“could,” “should,” “can,” or “continue” or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Examples of such statements in this report include descriptions of
our plans and strategies with respect to developing certain market
opportunities, our overall business plan, our plans to develop additional
strategic partnerships, our intention to develop our products and platform
technologies, our continuing growth and our ability to contain our operating
expenses. All forward-looking statements are subject to certain risks and
uncertainties that could cause actual events to differ materially from those
projected, including those described under Item 1.A. of Part I of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009, and matters
described in this report generally. In light of these risks and uncertainties,
there can be no assurance that the forward-looking statements contained in this
filing will in fact occur. You should not place undue reliance on these
forward-looking statements.





The
following is management’s discussion and analysis of certain significant factors
that have affected aspects of our financial position and results of operations
during the periods included in the accompanying unaudited financial statements.
You should read this in conjunction with discussion under “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations” and
the audited consolidated financial statements and accompanying notes for the
year ended December 31, 2009 included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 and the unaudited consolidated financial
statements and accompanying notes and the other financial information appearing
in Item 1 of this report and elsewhere in this report.





Except
as otherwise specifically stated or unless the context otherwise requires, the
"Company", "we," "us," "our," and the "Registrant" refer to, collectively, (i)
RINO International Corporation (formerly Jade Mountain Corporation); (ii)
Innomind Group Limited (“Innomind”), a wholly-owned subsidiary of RINO
International Corporation organized under the laws of the British Virgin
Islands; (iii) Rino Investment Co., Ltd., a wholly-owned subsidiary of RINO
International Corporation under the laws of the People’s Republic of China (the
“PRC”); (iv) Dalian Innomind Environment Engineering Co., Ltd. (“Dalian
Innomind”), a wholly-owned subsidiary of Innomind organized under the laws of
PRC; (v) Dalian RINO Heavy Industries Co., Ltd. (“RINO Heavy Industries”), a
wholly-owned subsidiary of RINO Investment, organized under the PRC laws; (vi)
Dalian RINO Environment Engineering Science and Technology Co., Ltd., a
contractually controlled affiliate of Dalian Innomind organized under the laws
of the PRC (“Dalian Rino”); (vii) Dalian Rino’s wholly owned subsidiaries,
Dalian Rino Environmental Engineering Project Design Co., Ltd., organized under
the PRC laws (“Dalian Rino Design”); (viii) Dalian Rino Environmental
Construction & Installation Project Co., Ltd., organized under the PRC laws
(“Dalian Rino Installation”) and (ix) Rino Technology Corporation, a
wholly-owned subsidiary of Dalian Rino organized under the laws of the state of
Nevada (“Rino Technology”).





Company
Overview





We are
engaged in designing, developing, manufacturing, installing and servicing
proprietary and patented environmental protection and energy saving equipment
for large, state-owned iron and steel industry manufacturers in the People’s
Republic of China. Our business operations are conducted throughout
China.





On July
13, 2009, our common stock, par value of $0.0001 per share (“Common Stock”),
started trading under the symbol "RINO" on the Nasdaq Global
Market.





Following
the expansion of China’s economy and growth in the size of its manufacturing
sectors such as its iron and steel industry, the total volumes of waterborne and
airborne industrial waste and pollution have grown, and consequently, China’s
industries face increasingly stringent governmental mandates to reduce or
eliminate sulphur dioxide emissions and untreated wastewater discharges. Failure
to meet mandated emission and discharge standards can result in financial
penalties. On July 31, 2009, the Chinese Ministry of Industry and Information
Technology published a formal plan for the implementation of Flue Gas
Desulphurization systems in the sintering plants of Chinese steel companies,
which is a specific roadmap to accelerate the number of desulphurization
projects completed throughout the PRC. During the three months ended March 31,
2010, our revenues reached $47.9 million, representing an increase of 34.4% from
the total revenues of $35.6 million for the same period ended March 31, 2009.
Our gross profit increased from $16.0 million for the three months ended March
31, 2009 to $16.7 million for the same period in 2010, representing an increase
of 4.7%. Our income from operations decreased to $9.9 million for the three
months ended March 31, 2010 from $12.6 million for the same period ended March
31, 2009, representing a decrease of 21.6%. Our net income for the three months
period ended March 31, 2010 grew to $18.7 million from $12.5 million for the
same period ended March 31, 2009, representing an increase of
49.6%.




3




Principal
Products




We have
three principal products and product lines: the “Lamella Inclined Tube Settler
Waste Water Treatment System,” the “Flue Gas Desulphurization System,” and the
“High Temperature Dynamic Anti-Oxidation System for Hot Rolled Steel.” In
addition, we also provide machining services for industrial
enterprises.





1) Lamella Inclined Tube
Settler Waste Water Treatment System





Our core
product, the Lamella Inclined Tube Settler Waste Water Treatment System (the
“Waste Water System”), is a highly efficient wastewater treatment system that
incorporates our proprietary and patented “Lamella Inclined Tube Settler”
technology. We believe that the Waste Water System is among the most
technologically advanced wastewater treatment systems presently in use in
China’s iron and steel industry. It includes an industrial wastewater treatment
system, highly efficient solid and liquid abstraction dewatering equipment and
coal gas dust removal and cleaning equipment. The technology has received
numerous regional and national design awards, and has been successfully
installed and used at some of the largest steel mills in China, including Jinan
Iron & Steel Group Co., Ltd., Benxi Iron & Steel (Group) Co., Ltd.,
Handan Iron & Steel Group Co., Ltd., Tianjin Tiangang Group Co., Ltd.,
Shijiazhuang Iron & Steel Group Co., Ltd., Panzhihua Iron & Steel Group
Co., Ltd., Anyang Iron & Steel Group Co., Ltd., Nanchang Changli Steel Co.,
Ltd., Shaogang Steel Co., Ltd., Linggang Steel Co., Ltd. Weifang Steel Group
Co.,Ltd and Puyang Steel Co., Ltd.




Our
combination of proprietary system design and patented technology allows
wastewater to flow through the system in layers while at the same time settling
particulate matter without disturbing the water flow. Operating results of the
above Lamella Wastewater System installations show that our technology improves
the stability of the settling sedimentation, increases the available settling
area, shortens the settling distance for particles, reduces the settling time,
and results in particle removal efficiency rates of up to 99%. After treatment
with our technology and system, coal gas wastewater and wastewater containing
iron mineral powder can be reused and returned to the production process without
further treatment. This reduces the demand for industrial water for the
enterprises utilizing our technology, reduces the output of solid industrial
waste and improves the efficient use of resources.





Compared
with alternative inclined plate technology, the Lamella Wastewater Treatment
System has several important advantages as shown in the following
table:





Normal Inclined Plate Settling Pool
                  
                  Lamella Inclined Tube SettlerWater
      power staying time 30 minutes, surface load 3m3/m2·h,
      small hydraulic coefficient, short waterpower process (with short current
      in winter).
                  
                  Water
      power staying time 45 minutes with surface load 8m3/m2·h,
      large hydraulic coefficient, long water power process.One-time
      precipitation, is not fit for a wide range wave of floats, affected by the
      stability and effect of the water outlet.
                  
                  Three-time
      precipitation (with sludge abstraction collection system in every layer),
      anti-pump load, no interference between water inlet and sludge outlet,
      water outlet
stable.





Water
      inlet float content: SS3,000 ~ 5,000mg/L, water outlet float content:
      SS100 ~ 200 mg/L, low treatment efficiency.
              
              Water
      inlet float content: SS3,000 ~ 16,000mg/L water outlet float content: SS50
      ~ 80 mg/L, high treatment efficiency.Inclined
      plate, inclining angle 60 degree, small settling sedimentation
      area.
              
              Inclined
      plate, inclined tube inclining angle 45 degree, under the same volume
      condition, largely enlarge the settling sedimentation
  area.





Small
      sludge abstraction area, low sludge water abstraction efficiency, short
      life cycle of the sludge outlet, high and unstable water content of
      sludge, adds difficulty to the next sludge treatment
    process.
              
              With
      sludge water abstraction area and dust collection transmission device,
      long sludge outlet circle, special sludge disposal equipment sludge
      outlet, lower water content of sludge, convenient for new process to
      recycle.





The
      low carbon steel structures - such as pool surface frame - exposed to
      humidity and high temperature, easily corrode, which greatly reduces the
      life of equipment.
              
              Lamella
      Inclined Tube Settler system is enclosed, the high humidity of the tank
      will not cause corrosion of the equipment.Occupies
      large area - large footprint, strict requirement for
      placement.
              
              Occupying
      small area - small footprint - equipment can save over 30% area to treat
      same amount of water and is flexible for installation.Complicated
      system technique, complicated equipment configuration, high maintenance,
      inconvenient for use with automated control, often creates secondary
      pollution.
              
              Short
      technical process, simple equipment, low failure rate - high MTBF, easy
      maintenance, highly automated, low operational cost, closed-end
      circulating treatment, without secondary
  pollution.




4




2) Flue Gas Desulphurization
Systems





In China,
sulphur dioxide emitted from the sintering process of manufacturing iron and
steel is a major component of environmental pollution as a result of China’s
industrial expansion. Sintering is part of steel-making process; removing
sulphur dioxide from a steel mill’s hot flue gas emissions is, therefore, a
principal way of controlling acid rain. During this process, the sulphur content
is separated and emitted with flue gas while being heated.





We have
two principal desulphurization technologies: Circulating-Fluidized Bed-Flue Gas
Desulphurization System (“CFB-FGD System”) and Ammonia-based Desulphurization
system (the "DXT-FGD System").





CFB-FGD
System





The
CFB-FGD System is a highly effective system that removes sulphur dioxide from
flue gas emissions generated by the sintering process in the production of iron
and steel (a process in which sulphur and other impurities are removed from iron
ore by heating, without melting, pulverized iron ore), so that the discharge
will meet all relevant China’s air pollution standards. Without such treatment,
flue gasses from sintering that contain a high content of sulphur dioxide will
react with atmospheric water and oxygen and therefore produce sulphuric acid
that precipitates as “acid rain.” As illustrated below, the CFB-FGD System is
comprised of a desulphurization agent inlet system, a circulating fluidized bed
desulphurization reactor, a dust removal system, a desulphurization dust removal
treatment system, a desulphurization wind pump system, a monitoring system, an
electrical control system and a smoke flue system.











The
CFB-FGD System utilizes proprietary technology jointly developed by Dalian RINO
and the Chinese Academy of Sciences. We have the right to acquire certain
related technology from the Chinese Academy of Sciences for RMB 1 million
pursuant to a technology transfer agreement dated May 18, 2007.





Compared
with other semi-dry desulphurization technologies, our proprietary technology
has the following advantages:


1.
            Our
      equipment has a smaller footprint;


2.
            Shorter
      circulation process and lower calcium sulphur
  ratio;


3.
            Lower
      cost of operating the system; and


4.
            Higher
      desulphurization rates.





In
addition, our desulphurization process does not generate wastewater. After the
treatment, sulphur and dust content in flue gas satisfy the national standard in
China. In addition, the costs for the manufacturing and installation of the
equipment are relatively affordable to the targeted iron and steel mills.





DXT-FGD
System




The DXT
System or the DXT Flue Gas Desulphurization process is to use ammonia (which is
extracted from the onsite coke oven gas process and stored in tanks) as
desulphurization agent, without lowering the flue gas temperature, which reacts
with SO2 to form an
"ammonium sulfate" solution. After removing the heavy metals and other harmful
substances, the ammonium sulfate can be used to produce agricultural fertilizers
that meet the Chinese national quality standards. In early September 2009, we
commenced installation of our new proprietary DXT System on a 280 m2 sinter
system at Hunan Lianyuan Iron and Steel Company. The total contract value is
approximately $10.3 million, with the installation and testing scheduled to be
completed during the second quarter of 2010. The revenue was recognized by the
end of April, 2010.




To
effectively utilize this synthetic ammonia extracted from coke oven gas, which
is later introduced to the flue gas via an injection grid, the DXT System
utilizes a component technology, the ammonia scrubbing technology, licensed from
Baosteel Group Co., Ltd. (“Baosteel”). Baosteel is China's largest steel
producer, which has been successfully applying this technology to its
manufacturing process for 10 years. The ammonia scrubbing technology was
initiated in the 1960s at the TVA fertilizer center in the U.S., and was later
commercialized by German, U.S. and Japanese companies in the 1970s'. However,
until now, technical issues have limited wide scale adoption of ammonia
scrubbing within the flue gas desulphurization process. These technical issues
include, among other things, the safe and proper transportation and storage of
ammonia, the effective filtration of heavy metals from the by-product ammonium
sulfate and the control of the escape of ammonia during the process, called
"ammonia slip".




5




After
four years of research and development, we have solved these technical problems
by introducing the DXT System, which to our knowledge, is the only truly
effective ammonia scrubbing desulphurization system in China's iron and steel
industry. We believe, that in addition to our commitment to remove up to 99% of
the harmful SO2, the DXT
System also utilizes less energy, decreases operating and maintenance costs, and
creates a sustainable revenue stream through the production of high quality
ammonia sulfate fertilizers for agricultural use. The Chinese government
strongly supports technologies which are both environmentally friendly and
economical. Our customers in the iron and steel manufacturing industry that use
the DXT System will be eligible for tax credits and government subsidies to
offset their production costs.




Economically,
ammonia scrubbing technology in China has considerable potential for the
following two reasons. One is the sufficient supply of wallboard gypsum in
China. Most scrubbing systems produce gypsum, which is sold to wallboard
companies. However, the potential amount of SO2 to be
scrubbed is far greater than that can be consumed by the wallboard industry.
Another reason is the attractive price of ammonium sulfate fertilizer.
Converting coke oven gas to fertilizer is obviously made more economical by the
available free ammonia. Presently, the purchase price of ammonia is less than
25% of that of ammonium sulfate. Sinter plants, especially those located close
to Chinese fertilizer markets, could very profitably produce ammonium sulfate
fertilizer.




3) High Temperature Dynamic
Anti-Oxidation System for Hot Rolled Steel





Our High
Temperature Anti-Oxidation System for Hot Rolled Steel (the “Anti-Oxidation
System”) is a set of products and a mechanized system that substantially reduces
oxidation-related output losses in the production process of continuous casting
and hot steel rolling. In the process of continuous casting and hot steel
rolling, oxidation-related output loss ranges from 2% to 5% on average, while
our Anti-Oxidation System reduces such loss by over 60%. In addition, oxidation
process in high-temperature steel production not only wastes of water and energy
but also generates pollutants. In the United States, Japan and Europe,
technology has been developed to solve this problem, but the costs of the
coating used in such technology and the inability of the equipment to be
utilized in high-temperature environments limit its application to the
manufacturing of specialty steel products such as stainless steel, silicon and
carbide steel products.





Our
Anti-Oxidation System is specifically designed to work effectively with hot
rolled steel products in a high-temperature environment. As illustrated below,
our system operates at significantly higher product temperatures than its
competitors, thereby increasing its general utility and its range of steel
product applications. We believe that in design and technology, our
Anti-Oxidation System is the only anti-oxidation process available for the iron
and steel industry (both in the PRC and internationally) that can be applied in
a high-temperature environment, and is a unique solution to the loss of steel
production output due to high-temperature oxidation, which has been a
long-standing problem in the world-wide iron and steel industry.











This
technology utilized in the Anti-Oxidation System is jointly developed by Dalian
RINO and the Chinese Academy of Sciences. In March 2006, Dalian Rino acquired
the technology from the Chinese Academy of Sciences under an agreement that
provides for the co-ownership of the intellectual property rights to the formula
for the anti-oxidizing paint used in the system and to the spray system for
applying the paint, co-ownership of any patents granted, and the transfer to
Dalian Rino of all commercialization rights.





As hot
rolled steel consists of approximately 90% of China’s steel production and 90%
of world-wide production, we believe that our technology has a far broader
market both in China and internationally than is the competing systems and
technologies.





From our
previous experience, each unit of our Anti-Oxidation System services one steel
line and costs approximately $1.4 million to be installed. The coating material
developed by Dalian Rino for the use with the anti-oxidation equipment can be
produced at relatively low cost at approximately $1,264 per ton, which may cover
approximately 1,180 tons of steel. Our coating material is usable in a
high-temperature environment and is easily applied in a uniform manner. Such
coating can be directly sprayed onto hot steel slabs at temperatures of
600°-1000° C, therefore saving substantial costs and energy, compared to all
other anti-oxidation equipment.




6




Contract Machining
Services





In
addition to the environmental remediation and protection systems above, since
late 2005 we have also being using our slight capacity surplus of mainframe
equipment processing to perform contract machining services for third-party
industrial enterprises.





The
specialized heavy machinery and equipment that we use to produce our Lamella
Wastewater System, Flue Gas Desulphurization Systems and Anti-Oxidation System
also provide us with a substantial capacity to undertake large, specialized and
high-precision parts machining. To this end, Dalian Rino establishes and
maintains strategic cooperation relationships with companies such as China First
Heavy Industries, with which we contracted to provide access to our heavy
machine tools, and Dongfang Electric Machinery, for which we provide hydropower
equipment parts.




We expect
that as sales of our own products increase, we will reduce or eliminate
contracting the use of our machines and equipment to third parties.





Customers





Our
customers are mainly large iron and steel companies in China. Generally, our
projects involve manufacturing, installation and testing of the equipment we
sell, and the contract prices vary with products and technical conditions. Due
to the size of our projects, we generally work on a limited number of projects
with a limited number of customers at any given period of time. Due to the size
of our projects and the length of time (on average in 6 - 8 months) to complete,
it appears that our revenues are generated from a limited number of customers at
any given period of time. However, we do not rely on a limited number of
customers for revenue generation over time, as our customers constantly change.
There are approximately 34 iron and steel companies in China of a size and with
annual production levels that make our products feasible for sale and
installation. In order to expand our sales, we plan to capture increasing
numbers of these potential customers for primary product sales and aggressively
cross-sell our products to each customer. During the years ended December 31,
2009 and 2008, no customer accounted for more than 10% of the Company’s total
sales. For the quarter ended March 31, 2010, our biggest customer and contract
so far, Shougang Jingtang Iron & Steel Co., Ltd., is accounted for 21.5% of
our total revenue. Sales to
the other three major customers, Baotou Iron and Steel Group, Sichuan Steel
Factory and Zhongtian Iron and Steel Co., Ltd., contributed approximately 12%,
11% and 10% of our revenue, respectively, in the first quarter of
2010.




All of
our products are customized to our customers’ specific requirements. We enter
into fixed-price equipment sales contracts with our customers that are performed
in engineering, manufacturing, construction and installation phases. Generally,
we fulfill our contractual obligations within twelve months.





Our
project-based revenue is affected directly by our customers’ capital budgets and
their needs to build new plants. Because most of our customers are
state-owned-enterprises, their budgeting decisions are influenced by the Chinese
central government’s environmental protection and pollution control policies,
which presently are favorable to our business and products. We believe that such
policy emphasis will continue in the foreseeable future. The cost of revenues
for our products includes direct materials, direct labor, and manufacturing
overhead, with a significant portion allocated to materials costs, which are
subject to fluctuation.





Competition





Lamella Wastewater
System





Prior to
Dalian Rino’s introduction of its Lamella Wastewater technology, the typical
industrial wastewater treatment technology used in China relied on an inclined
“plate settling pool” process which is still generally available in China. Our
advanced technology results in the following competitive advantages: large
hydraulic coefficient, long water power process, high treatment efficiency, etc.
We know of no comparable technology presently available in China, and we will
emphasize the foregoing cost and efficiency advantages.




Desulphurization
System





Presently
in China, major domestic companies engaged in the desulphurization equipment
market include: Beijing Guodian Longyuan Environmental Company, Zhejiang Feida
Company, Fujian Longjing Environmental Company, Wuhan Kaidi Electric Power
Company, Jiulong Electric Power Company, Qinghua Tongfang, University of Science
& Technology, Beijing ZHTD Technology, Talroad Company, Yonker Environmental
Protection Group, and China City Environment Protection Engineering. To the best
of our knowledge, among them, University of Science & Technology, Beijing
ZHTD Technology Co., Talroad Company, Yonker Environmental Protection Group,
China City Environment Protection Engineering Ltd. Co. and Fujian Longjing Co.,
Ltd have entered into the desulphurization market of the iron and steel
industry; and the rest are mainly servicing the desulphurization market of
China’s power industry. We consider Fujian Longjing as our major potential
competitor in the desulphurization market, but it is more focused on power
industry.





Major
international companies in the desulphurization market include: Voestalpine AG
and Mitsubishi, each of which has won one business contract in Taiyuan and Anhui
in China, respectively, and are currently in the installation and testing stage.
We believe we have strong competitive advantages over these international
players in terms of project investments and operating costs. We don’t believe
they will become our strong competitors in the near future.




7




Anti-Oxidation
System





We
believe our Anti-Oxidation System is unique and virtually without competition in
China. We know of no other entity that is engaged in developing or supplying
anti-oxidation technology that can operate on-line at the high temperatures (600
– 1000 °C) involved in hot rolled steel production, which represents 90% of
China’s steel output. A number of anti-oxidation technologies are available
internationally from suppliers that include: Advanced Technical Products
Company, ATP Metallurgical Coatings, Duffy Company, Condursal and Berktekt.
However, the high costs of the anti-oxidizing coatings these technologies rely
on, and especially their ineffectiveness at high temperatures, have limited
their market to specialty steels. Our Anti-Oxidation System is specifically
designed to apply coating on-line under high temperature condition. To our
knowledge, there is no other company in China that has similar technology.




Recent
Developments





Dalian
Environmental Exchange Center Co., Ltd.(“DEEC”)





DEEC was
established on March 9, 2010 under the laws of the PRC with registered capital
of RMB 10 million. On February 4, 2010, Dalian RINO contributed RMB 3 million
(or approximately $440,100) into DEEC, which accounts for 30% of the ownership
interest. DEEC’s business includes comprehensive trading of the technologies and
proprietary rights relating to environmental protection, energy saving, and
greenhouse gases (carbon dioxide). DEEC also provides management, technology and
services in environmental protection and energy saving related project
consulting, design planning, project evaluations and project
investments.





Currently,
there are only seven other similar exchange centers in China (located
respectively in Beijing, Shanghai, Tianjin, Hangzhou, Wuhan, Kunming and Hebei).
Despite the small amounts, we believe our investments in DEEC as
strategically meaningful, because: 1) we are the second largest shareholder of
DEEC, which will promote our reputation and credibility, therefore benefit our
marketing; 2) through the platform set by DEEC, we can have easier access to the
updated information and technology in the environmental protection industry,
which may assist us to be a competitive player in the international market; and
3) DEEC will provide our clients with useful energy-saving information and
profit earning opportunities, which will in turn drive up their demand for
environmental protection facilities, such as our products and
services.





CFB-FGD System Listed as
“2010 National Primary Technologies of Environmental
Protection”





On April
15, 2010, our Circulating-Fluidized Bed-Flue Gas Desulphurization System
(“CFB-FGD System”) is the only one of its comparables in its sector that is
listed as “2010 National Primary Technologies of Environmental Protection.” In
2009, there used to be two other similar technologies, together with CFB-FGD
that were listed in last year’s “2009 National Advanced Technologies of
Anti-Pollution Industry”. Both lists are released by the Association of
Environmental Protection Industry of China. And it evidences that our technology
is highly recognized by Chinese authorities, and that our advantages over the
competitors of our technology stand more prominent under stricter
regulations,.





BOT
Projects





Build-Operate-Transfer
(“BOT”) projects are highly encouraged by Chinese government in environmental
protection industry. For example, Ministry of Industry and Information (MII)
promotes the BOT projects in metallurgy industry by alleviating the financing
burden of such enterprises, so that they can make the best use of funds from
society. This will incur a higher entry barrier for smaller players which do not
have advanced technology and solid capital support. Also, commercial banks are
highly encouraged by the Chinese government to provide loans to BOT projects in
metallurgy industry. Several major banks in China have expressed their
willingness of providing loans to our BOT projects. Usually, BOT projects
require investments during the initial 4 years and start generating profits
thereafter.





On March
1, 2010, we secured an $8.1 million project loan for the construction phase
of our BOT project with Shougang Jingtang Iron & Steel Co., Ltd., which
covers the design, construction and installation of two Semi-Dry Flue Gas
Desulphurization ("FGD") units. The project loan, provided by Pudong Development
Bank of Shanghai, has a four-year term which commenced on March 1, 2010.
Interest on the outstanding principal of the loan is payable quarterly. The
interest rate, initially set at 6.9%, is based upon the Chinese Central Bank
Rate plus a fixed margin, and can be adjusted only once annually to reflect
changes in the underlying Chinese Central Bank Rate. Additionally, the loan
carries no prepayment penalties. Upon construction completion and final customer
approval, we will commence the 10-year operating contract of this BOT project.
The commencement date is expected to be in the fourth quarter of
2010.





Sludge Treatment
System





In
November 2008, Dalian University of Technology (“DUT”) successfully developed a
new sludge treatment system with our cooperation. This can be used to treat
sludge generated by the municipal wastewater, industrial sludge generated by
chemical and oil industry. We estimate this market is of approximately $28.8
billion in China. To treat the sludge, the first and most critical step is to
remove water from the sludge through a dehydration process, which will reduce
the quantity of the sludge and make it easier to be incinerated and vaporized.
Depending on the heavy metal content of the desiccated sludge, the final product
can be used as agricultural fertilizer if the heavy metal content is low, or,
after further processing, as a component in various construction materials if
the heavy metal content is high.




8




We
believe the current best sludge treatment technology available in the PRC market
(provided by third parties) can make the sludge moisture content reach 70%,
whereas our technology, using superheated steam to dehydrate sludge, can make
the moisture content at a 50 – 60% level. In addition, our system costs
approximately 30% less than imported ones and the costs of daily operation are
approximately 45% less. The Chinese government recently promulgated a new
regulation requiring at least 60% of municipal wastewater be treated by 2010,
the implementation of which is expected to significantly increase the amount of
sludge generated by the wastewater treatment process in China in the next
several years. We estimate the profits to process one ton of sludge generated by
municipal wastewater treatment process vary between $12 and $19, depending on
different steam sources. Currently, approximately 40 million tons of sludge is
being generated by the wastewater treatment process annually with a water
content of approximately 80%.





We
believe Northeastern China, where Dalian RINO is located, is the oil industry
center and this region generates approximately 2 million tons of oil sludge
annually. Although our new sludge treatment system has not yet generated any
revenue, we estimate the profit to process one ton of oil sludge averages $30.
DUT has made a patent application for this technology in China. Pursuant to our
agreement with DUT, we will pay an ongoing royalty of approximately 5% of sales
to DUT.





Appointment of New
CFO





Effective
April 27, 2010, the Board of Directors appointed Ben Wang to serve as the Chief
Financial Officer of the Company. The terms of Mr. Wang’s employment are still
under negotiation.





Loan
Repayment





On March
31, 2010, the Company entered into a loan agreement with Mr. Dejun Zou and Ms.
Jianping Qiu evidencing the terms of a loan made to them in a principal sum of
$3.5 million at an annual interest rate of 5.25% (the “Loan”, such agreement
hereinafter referred to as the “Loan Agreement”). Pursuant to the Loan
Agreement, Mr. Zou and Ms. Qiu also issued a secured promissory note to the
Company which is due on May 10, 2010 (the “Secured Promissory Note”). A copy of
the Loan Agreement with the Secured Promissory Note is filed herewith as Exhibit
10.1. On May 10, 2010, the Company received payment in full of all outstanding
principal and interest of the Loan, totaling approximately $3.577
million.





Use of Proceeds of December
2009 Financing





As of the
date of this Report, we intend that the proceeds that we received from a
registered direct offering in December 2009 will be used for the following
purposes:





Projects
                            
                            Amounts ($ millions)1
                            
                            Changxing
      Island Industrial Base
                            
                            
                            501.1
                            
                            Land
      Acquisition
                            
                            
                            41.2
                            
                            Building
      Construction
                            
                            
                            361.3
                            
                            Equipment
      Purchase
                            
                            
                            102
                            
                            Dalian
      Municipal Sludge Treatment
                            
                            
                            202.1
                            
                            Land
      Acquisition
                            
                            
                            3.52.2
                            
                            Building
      Construction
                            
                            
                            8.22.3
                            
                            Equipment
      Purchase
                            
                            
                            7.32.4
                            
                            Installation
                            
                            
                            0.93
                            
                            Dalian
      Innomind Projects
                            
                            
                            20Total
                            
                            
                            90





Changxing
Island Project





The
Changxing Island Industrial Project requires a total investment amount of around
$107 million. Aside from using $50 million of the proceeds that we raised from
the financing in December 2009, the remaining $57 million will be funded by
Chinese local commercial banks.





On March
2, 2010, Rino Heavy Industry entered into a Purchase Agreement for Land Use
Right of State-Owned Construction Site (the “Agreement”) with Dalian City Land
Resources and Housing Bureau of Liaoning Province of PRC (the “Seller”) for the
land located at Enterprise District, Lingang Industrial District, Changxing
Island, Dalian (the “Changxing Island Land”). The purchase price for the land
use right is in an aggregate amount of RMB 51,239,320 (or approximately
$7,516,808) (the “Purchase Price”). For more details of the Agreement, please
refer to our Annual Report on Form 10-K for the fiscal year ended December 31,
2009.





By the
end of March 31, 2010, we had already invested $8.5 million in the Changxin
Island Project, which includes infrastructure construction, land acquisition,
equipment prepayment and taxes. We started the construction of the Changxing
Island Project on April 20, 2010. Recently, the State Council of China named
Changxin Island Industrial Zone as “National Level Development Zone”, which may
attract more investments and then drive up the land value
thereafter.




9




Dalian
Innomind Working Capital





Approximately
$20 million will be used as working capital for the projects that will be
undertaken by Dalian Innomind. Dalian Innomind shares some of the projects with
Dalian RINO, such as Waste-water treatment projects and Flue-gas desulfurization
projects.




Backlog





Backlog,
defined as unfinished projects, as of March 31, 2010 was $110.5 million and
the breakdown associated with the backlog is set forth in the following table.
The Company expects that approximately 50% of this backlog amount will turn into
revenue by the end of the second quarter of 2010.





Product Segment
                  
                  Amount ($ millions)1.  Desulphurization
      Systems
                  
                  
                  67.72.  Wastewater
      Treatment
                  
                  
                  22.33.  Anti-oxidation
      Systems
                  
                  
                  1.84.  Municipal
      Sludge Treatment
                  
                  
                  18.7Total
                  
                  
                  110.5





Results
of Operations





Three
Months Ended March 31, 2010 and 2009.





Revenue





Total
revenue increased by $12.3 million to $47.9 million or an increase of 34.4% for
the three months ended March 31, 2010, as compared to the total revenue $35.6
million for the three months ended March 31, 2009. Revenue growth was driven by
demand for RINO’s major product lines as the Company continued to execute on new
and existing project installations. The breakdown of the revenue growth is as
follows:





For the three months ended March 31,2010
                
                
                2009Revenue(in thousands)
                
                
                As a % of total revenue
                
                
                Revenue(in thousands)
                
                
                As a % oftotal revenue
                
                
                % ofIncreaseWastewater treatment equipment
                
                $
                10,792
                
                
                
                22.5
                %
                
                
                7,238
                
                
                
                20.3
                %
                
                
                49.1
                %Flue
      gas desulphurization
                
                
                33,938
                
                
                
                70.9
                %
                
                
                25,704
                
                
                
                72.2
                %
                
                
                32.0
                %Anti-oxidation
      equipment and coatings
                
                
                3,037
                
                
                
                6.4
                %
                
                
                2,424
                
                
                
                6.8
                %
                
                
                25.3
                %Machining
      services
                
                
                92
                
                
                
                0.2
                %
                
                
                242
                
                
                
                0.7
                %
                
                
                (62.2
                )%Total
      revenue
                
                $
                47,859
                
                
                
                100
                %
                
                
                35,608
                
                
                
                100.0
                %




Demand
for our Lamella Wastewater System, increased 49.1% to $10.8 million for the
three months ended March 31, 2010, as compared with $7.2 million for the three
months ended March 31, 2009. Our increase in the waste water system sales was
mainly due to the increased demand from the iron and steel industry for our
solutions.





Our
Desulphurization System, which we introduced in late 2006, utilizes proprietary
technology we jointly developed with the Research Institute of the Chinese
Academy of Sciences, and can reduce flue gas sulphur dioxide levels by over 90%.
Our increase in the flue gas desulphurization sales were mainly due to the
increased demand from the iron and steel industry for the solutions, as our
Desulphurization System offers for airborne sulphur dioxide emissions. For the
three months ended March 31, 2010, we recorded revenues of $34.0 million, as
compared to revenues of $25.7 million for the three months ended March 31, 2009,
representing an increase of 32.0%.





Our
Anti-Oxidation System, which we introduced in January 2007, materially reduces
oxidation loss in the production of hot rolled steel plates. Anti-oxidation is a
long-sought solution in the iron and steel industry. We believe our
Anti-Oxidation System, including coatings and spraying equipment, is the only
online system that prevents or reduces oxidation without needing to first cool
down the steel slab. We anticipate that our Anti-Oxidation System will be an
important driver of revenue growth. For the three months ended March 31, 2010,
we recorded revenues of $3.0 million anti-oxidation equipment and related
coatings sales, as compared to revenues of $2.4 million for the three months
ended March 31, 2009, representing an increase of $ 0.6 million or 25.3%. The
increase in revenues largely reflects our increased demand as the value of our
anti-oxidation technology has been proven in commercial practice.




10




In
addition to the foregoing, we provide machining services to third parties,
utilizing our heavy machine tools’ idle time to generate contract manufacturing
revenue. The revenue generated from our machining services fluctuates based on
the level of our using our heavy machining equipment to produce more of our own
products rather than for third-party contract work. For the three months ended
March 31, 2010, revenues accounted for 0.2% of the total revenue as compared to
0.7 % for the corresponding period in 2009, reflecting a higher level of
equipment construction and reduced level of services provided to third
parties.





Cost
of Sales





The cost
of sales for the three months ended March 31, 2010 increased by $11.5 million to
$31.2 million from $19.7 million for the three months ended March 31, 2009,
representing an increase of 58.5%. The increase was largely due to increased
sales. As a percentage of sales, the cost of sales increased to 65.1% for the
three months ended March 31, 2010 compared to 55.2% for the same period in 2009.
The breakdown of the cost of sales is as follows:





For the three months ended March 31,2010
                    
                    
                    2009Total
                      (in thousands)
                    
                    
                    % of sales
                    
                    
                    Total
                      (in thousands)
                    
                    
                    % of salesRevenuesContracts
                    
                    $
                    47,768
                    
                    
                    
                    
                    
                    $
                    35,366Machining
      Services
                    
                    
                    92
                    
                    
                    
                    
                    
                    
                    242Cost
      of SalesContracts
                    
                    $
                    31,160
                    
                    
                    
                    65.2
                    %
                    
                    $
                    19,333
                    
                    
                    
                    54.7
                    %Machining
      Services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    324
                    
                    
                    
                    133.9
                    %Gross
      Profit
                    
                    $
                    16,700
                    
                    
                    
                    34.9
                    %
                    
                    $
                    15,951
                    
                    
                    
                    44.8
                    %




As a
result of the growth in our business, our capacity has directly impacted how we
operate and how much we can charge from period to period, depending on demand
level, production efficiency and location of the contracts. Average contract
price is at $10.1 million in 2010 as compared to $7.1 million in 2009.
Initially, we had to try to fully utilize our own manpower on the contracted
projects. However, when we reached our maximum production capacity, we have to
outsource some of our products to outside constructors. We have incurred total
of $5.8 million outsourcing expense for the three months ended March 31, 2010 as
compared to $0.9 million in the same period in 2009. In addition, the decrease
of the gross margin was also impacted by the increase in the market price of
steel. Increase in outsourcing has significantly increased our cost of sales and
resulted in decrease in gross margin.


Our gross
profit for the three months ended March 31, 2010 has increased by $ 0.7 million
or 4.7 % over the gross profit for the same period in 2009. The increase in
gross profit was mainly because we received and completed more projects in 2010,
due to the high demand of our products and the Chinese government regulation
which has significantly increased demand for our products. Our manufacturing
capacity directly impacts how we operate and can change from period to period,
depending on demand level, production efficiency and location of the contracts.
In periods of high demand, we tend to outsource and consequently results in
higher costs and lower profit margins. During the three months ended March 31,
2010, the 58.5% increase in cost of sales was directly attributable to
outsourcing that intends to complement our in-house production and to meet
project implementation timelines.





Operating
Expense





Operating
expenses for the three months ended March 31, 2010 increased to $6.8 million
from $3.4 million for the same period ended March 31, 2009, representing an
increase of 102.7%. The $3.4 million increased in our operating expenses
was mainly resulted from the increase of sales commission from $2.0 million in
2009 to $4.9 million. Our Company’s sales commission is usually determined based
on the execution of a signed contract. The Company agreed to pay 4-8% sales
commission upon the receipt of first payment from its customers. During the
first three months of 2010, we signed 15 new contracts. Based on the sales
commission agreements, we are obligated to pay sales commission on 13 projects
that were signed and first payments received in the first quarter of 2010
plus one contract that was signed in 2009 and the first payment was received in
the first quarter of 2010. The average contract price of these 13 projects is at
$8.5 million. As compared to the three months ended March 31, 2009, the Company
was obligated to pay sales commission on 6 projects at an average contract price
of $7.2 million. Overall, increase in commission expense was due to our business
expansion with more contracts signed in current period as compared to the same
period in 2009.


Other
Income, Net





Other
income, net, for three months ended March 31, 2010 increased $10.4 million to $
10.3 million from other expense, net, of $ 104,998 in 2009. The increase in
other income, net, was mainly due to the decrease of fair value on warrants we
issued, which is a direct result of stock price drop. The interest income
increased $0.03 million as a higher interest rate was earned on the cash
deposited by the Company in a bank, during the three months ended March 31,
2010. The interest expenses decreased by $0.1 million, because most of the loans
made to us were secured during March 2010, and interest was only accrued for
less than a month. On March 1, 2010, the Company secured an $8.1 million project
loan from Pudong Development Bank of Shanghai for "build" contract of its BOT
(Build-Operate-Transfer) desulphurization project with Shougang Jingtang Iron
& Steel Co., Ltd.




11




Liquidity
and Capital Resources





We have
historically funded our working capital needs from operations, advance payments
from customers, bank borrowings, and capital from shareholders. Our working
capital requirements are influenced by the level of our operations, the
numerical and dollar volume of our project contracts, the progress of our
contract execution, and the timing of accounts receivable
collections.





Cash
and Cash Equivalents





Our
liquidity position remains strong, supported by approximately $97.7 million cash
and cash equivalents as of March 31, 2010, representing a decrease of 27.4 % as
compared to $134.5 million as of December 31, 2009. Cash generated from
operations and financing activities fully supported the needs of our working
capital, and capital investments in 2009. We believe that our cash position is
adequate to meet future short-term and mid-term liquidity
requirements.





Cash used
in operations totaled $38.2 million in the three months ended March 31, 2010,
representing an decrease of 238.4 % as compared to $27.6 million cash provided
by operations in the same period of 2009. The major components of cash used in
operations are net earnings from operations, adjusted for non-cash income and
expenses and changes in working capital. Cash provided by operations decreased
by $65.7 million in the three months ended March 31, 2010 as compared to the
same period of 2009.





The
following tables present our net cash flows for the three months ended March 31,
2010 and for the same period ended March 31, 2009.





For the three months ended
                  March 31,US$ (in thousands)
                
                2010
                
                
                2009Cash
      (used in) provided by operating activities
                
                $
                (38,156
                )
                
                $
                27,570Cash
      used in investing activities
                
                $
                (8,967
                )
                
                $
                (21
                )Cash
      provided by financing activities
                
                $
                10,196
                
                
                $
                650




Cash
flow from operating activities





Net cash
used in operating activities was $38.2 million for the three months ended March
31, 2010 as compared to net cash provided by operations of $27.6 million in the
same period ended March 31, 2009. The major components of cash used by
operations were related to the increased operating net earnings, and offset by
non-cash gain of the fair value of the warrants, increase in cost and estimated
earnings in excess of progress billing for uncompleted projects and increase in
advances for inventory purchases.





Accounts
Receivable





Our
accounts receivable at March 31, 2010 decreased to $52.3 million from $57.8
million at December 31, 2009, representing a decrease of 9.6%. The decrease in
our accounts receivable was result of increased unbilled projects and also
reflects the Company’s effort to timely collect the accounts
receivable.





Costs
and estimated earnings in excess of billings on uncompleted
contracts





Costs and
estimated earnings in excess of billings on uncompleted contracts increased to
$24.4 million from $3.3 million on December 31, 2009. The increase was mainly
due to the fact that there were only two contracts uncompleted as of December
31, 2009. However, as of March 31, 2010, fifteen contracts remained open, which
resulted in increase of unbilled projects.





Advances
for inventory purchase





Advances
for inventory purchase are required to ensure timely delivery of raw materials
needed to execute existing production contracts as well as to expand the
business. Our advances for inventory purchase increased to $84.4 million on
March 31, 2010, an increase of $50.3 million or 147.7%, from the $34.1 million
recorded on December 31, 2009. The increase was largely related to the increased
prepayment for raw materials in order to secure timely delivery, which is
consistent with our business expansion.





Cash
used in investing activities





For the
three months ended March 31, 2010, net cash used in investing activities
increased to $ 9.0 million as compared to $ 20,789 used for the same period
ended March 31, 2009, representing an increase of $8.9 million. This increase
primarily resulted from the $8.5 million increased in advances for non-current
assets and purchase of fixed assets for the three months ended March 31, 2010,
as compared to a $20,789 prepayment made in the same period of
2009.




12




Cash
provided by financing activities





For the
three months ended March 31, 2010, net cash provided by financing activities
increased to $ 10.2 million as compared to cash provided by financing of $0.6
million for the same period ended March 31, 2009, representing a increase of
1469.4%. The increase was primarily due to the additional bank loan received in
the amount of $ 10.3 million for the three months ended March 31, 2010, and
there was no loan obtained in the same period in 2009.





Related
Party Transactions





The
Company owed $425,252 and $ 494,614 to Mr. Dejun Zou, our CEO and director, as
of March 31, 2010 and December 31, 2009, respectively, for advances made on an
unsecured basis, payable on demand and interest free. Imputed interest is
charged per annum on the amount with loan in nature due at 0% and 5.24 % for the
three months periods ended March 31, 2010 and 2009, respectively. Total imputed
interest recorded as additional paid-in capital amounted to $0 and $5,375 for
the three months ended March 31, 2010 and 2009, respectively.





On March
31, 2010, the Company entered into a loan agreement with Mr. Dejun Zou and Ms.
Jianping Qiu evidencing the terms of a loan made to them in a principal sum of
$3.5 million at an annual interest rate of 5.25%. Pursuant to the Loan
Agreement, Mr. Zou and Ms. Qiu also issued a secured promissory note to the
Company due on May 10, 2010 (the “Secured Promissory Note”). Mr. Zou and Ms. Qiu
are directors and officers of the Company. The Loan, with principal and accrued
interest totaling approximately $3.577 million, was fully repaid on May 10,
2010.





Off-Balance
Sheet Arrangements





The
Company does not have any off-balance sheet arrangements.





CRITICAL
ACCOUNTING POLICIES




We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method used to apply the accounting
principle.





Fair Value of Financial
Instruments





On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:





·
            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.





·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.





·
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value.





Effective
January 1, 2009, warrants previously treated as equity pursuant to the
derivative treatment exemption are no longer afforded equity treatment because
the strike price of the warrants is denominated in the U.S. dollar, a currency
other than the Company’s functional currency, the Chinese Renminbi (RMB). As a
result, the warrants are not considered indexed to the Company’s own stock, and
as such, all future changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised
or expired.





Revenue
Recognition





Contracts.The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method. Under the percentage-of-completion
method, management estimates the percentage-of-completion based upon costs
incurred to date as a percentage of the total estimated costs to the customer.
When total cost estimates exceed revenues, the Company accrues for the estimated
losses immediately. The use of the percentage-of- completion method requires
significant judgment relative to estimating total contract revenues and costs,
including assumptions relative concerning the length of time to complete the
project, the nature and complexity of the work to be performed, and anticipated
changes in estimated costs. Estimates of total contract revenues and costs are
continuously monitored during the term of the contract, and recorded revenues
and costs are subject to revision as the contract progresses. When revisions in
estimated contract revenues and costs are determined, such adjustments are
recorded in the period in which they are first identified.




13




Services.In addition to the
Company’s specialty equipment sales, the Company uses heavy machining equipment
to perform machining services for third parties. These engagements, numbering
several hundred per year, are essentially piecework and are completed in usually
less than one month. Each machining engagement is governed by a separate
contract, indicating existence of an arrangement. Revenue is recognized when
service is performed, which is usually concurrent with delivery to the customer,
the contract price is set by contract, and collectability is reasonably
assured.





The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.





Recently Issued Accounting
Pronouncements and Adopted Accounting





In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have impact on the
Company’s consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU, however, the
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.





In
February 2010, FASB issued ASU No. 2010-9 – Amendments to Certain Recognition
and Disclosure Requirements. This update addresses certain implementation issues
related to an entity’s requirement to perform and disclose subsequent-events
procedures, removes the requirement that public companies disclose the date of
their financial statements in both issued and revised financial statements.
According to the FASB, the revised statements include those that have been
changed to correct an error or conform to a retrospective application of U.S.
GAAP. The amendment is effective for interim and annual reporting periods in
fiscal year ending after June 15, 2010. The Company does not expect the adoption
of this ASU to have a material impact on the Company’s consolidated financial
statements.




14




In March
2010, FASB issued ASU No. 2010-10 – Amendments for Certain Investment Funds.
This update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.





In March
2010, FASB issued ASU No. 2010-11 – Scope Exception Related to Embedded Credit
Derivatives. Embedded credit-derivative features related only to the transfer of
credit risk in the form of subordination of one financial instrument to another
are not subject to potential bifurcation and separate accounting as clarified by
recently issued FASB guidance. Other embedded credit-derivative features are
required to be analyzed to determine whether they must be accounted for
separately. This update provides guidance on whether embedded credit-derivative
features in financial instruments issued by structures such as collateralized
debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and
separate accounting. The guidance is effective at the beginning of a company’s
first fiscal quarter beginning after June 15, 2010. The Company does not expect
the adoption of this ASU to have a material impact on the Company’s consolidated
financial statements.




Item
3. Quantitative and Qualitative Disclosure About Market Risk





Not
applicable.




Item
4. Controls and Procedures.




Disclosure
Controls and Procedures




The
Company’s management, with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this report. The
term “disclosure controls and procedures” as defined in Rules 13a-15(e) and
15d-15(e) means controls and other procedures of the Company that are designed
to ensure that information required to be disclosed by a company in reports,
such as this reports, that it files, or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the U.S. Securities and Exchange Commission’s (“SEC”) rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on that evaluation, management concluded
that because of the material weakness in internal control over financial
reporting described below, our disclosure controls and procedures were not
effective as of March 31, 2010, to satisfy the objectives for which they are
intended.





1)
Insufficient controls over related party transactions and cash disbursement
management





During
the fiscal year ended December 31, 2009, the Company made a loan to certain
officers and directors (the “Loan”) which created a contingent liability for a
possible violation of Section 13(k) of the Exchange Act (Section 402(a) of the
Sarbanes-Oxley Act of 2002). Section 13(k) provides that it is unlawful for a
company, such as the Company, which has a class of securities registered under
Section 12 of the Exchange Act, to directly or indirectly, including through any
subsidiary, extend or maintain credit in the form of a personal loan to or for
any director or executive officer of the company.





The lack
of adequate cash disbursement management by the Company and lack of adequate
procedures and controls with respect to related party transactions which allowed
for the Loan to occur are material weaknesses in the Company’s internal
controls.




2)
Ineffective controls over accounting for revenues and billing
process





We did
not design and maintain effective controls over the accounting for assets.
Specifically, the controls over our billing system were not designed and
operating effectively to ensure the completeness and accuracy of related
revenues. As of March 31, 2010, management’s evaluation of internal controls
revealed that our accounting department was not timely notified about the
entry of certain subcontracted projects.





Further,
during its evaluation, management determined that a material weakness existed
with respect to our process of estimating the allowance for uncollectible
accounts at March 31, 2010. The Company’s process for determining its allowance
for uncollectible accounts focused primarily on evaluating the appropriate
percentage of gross revenues to record during a particular period. However, as
of March 31, 2010, the Company did not have processes or controls in place that
would enable management to appropriately evaluate, document and review the
adequacy of the allowance for uncollectible accounts as of a particular
period-end.




15




3)
Lack of controls over fixed assets management





We did
not maintain effective controls over recording of fixed assets. Specifically, we
mistakenly recorded the receipt of certain fixed assets, which resulted in
significant adjustment between the fixed assets and the advance to suppliers.
The lack of timely reconciliation procedures and deficient recordkeeping
controls result in material weakness in this area such that there is a
reasonable possibility that due to these control deficiencies a material
misstatement will not be prevented or detected on a timely basis.





4)
Lack of internal audit function





We lack
qualified resources to perform the internal audit functions properly, and the
scope and effectiveness of the internal audit function are yet to be developed.
Specifically, the reporting mechanism between the accounting department and the
Board of Directors and the CFO was not effective, therefore resulting in the
delay of recording, reporting and the failure to comply with the Company’s Code
of Ethics.





Changes
in Internal Control over Financial Reporting





As a
result of the foregoing material weaknesses, as of March 31, 2010, the Company’s
audit committee of its Board of Directors has undertaken to further review
internal controls along with management and in cooperation with outside
consultants in order to remediate all existing material weaknesses and internal
control deficiencies.





Effective
April 27, 2010, the Company’s Board of Directors approved the appointment of Ben
Wang as its Chief Financial Officer.




Except as
described above, there were no changes in our internal control over financial
reporting during the fiscal quarter ended March 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




Management
also intends to take the following further specific actions to address the
deficiencies that are identified and strengthen our internal control over
financial reporting:





•
            to implement proper procedures of
      cash disbursement approval-control management under the supervision of the
      Audit Committee of the Board of
Directors





•
            to create positions in our
      accounting department to segregate duties of recording, authorizing and
      testing





•
            to increase our accounting and
      financing personnel resources, by retaining more U.S. GAAP knowledgeable
      financial professionals





•
            to allocate sufficient resources
      to achieve an effective internal audit
  function





•
            to establish direct reporting
      procedures from the Chief Accounting Officer to the Chief Financial
      Officer to ensure a better overview of the Company’s financial reporting
      system by the CFO





•
            to reemphasize to all the
      officers and employees of the Company the Code of Ethics and to ensure all
      officers and employees’ full compliance of the Code of
      Ethics





•
            to adopt policies and procedures
      regarding related party transactions and to ensure Audit Committee’s
      review of all interested
transactions





Our
management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent or detect 100% of all errors and fraud that may
occur. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Due to the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected. And management believes that the steps we are taking are necessary for
remediation of the material weaknesses identified above, and we will continue to
monitor the effectiveness of these steps and to make any changes that our
management deems appropriate.




16




PART
II - OTHER INFORMATION




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





None.





Item 6. Exhibits





(a)
            Exhibits





10.1
–Loan Agreement, dated March 31, 2010, among the Company, Dejun Zou and Jianping
Qiu.





31.1 -
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.





31.2 -
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.





32.1 -
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.




17




SIGNATURES





Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.




RINO
      INTERNATIONAL CORPORATIONDate:
      May 14, 2010
                  BY:
                  /s/
      Zou DejunZou
      DejunChief
      Executive Officer




18




INDEX TO
EXHIBITS




EXHIBIT
                NUMBER
              
              DESCRIPTION10.1
              
              Loan
      Agreement, dated March 31, 2010, among the Company, Dejun Zou and Jianping
      Qiu.31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.




19