UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 _______________________
 
 FORM
10-Q
 _______________________





(Mark
One)





ýQUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended September 30, 2009


oTRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE EXCHANGE ACT


Commission
file
number                                                      000-52770





PACIFIC
ASIA PETROLEUM, INC.
 (Exact
name of issuer as specified in its charter)
 
 
 Delaware                                                                                                             30-0349798
 (State or
Other Jurisdiction of Incorporation or
Organization)                   (I.R.S
Employer Identification No.)
 
 
 250
East Hartsdale Ave.
 Hartsdale,
New York 10530
 (Address
of principal executive offices)
 
 (914)
472-6070
 (Issuer’s
telephone number)


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 Data 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   x


Non-accelerated
filer   ̈(Do
not check if a smaller reporting
company)          Smaller
reporting company   ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes   ̈  No x





The
number of shares outstanding of each of the issuer’s classes of common stock, as
of November 9, 2009 is as follows:





Class
      of Securities
            
            Shares
      OutstandingCommon
      Stock, $.001 par value
            
            42,486,696








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Pacific Asia
Petroleum, Inc.


FORM
10-Q


Table
of Contents





PageCAUTIONARY STATEMENT
            1PART
      I
            FINANCIAL INFORMATION
            2Item
      1.
            Financial Statements
            2Condensed Consolidated Balance Sheets as of September 30,
      2009 (unaudited) and December 31, 2008
            2Condensed Consolidated Statements of Income (unaudited) for the
      nine months and thethree months ended September 30, 2009 and 2008 and for the period
      from inception (August 25, 2005) through September 30,
      2009
            3Condensed Consolidated Statements of Comprehensive Income
      (Loss)  (unaudited) for the nine months and thethree
      months ended September 30, 2009 and 2008 and for the period from inception
      (August 25, 2005) through September 30, 2009
            4Condensed Consolidated Statement of  Equity
      (Deficiency) (unaudited) for the period from inception (August 25, 2005)
      through September 30, 2009
            5Condensed Consolidated Statements of Cash
      Flows  (unaudited) for the nine months ended September 30, 2009
      and 2008 and for the period from inception (August 25, 2005) through
      September 30, 2009
            6Notes to Condensed Consolidated Financial Statements
      (unaudited)
            7Item
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
            11Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            18Item
      4.
            Controls and Procedures
            18PART
      II
            OTHER INFORMATION
            19Item
      1.
            Legal Proceedings
            19Item
      1A.
            Risk Factors
            19Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            19Item
      3.
            Defaults Upon Senior Securities
            20Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            20Item
      5.
            Other Information
            21Item
      6.
            Exhibits
            21SIGNATURES
            
            22














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CAUTIONARY STATEMENT








All
statements, other than statements of historical fact, included in this Form
10-Q, including without limitation the statements under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Description
of Business,” are, or may be deemed to be, forward-looking statements. Such
forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of Pacific Asia Petroleum, Inc. and its subsidiaries
(collectively, the “Company”), to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements contained in this Form 10-Q.





In our
capacity as Company management, we may from time to time make written or oral
forward-looking statements with respect to our long-term objectives or
expectations which may be included in our filings with the Securities and
Exchange Commission (the “SEC”), reports to stockholders and information
provided in our web site.





The words
or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,”
“forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar
expressions identify “forward-looking statements.”  Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected.  We caution you not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made.  We are calling to your attention important factors
that could affect our financial performance and could cause actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.





The
following list of important factors may not be all-inclusive, and we
specifically decline to undertake an obligation to publicly revise any
forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.  Among the factors that could
have an impact on our ability to achieve expected operating results and growth
plan goals and/or affect the market price of our stock are:








·
            Lack
      of operating history, operating revenue or earnings
    history.


·
            Dependence
      on key personnel.


·
            Fluctuation
      in quarterly operating results and seasonality in certain of our
      markets.


·
            Timing
      of exploration and development expenses and potential delays in the
      development or start-up of planned
projects.


·
            The
      potential failure to achieve expected net production from existing and
      future crude-oil and natural-gas development
  projects.


·
            Possible
      significant influence over corporate affairs by significant
      stockholders.


·
            Our
      ability to enter into definitive agreements to formalize foreign energy
      ventures, acquisitions of assets, and secure necessary exploitation
      rights.


·
            Our
      ability to raise capital to fund our operations and acquisitions of
      assets.


·
            Our
      ability to successfully integrate and operate acquired or newly formed
      entities and multiple foreign energy ventures and
      subsidiaries.


·
            The
      competition from large petroleum and other energy
    interests.


·
            Changes
      in laws and regulations that affect our operations and the energy industry
      in general.


·
            Risks
      and uncertainties associated with exploration, development and production
      of oil and gas, drilling and production
risks.


·
            Expropriation
      and other risks associated with foreign
  operations.


·
            Risks
      associated with anticipated and ongoing third party pipeline construction
      and transportation of oil and gas.


·
            The
      lack of availability of oil and gas field goods and
    services.


·
            Environmental
      risks, economic conditions, and other risk factors detailed
      herein.











- 1
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PART IFINANCIAL
      INFORMATIONItem
      1.  Financial StatementsPacific
      Asia Petroleum, Inc. and Subsidiaries(A
      Development Stage Company)Condensed
      Consolidated Balance SheetsAs
      of
            
            
            As
      ofSeptember
      30,
            
            
            December
      31,2009
            
            
            2008(Unaudited)AssetsCurrent assetsCash
      and cash equivalents
            
            $
            5,770,063
            
            
            $
            10,515,657Short-term
      investments
            
            
            1,728,217
            
            
            
            1,260,000Accounts
      receivable
            
            
            55,428
            
            
            
            -Income
      tax refunds receivable
            
            
            8,500
            
            
            
            8,500Prepaid
      expenses
            
            
            618,056
            
            
            
            90,657Inventories
            
            
            22,292
            
            
            
            -Deposits
            
            
            112,675
            
            
            
            37,556Advances
            
            
            4,139
            
            
            
            383Total
      current assets
            
            
            8,319,370
            
            
            
            11,912,753Non-current assetsProperty,
      plant and equipment - at cost (net of accumulated depreciation and
      amortization:September
      30, 2009 - $180,786;  December 31, 2008 -
$88,577
            
            
            664,589
            
            
            
            569,303Intangible
      assets
            
            
            384
            
            
            
            384Investment
      in long-term certificate of deposit
            
            
            25,000
            
            
            
            -Long-term
      advances
            
            
            385,497
            
            
            
            386,415Investment
      in nonsubsidiary - at fair value
            
            
            634,380
            
            
            
            -Deferred
      charges
            
            
            326,743
            
            
            
            1,250,234Total
      Assets
            
            $
            10,355,963
            
            
            $
            14,119,089Liabilities and EquityCurrent liabilitiesAccounts
      payable
            
            $
            338,668
            
            
            $
            25,446Income
      taxes payable
            
            
            4,800
            
            
            
            5,148Accrued
      and other liabilities
            
            
            1,040,578
            
            
            
            658,257Total
      current liabilities
            
            
            1,384,046
            
            
            
            688,851EquityStockholders'
      equity - Pacific Asia Petroleum, Inc. and Subsidiaries:Common
      stockAuthorized
      - 300,000,000 shares at $.001 par value; Issued and outstanding
      -42,322,743
      as of September 30, 2009;  40,061,785 as of December 31,
      2008
            
            
            42,323
            
            
            
            40,062Preferred
      stockAuthorized
      - 50,000,000 shares at $.001 par value;Issued
      - 23,708,952 as of September 30, 2009 and December 31,
2008Outstanding
      - none as of September 30, 2009 and December 31, 2008
            
            
            -
            
            
            
            -Paid-in
      capital
            
            
            24,991,330
            
            
            
            21,741,965Deficit
      accumulated during the development stage
            
            
            (16,693,227
            )
            
            
            (8,968,064
            )Other
      comprehensive income
            
            
            306,528
            
            
            
            229,860Total
      stockholders' equity - Pacific Asia Petroleum, Inc. and
      Subsidiaries
            
            
            8,646,954
            
            
            
            13,043,823Noncontrolling
      interests
            
            
            324,963
            
            
            
            386,415Total
      equity
            
            
            8,971,917
            
            
            
            13,430,238Total
      Liabilities and Equity
            
            $
            10,355,963
            
            
            $
            14,119,089The
      accompanying notes to unaudited condensed consolidated financial
      statements are an integral part of this statement.




- 2
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Pacific Asia Petroleum, Inc. and Subsidiaries(A
      Development Stage Company)Condensed
      Consolidated Statements of Income(Unaudited)For
      the periodfrom
      inceptionFor
      the nine months
            
            
            For
      the three months
            
            
            (August
      25, 2005)ended
      September 30,
            
            
            ended
      September 30,
            
            
            through2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            9/30/2009RevenuesChemical
      sales
            
            $
            55,409
            
            
            $
            -
            
            
            $
            55,409
            
            
            $
            -
            
            
            $
            55,409Cost of SalesCost
      of sales
            
            
            53,207
            
            
            
            -
            
            
            
            53,207
            
            
            
            -
            
            
            
            53,207Gross
      profit
            
            
            2,202
            
            
            
            -
            
            
            
            2,202
            
            
            
            -
            
            
            
            2,202Operating ExpensesDepreciation
            
            
            92,068
            
            
            
            40,115
            
            
            
            35,129
            
            
            
            17,323
            
            
            
            179,426All
      other operating expenses
            
            
            7,695,364
            
            
            
            3,562,286
            
            
            
            2,663,804
            
            
            
            1,233,600
            
            
            
            17,612,430Total
      operating expenses
            
            
            7,787,432
            
            
            
            3,602,401
            
            
            
            2,698,933
            
            
            
            1,250,923
            
            
            
            17,791,856Operating
      Loss
            
            
            (7,785,230
            )
            
            
            (3,602,401
            )
            
            
            (2,696,731
            )
            
            
            (1,250,923
            )
            
            
            (17,789,654
            )Other Income (Expense)Interest
      Income
            
            
            30,185
            
            
            
            275,231
            
            
            
            4,106
            
            
            
            82,037
            
            
            
            1,071,442Other
      Income
            
            
            216
            
            
            
            14,695
            
            
            
            -
            
            
            
            14,695
            
            
            
            27,848Other
      Expense
            
            
            (945
            )
            
            
            (37
            )
            
            
            (589
            )
            
            
            35
            
            
            
            (1,831
            )Total
      Other Income
            
            
            29,456
            
            
            
            289,889
            
            
            
            3,517
            
            
            
            96,767
            
            
            
            1,097,459Net
      loss before income taxes andnoncontrolling
      interests
            
            
            (7,755,774
            )
            
            
            (3,312,512
            )
            
            
            (2,693,214
            )
            
            
            (1,154,156
            )
            
            
            (16,692,195
            )Income
      tax expense
            
            
            (30,725
            )
            
            
            (6,647
            )
            
            
            (8,219
            )
            
            
            (6,807
            )
            
            
            (82,633
            )Net
      loss
            
            
            (7,786,499
            )
            
            
            (3,319,159
            )
            
            
            (2,701,433
            )
            
            
            (1,160,963
            )
            
            
            (16,774,828
            )Less:
      Net loss - noncontrolling interests
            
            
            61,336
            
            
            
            10,169
            
            
            
            57,271
            
            
            
            2,983
            
            
            
            81,601Net
      Loss - Pacific Asia Petroleum, Inc.and
      Subsidiaries
            
            $
            (7,725,163
            )
            
            $
            (3,308,990
            )
            
            $
            (2,644,162
            )
            
            $
            (1,157,980
            )
            
            $
            (16,693,227
            )Net
      loss per common share - Pacific AsiaPetroleum
      Inc. common shareholders -basic
      and diluted
            
            $
            (0.19
            )
            
            $
            (0.08
            )
            
            $
            (0.06
            )
            
            $
            (0.03
            )Weighted
      average number of commonshares
      outstanding, basic and diluted
            
            
            41,473,825
            
            
            
            39,984,024
            
            
            
            42,219,561
            
            
            
            39,993,133The
      accompanying notes to the unaudited condensed consolidated financial
      statements are an integral part of this statement.





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Pacific Asia Petroleum, Inc. and
    Subsidiaries(A
      Development Stage Company)Condensed
      Consolidated Statements of Comprehensive Income (Loss)(Unaudited)For
      the periodfrom
      inceptionFor
      the nine months
            
            
            For
      the three months
            
            
            (August
      25, 2005)ended
      September 30,
            
            
            ended
      September 30,
            
            
            through2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            9/30/2009Net
      loss
            
            $
            (7,786,499
            )
            
            $
            (3,319,159
            )
            
            $
            (2,701,433
            )
            
            $
            (1,160,963
            )
            
            $
            (16,774,828
            )Other
      comprehensive income (loss) -pre-tax
      and net of tax:Currency
      translation adjustment
            
            
            (4,928
            )
            
            
            125,630
            
            
            
            (485
            )
            
            
            19,755
            
            
            
            232,136Unrealized
      gain oninvestments
      in securities
            
            
            81,480
            
            
            
            -
            
            
            
            81,480
            
            
            
            -
            
            
            
            81,480Total
      other comprehensive income (loss)
            
            
            76,552
            
            
            
            125,630
            
            
            
            80,995
            
            
            
            19,755
            
            
            
            313,616Comprehensive
      income (loss)
            
            
            (7,709,947
            )
            
            
            (3,193,529
            )
            
            
            (2,620,438
            )
            
            
            (1,141,208
            )
            
            
            (16,461,212
            )Less:
      Comprehensive (income) loss -Noncontrolling
      interests' share:Net
      loss plus pre-tax and net oftax
      other comprehensive income/loss
            
            
            61,452
            
            
            
            6,521
            
            
            
            57,302
            
            
            
            2,511
            
            
            
            74,467Comprehensive
      income (loss) -Pacific
      Asia  Petroleum, Inc. andSubsidiaries
            
            $
            (7,648,495
            )
            
            $
            (3,187,008
            )
            
            $
            (2,563,136
            )
            
            $
            (1,138,697
            )
            
            $
            (16,386,745
            )The
      accompanying notes to the unaudited condensed consolidated financial
      statements are an integral part of this statement.





- 4
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Pacific Asia Petroleum, Inc. and Subsidiaries(A
      Development Stage Company)Condensed
      Statement of Equity (Deficiency)For
      the period from inception (August 25, 2005) to September 30,
      2009(Unaudited)Pacific
      Asia Petroleum, Inc. StockholdersDeficitNo.
      of
            
            
            
            
            
            
            
            
            No.
      of
            
            
            
            
            
            
            
            
            
            
            
            AccumulatedCommon
            
            
            
            
            
            
            
            
            Preferred
            
            
            
            
            
            
            
            
            Other
            
            
            During
      the
            
            
            
            
            
            TotalShares
            
            
            Common
            
            
            Subscriptions
            
            
            Shares
            
            
            Preferred
            
            
            Paid-in
            
            
            Comprehensive
            
            
            Development
            
            
            Noncontrolling
            
            
            Equity$.001
      par value
            
            
            Stock
            
            
            Receivable
            
            
            $.001
      par value
            
            
            Stock
            
            
            Capital
            
            
            Income
      (Loss)
            
            
            Stage
            
            
            Interests
            
            
            (Deficiency)Balance
      - August 25, 2005
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Issued
      for cash
            
            
            1,852,320
            
            
            
            1,852
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,148
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,000Subscriptions
            
            
            3,451,680
            
            
            
            3,452
            
            
            
            (28,000
            )
            
            
            -
            
            
            
            -
            
            
            
            24,548
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (51,344
            )
            
            
            -
            
            
            
            (51,344
            )Balance
      - December 31, 2005
            
            
            5,304,000
            
            
            
            5,304
            
            
            
            (28,000
            )
            
            
            -
            
            
            
            -
            
            
            
            34,696
            
            
            
            -
            
            
            
            (51,344
            )
            
            
            -
            
            
            
            (39,344
            )Subscriptions
      paid
            
            
            -
            
            
            
            -
            
            
            
            28,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            28,000Issued
      for fees and services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,829,421
            
            
            
            1,829
            
            
            
            195,776
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            197,605Issued
      for cash
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,161,802
            
            
            
            8,162
            
            
            
            4,215,262
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,223,424Subsidiary
      paid-in capital additions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            359,410
            
            
            
            359,410Amortization
      of options fair value
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            29,065
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            29,065Currency
      translation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            19,228
            
            
            
            -
            
            
            
            -
            
            
            
            19,228Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,086,387
            )
            
            
            (1,220
            )
            
            
            (1,087,607
            )Balance
      - December 31, 2006
            
            
            5,304,000
            
            
            
            5,304
            
            
            
            -
            
            
            
            9,991,223
            
            
            
            9,991
            
            
            
            4,474,799
            
            
            
            19,228
            
            
            
            (1,137,731
            )
            
            
            358,190
            
            
            
            3,729,781Issued
      for services - pre-merger
            
            
            600,032
            
            
            
            600
            
            
            
            -
            
            
            
            117,729
            
            
            
            118
            
            
            
            334,594
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            335,312Shares
      retained by Pacific Asia Petroleumoriginal
      stockholders in merger - 5/7/07
            
            
            468,125
            
            
            
            468
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            83,323
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            83,791Shares
      issued to ADS members in merger -    5/7/07
            
            
            9,850,000
            
            
            
            9,850
            
            
            
            -
            
            
            
            13,600,000
            
            
            
            13,600
            
            
            
            15,453,957
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            15,477,407Post-merger
      acquisition costs and adjustments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (291,093
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (291,093
            )Automatic
      conversion of Preferred Shares - 6/5/07
            
            
            23,708,952
            
            
            
            23,709
            
            
            
            -
            
            
            
            (23,708,952
            )
            
            
            (23,709
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issued
      for services, compensation cost ofstock
      options and restricted stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            195,442
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            195,442Subsidiary
      paid-in capital additions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40,020
            
            
            
            40,020Currency
      translation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            108,833
            
            
            
            -
            
            
            
            3,961
            
            
            
            112,794Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,383,684
            )
            
            
            (7,077
            )
            
            
            (2,390,761
            )Balance
      - December 31, 2007
            
            
            39,931,109
            
            
            
            39,931
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            20,251,022
            
            
            
            128,061
            
            
            
            (3,521,415
            )
            
            
            395,094
            
            
            
            17,292,693Issued
      on exercise of warrants
            
            
            79,671
            
            
            
            80
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (83
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3
            )Vesting
      of restricted stock
            
            
            76,400
            
            
            
            76
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (76
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Cancellation
      of restricted stock
            
            
            (10,400
            )
            
            
            (10
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -Compensation
      cost of stock options and restricted stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,355,590
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,355,590Issued
      for services
            
            
            15,000
            
            
            
            15
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            137,985
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            138,000Issued
      for acquisition of Navitas Corporation
            
            
            450,005
            
            
            
            450
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,176,141
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,176,591Acquired
      on acquisition of Navitas Corporation
            
            
            (480,000
            )
            
            
            (480
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,178,624
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,179,104
            )Currency
      translation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            101,799
            
            
            
            -
            
            
            
            3,289
            
            
            
            105,088Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,446,649
            )
            
            
            (11,968
            )
            
            
            (5,458,617
            )Balance
      - December 31, 2008
            
            
            40,061,785
            
            
            
            40,062
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            21,741,965
            
            
            
            229,860
            
            
            
            (8,968,064
            )
            
            
            386,415
            
            
            
            13,430,238Issued
      on exercise of warrants
            
            
            46,958
            
            
            
            47
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (47
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exchanged
      for stock of Sino Gas & Energy Holdings Limited
            
            
            970,000
            
            
            
            970
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            551,930
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            552,900Vesting
      of restricted stock
            
            
            220,000
            
            
            
            220
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (220
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Compensation
      cost of stock options and restricted stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,681,076
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,681,076Issued
      for services
            
            
            1,024,000
            
            
            
            1,024
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,016,626
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,017,650Currency
      translation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,812
            )
            
            
            -
            
            
            
            (116
            )
            
            
            (4,928
            )Unrealized
      gain on investments in securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            81,480
            
            
            
            -
            
            
            
            -
            
            
            
            81,480Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,725,163
            )
            
            
            (61,336
            )
            
            
            (7,786,499
            )Balance
      - September 30, 2009
            
            
            42,322,743
            
            
            $
            42,323
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            24,991,330
            
            
            $
            306,528
            
            
            $
            (16,693,227
            )
            
            $
            324,963
            
            
            $
            8,971,917The
      accompanying notes to the unaudited condensed consolidated financial
      statements are an integral part of this statement.


- 5
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Pacific Asia Petroleum, Inc. and Subsidiaries(A
      Development Stage Company)Condensed
      Consolidated Statements of Cash FlowsFor
      the nine months ended September 30, 2009 and 2008,and
      for the period from inception (August 25, 2005) to September 30,
      2009(Unaudited)For
      the periodNine
      months
            
            
            Nine
      months
            
            
            from
      inceptionended
            
            
            ended
            
            
            (August
      25, 2005)September
      30,
            
            
            September
      30,
            
            
            through2009
            
            
            2008
            
            
            September
      30, 2009Cash flows from operating
      activitiesNet
      loss - Pacific Asia Petroleum, Inc. and Subsidiaries
            
            $
            (7,725,163
            )
            
            $
            (3,308,990
            )
            
            $
            (16,693,227
            )Adjustments
      to reconcile net loss to cashused
      in operating activities:Interest
      income on long-term advance
            
            
            -
            
            
            
            (88,440
            )
            
            
            (188,987
            )Currency
      transaction loss
            
            
            1,627
            
            
            
            56,310
            
            
            
            86,118Stock-related
      compensation
            
            
            2,075,522
            
            
            
            1,101,187
            
            
            
            4,326,536Noncontrolling
      interests in net loss
            
            
            (61,336
            )
            
            
            (10,169
            )
            
            
            (81,602
            )Depreciation
      expense
            
            
            92,068
            
            
            
            40,115
            
            
            
            179,427Asset
      impairment loss
            
            
            -
            
            
            
            -
            
            
            
            273,618Changes
      in current assets and currentliabilities:Increase
      in accrued interest and other receivables
            
            
            (55,428
            )
            
            
            (27,868
            )
            
            
            (55,428
            )Increase
      in income tax refunds receivable
            
            
            -
            
            
            
            -
            
            
            
            (8,500
            )(Increase)
      decrease in advances
            
            
            (3,756
            )
            
            
            2,227
            
            
            
            (4,139
            )Increase
      in deposits
            
            
            (75,119
            )
            
            
            (7,337
            )
            
            
            (112,675
            )Increase
      in prepaid expenses
            
            
            (124,723
            )
            
            
            (29,879
            )
            
            
            (215,380
            )Increase
      in inventory
            
            
            (22,292
            )
            
            
            -
            
            
            
            (22,292
            )Increase
      in accounts payable
            
            
            312,469
            
            
            
            24,321
            
            
            
            322,764Increase
      in income tax and accrued liabilities
            
            
            381,973
            
            
            
            133,306
            
            
            
            896,610Net
      cash used in operating activities
            
            
            (5,204,158
            )
            
            
            (2,115,217
            )
            
            
            (11,297,157
            )Cash flows from investing
      activitiesNet
      sales (purchases) of available for sale securities
            
            
            (468,217
            )
            
            
            10,900,000
            
            
            
            (1,728,217
            )Purchase
      of long term certificate of deposit
            
            
            (25,000
            )
            
            
            -
            
            
            
            (25,000
            )Refunds/
      ( deposits) on prospective property acquisitions
            
            
            1,150,000
            
            
            
            (500,000
            )
            
            
            (50,000
            )(Increase)
      decrease in deferred charges
            
            
            (5,981
            )
            
            
            (13,421
            )
            
            
            (56,215
            )Additions
      to property, plant and equipment
            
            
            (185,878
            )
            
            
            (309,563
            )
            
            
            (804,182
            )Net
      cash provided by (used in) investing activities
            
            
            464,924
            
            
            
            10,077,016
            
            
            
            (2,663,614
            )Cash flows from financing
      activitiesPayment
      of notes payable
            
            
            -
            
            
            
            -
            
            
            
            (5,000
            )Increase
      in noncontrolling interest investment
            
            
            -
            
            
            
            -
            
            
            
            399,430Increase
      in long-term advance to noncontrolling interest subsidiary
      shareholder
            
            
            -
            
            
            
            -
            
            
            
            (400,507
            )Decrease
      in subscriptions receivable
            
            
            -
            
            
            
            -
            
            
            
            28,000Issuance
      of common stock net of issuance costs
            
            
            -
            
            
            
            (2,513
            )
            
            
            19,671,092Net
      cash provided by (used in) financing activities
            
            
            -
            
            
            
            (2,513
            )
            
            
            19,693,015Effect
      of exchange rate changes on cash
            
            
            (6,360
            )
            
            
            26,770
            
            
            
            37,819Net
      increase (decrease) in cash and cash equivalents
            
            
            (4,745,594
            )
            
            
            7,986,056
            
            
            
            5,770,063Cash
      and cash equivalents at beginning of period
            
            
            10,515,657
            
            
            
            2,208,969
            
            
            
            -Cash
      and cash equivalents at end of period
            
            $
            5,770,063
            
            
            $
            10,195,025
            
            
            $
            5,770,063Supplemental
      disclosures of cash flow informationInterest
      paid
            
            $
            934
            
            
            $
            -
            
            
            $
            934Income
      taxes paid
            
            $
            30,734
            
            
            $
            43,684
            
            
            $
            79,601Supplemental
      schedule of non-cash investing and financing activitiesCommon
      and preferred stock issued for services and fees
            
            $
            1,017,650
            
            
            $
            138,000
            
            
            $
            1,688,567Common
      stock issued for stock of nonsubsidiary
            
            $
            552,900
            
            
            $
            -
            
            
            $
            552,900Stock
      issuance costs paid as warrants issued
            
            $
            -
            
            
            $
            -
            
            
            $
            929,477Warrants
      exercised for common stock
            
            $
            -
            
            
            $
            (3
            )
            
            $
            (3
            )The
      accompanying notes to unaudited condensed consolidated financial
      statements are an integral part of this statement.





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Pacific Asia Petroleum, Inc. and Subsidiaries


(A
Development Stage Company)


Notes
to Condensed Consolidated Financial Statements


September
30, 2009


(Unaudited)





NOTE
1.  INTERIM FINANCIAL STATEMENTS





With the
exception of the condensed consolidated balance sheet as of December 31, 2008,
which has been derived from audited financial statements, the accompanying
condensed consolidated financial statements of Pacific Asia Petroleum, Inc. and
Subsidiaries (the “Company”) are unaudited.  Management believes this
interim data includes all adjustments necessary for a fair presentation of the
results for the interim periods reported.  All adjustments were of a
recurring nature.





Certain
notes and other information have been condensed or omitted from the interim
financial statements present in this Quarterly Report on Form
10-Q.  Therefore, these financial statements should be read in
conjunction with the Company’s 2008 Annual Report on Form 10-K.  The
results for the three- and nine-month periods ended September 30, 2009, are not
necessarily indicative of future results.





NOTE  2.  BUSINESS;
YEAR 2007 MERGER AND RECAPITALIZATION; LIQUIDITY





Refer to
Notes 1 and 2 to the consolidated financial statements in our 2008 Form 10-K for
a description of the Company’s business, and the merger and recapitalization of
the Company that occurred in 2007.





To date,
the Company has incurred expenses and sustained losses and has
generated  minimal revenue from operations.  Consequently,
its operations are subject to all risks inherent in the establishment of a new
business enterprise.  The Company will require significant financing
in excess of its September 30, 2009, available cash, cash equivalents, and
short-term investments in order to achieve its business plan.  It is
not certain that this financing will be successfully obtained.





NOTE  3.  BASIS
OF PRESENTATION AND USE OF ESTIMATES





The
Company’s interim financial statements are prepared on a consolidated basis
under U.S. Generally Accepted Accounting Principles as a development stage
company  We have applied the amendments to the FASB Accounting
Standards Codification Topic 810 (Consolidation) that were effective for the
Company on January 1, 2009, to data presented for periods before 2009 (see Note
4). This data has been revised retrospectively to reflect the revised
presentation basis in the financial statements for the three- and nine-month
periods ending and as of September 30, 2009. In addition, the Company is now
reporting detail of comprehensive income on a separate financial
statement.





Refer to
Note 5 to the consolidated financial statements in year 2008 Form 10-K for a
description of the Company’s significant accounting policies other than for
revenues and inventories, which were not present in that period.  The
Company has now commenced recognition of initial revenues in the interim period
ended September 30, 2009. Also at September 30, 2009, the Company had unused
inventory on hand that will be consumed in the operations of its in-situ well
treatment project.





Revenues


Revenues
are recognized only when the earnings process is complete and an exchange
transaction has taken place. An exchange transaction may be a physical sale, the
providing of services, or an exchange of rights and privileges.  The
recognition criteria are satisfied when there exists a signed contract with
defined pricing, delivery and acceptance (as defined in the contract) of the
product or service have occurred, there is no significant uncertainty of
collectability, and the amount is not subject to refund.  The current
sale of chemicals to a single customer reported in the period ended September
30, 2009, was managed on the Company’s behalf  by
Tongsheng,  a subsidiary of the family owned business of Mr. Li
Ziangdong (LXD). The transaction involved the placing of a phone order,
prepayment for the order in full prior to delivery, and acceptance and
acknowledgement of the receipt of goods by the purchaser in
writing.  The amount is not subject to refund. (See Note 5 – Related
Party Transactions)








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Inventory


The
Company’s inventory at September 30, 2009, consisted of finished chemicals
stated at lower of cost or market determined using the average cost method of
accounting.





In
preparing the accompanying financial statements, we have evaluated information
about subsequent events that became available to us through the date the
financial statements were issued (November  9, 2009).  This
information relates to events, transactions or changes in circumstances that
would require us to adjust the amounts reported in the financial statements or
to disclose information about those events, transactions or changes in
circumstances.





Management
uses estimates and assumptions in preparing these financial
statements.   Those estimates and assumptions affect the reported
amounts of assets and liabilities, disclosures of contingencies, and reported
revenues and expenses.  Actual results could vary from those
estimates.





NOTE
4.   ADOPTION OF UPDATES TO THE FASB ACCOUNTING STANDARDS
CODIFICATION





In July
2009, The Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (“Codification”)(“ASC”) which became the source of
authoritative accounting principles effective with financial statements of
interim and annual periods ending after September 15, 2009.  Sources
of accounting principles referred to in this report refer to Topics, Subtopics
and Sections of the Codification, except for grandfathered previously issued
accounting standards not yet included in the Codification.





ASC
825-10


Commencing
with the interim period ending June 30, 2009, the Company adopted new
requirements for quarterly disclosures related to fair values of financial
instruments whether or not currently reflected on the balance sheet at fair
value.  Previously,  qualitative and quantitative
information about fair value estimates for financial instruments not measured on
the balance sheet at fair value were disclosed only
annually.   Quarterly disclosures were required under an update
to  ASC Topic 825 (Financial Instruments) effective for interim
periods ending after June 15, 2009.   The adoption of this update
did not have a material impact on the Company’s results of operations or
financial condition.





ASC
810-10


Effective
January 1, 2009, the Company adopted an update to ASC Topic 810 (Consolidation)
that changes the accounting and reporting for noncontrolling interests (formerly
known as minority interests) in subsidiaries and for the deconsolidation of a
subsidiary.  The presentation of noncontrolling interests in the
balance sheet and income statement has been revised to report noncontrolling
interests as a separate component of total consolidated equity and total
consolidated net income, rather than as reduction adjustments.  In
addition, if a subsidiary is deconsolidated, the parent company will now
recognize a gain or loss to net income based upon the fair value of the
noncontrolling equity at that date.





The
update is applied prospectively except for the provisions involving financial
statements line detail presentation.  All of the Company’s financial
statements contain changes as a result of the update. Under  the
update, the amount formerly titled “Net Loss” in the income statement is now
referred to as “Net Loss - Pacific Asia Petroleum, Inc. and Subsidiaries,” to
designate the portion of total net loss attributable to the controlling
shareholder interest of the parent company.





ASC
855-10


Effective
with the six months ended June 30, 2009, the Company adopted an update to ASC
Topic 855 (Subsequent Events).   Subsequent events are events or
transactions about which information becomes available after the balance sheet
date but before the financial statements are issued or are available to be
issued.  In the case of the Company as a public entity, the applicable
cutoff date is the date the financial statements are issued, whereas previously
the cutoff date could be the date the financial statements were available for
issuance.





The
update  requires that certain subsequent events (“recognized
subsequent events”) be recorded in the financial statements of the latest
preceding period currently being issued.  These items provide evidence
about conditions that existed at the date of that balance sheet, including
estimates inherent in preparing the financial statements for that
period.   Other subsequent events (“nonrecognized subsequent
events”) are not recorded in balance sheet for the latest preceding period
currently being issued. Those items relate to conditions that arose only after
the balance sheet date.   Disclosure is required for
nonrecognized subsequent events if necessary to prevent those financial
statements from being misleading.






- 8
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table of contents -





NOTE
5.  RELATED PARTY TRANSACTIONS





In March
2009, the Company issued 970,000 shares of Company Common Stock, to Mr. Richard
Grigg, the Company’s Senior Vice President and Managing Director,  in
exchange for 3,825,000 Ordinary Fully Paid Shares of Sino Gas & Energy
Holdings Limited (SG&E) owned by Mr. Grigg. This represented approximately
3.26% of the outstanding shares of SG&E as of March 9, 2009. The acquired
shares were originally accounted for by the Company as a non-current investment
carried at cost.  Commencing with the interim period ending September
30, 2009, the carrying amount is recorded at fair value, due to SG&E trading
publicly on the Australian Stock Exchange beginning September 15, 2009. Mr.
Grigg is a former executive of SG&E who joined the Company in October
2007.  The SG&E shares were acquired in order to eliminate
possible conflicts of interest involving Mr. Grigg regarding possible future
transactions that may occur between the Company and SG&E, as both companies’
business plans involve developing operations in China.





During
the third quarter of 2009, the Company conducted the business of its yet to be
incorporated Chinese joint venture company (CJVC) through an arrangement with
Tongsheng, a subsidiary of the family owned business of Mr. Li Xiangdong (LXD).
Upon the incorporation of the CJVC in China on September 24, 2009, LXD became a
24.5% interest owner in the CJVC. This arrangement with Tongsheng was necessary
because, pending the incorporation of the CJVC, the Company was not licensed in
China to purchase, blend or sell chemicals.





Under the
arrangement with Tongsheng, Tongsheng manufactures specialty blends of chemicals
using technology developed by LXD and sells the finished product to customers of
the Company. The patent rights and related technology for the specialty
chemicals and processes will be contributed to the CJVC by LXD. Tongsheng
collects and remits to the Company revenues collected in advance of delivery of
product to the customer and bills the Company for the related costs. Beginning
in the fourth quarter of 2009, the CJVC will be able to deal directly with its
customers.





See
“Enhanced Oil Recovery and Production (EORP)” appearing on page 12 of this Form
10Q under the “Our Business” segment of Item 2- Management’s Discussion and
Analysis of Financial Condition and Results of Operations for additional
information about the formation of the CJVC.





NOTE
6.  NEW ACCOUNTING STANDARDS AND UPDATES TO THE CODIFICATION NOT YET
ADOPTED





As of
September 30, 2009, the following new accounting standard not yet added to the
Codification had been issued, but not yet adopted by the
Company.  This standard  is not expected to have a material
effect on the Company’s financial statements in the foreseeable
future.





SFAS No.
167:  “Amendments to FASB Interpretation  No.
46(R)


This
standard amends Interpretation No. 46(R) by requiring consolidation of certain
special purpose entities that


were
previously exempted from consolidation. The revised criteria will define a
controlling financial interest for requiring consolidation as:  the
power to direct the activities that most significantly affect the entity’s
performance, and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. This standard is effective for fiscal
years beginning after November 15, 2009.





NOTE
7. FINANCIAL INSTRUMENTS FAIR VALUES AND FAIR VALUE ADJUSTMENTS





The
September 30, 2009, balance sheet includes an available-for-sale equity
investment in a nonsubsidiary company carried at a fair value of
$634,380.  The fair value is determined using “ Level 1” inputs as
defined in ASC Topic 820 (Fair Value Measurements and
Disclosures).  Level 1 inputs represent inputs observable in an active
market, which in this case is a public active stock market.





At
September 30, 2009, the carrying amounts of the Company’s other financial
instruments, which include cash equivalents, short- and long-term investments,
trade receivables, deposits, long-term advances, accounts payable and accrued
expenses approximate their fair values, due to the short-term nature and
maturities of many of the above listed items.






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The
Company has a long-term advance carried at cost that it periodically reviews for
possible impairment. At September 30, 2009, the carrying amount of the long-term
advance  was $385,497. The Company did not perform any fair value
assessments of  this investment during the first nine months of 2009,
since in the opinion of Company management no impairment indicators were present
that would necessitate such evaluations to be performed. Any such future
impairment measurements will involve the use of “Level 3” inputs, as defined in
ASC Topic 820 (Fair Value Measurements and Disclosures).  Level 3 inputs
are not observable in an active market.





NOTE
8. LITIGATION AND CONTINGENCIES





At
September 30, 2009, the Company was not aware of any litigation, actual or
potential, which could have a material effect on its financial
position.





NOTE
9. SUBSEQUENT EVENTS





On
October 5, 2009, Molopo Australia Ltd. (“Molopo”) publicly disclosed that it is
in an advanced stage of negotiations with the Company in respect of the sale of
Molopo’s 26.1% gross interest in Fortune Liulin Gas Company Limited (the “FLG
Interest”), which entity is a party to a production sharing contract covering
the Liulin coalbed methane block (the “Liulin PSC”) located in the Shanxi
Province of the People’s Republic of China.  As currently contemplated
by the parties, as consideration for the FLG Interest, the Company plans to
issue approximately 2.7 million shares of Common Stock of the Company to Molopo
and pay to Molopo a 2% royalty on future production revenue received from the
FLG Interest by the Company.  The sale remains subject to the
finalization of negotiations, terms and documentation, and is subject to waiver
of pre-emptive rights held by the Fortune Oil Group, Molopo’s partner in the
PSC.  There is no certainty the transaction will proceed and be
consummated under the terms currently contemplated, or at all.





On
November 5, 2009, the Company's shares of Common Stock commenced trading on the
NYSE Amex under the ticker symbol "PAP."  Prior to that date, the Company's
shares traded on the Over-The-Counter (OTC) Bulletin Board under the symbol
"PFAP.OB.





On
November 8, 2009, the Company entered into a non-binding agreement with an
investor group that would provide the Company with up to $15 million over a 15
month period. The proposed financing would take the form of convertible notes
priced at a premium to the Company’s stock price. The Company would have the
option to satisfy principal and interest payments by issuing shares of its
common stock. If concluded, the arrangement would provide the Company with added
financial flexibility as it endeavors to expand the scope of its EORP program
and pursue other opportunities.








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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Throughout
this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” ” Company,” and
“our Company” refer to Pacific Asia Petroleum, Inc. (“PAP”), a Delaware
corporation, and its present and former subsidiaries, including Pacific Asia
Petroleum, Ltd. (“PAPL”), Pacific Asia Petroleum Energy Limited (“PAPE”), Inner
Mongolia Production Co (HK) Limited, and Inner Mongolia Sunrise Petroleum JV
Company (collectively, the “Company”). References to “PAP” refer to Pacific Asia
Petroleum, Inc. prior to the mergers of Inner Mongolia Production Company LLC
(“IMPCO”) and Advanced Drilling Services, LLC (“ADS”) into wholly-owned
subsidiaries thereof, effective May 7, 2007.  Historical financial
results presented herein are the results of IMPCO from inception on August 25,
2005 to May 6, 2007 and the consolidated entity Pacific Asia Petroleum, Inc.
from May 7, 2007 forward, which is considered to be the continuation of IMPCO as
Pacific Asia Petroleum, Inc.





Cautionary
Statement Regarding Forward-Looking Statements





This
Quarterly Report contains forward-looking statements, which reflect the views of
our management with respect to future events and financial performance. These
forward-looking statements are subject to a number of uncertainties and other
factors that could cause actual results to differ materially from such
statements. Forward-looking statements are identified by words such as
“anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,”
“targets” and similar expressions. Readers are cautioned not to place undue
reliance on these forward-looking statements, which are based on the information
available to management at this time and which speak only as of this date. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.  For a discussion of some of the factors that may cause
actual results to differ materially from those suggested by the forward-looking
statements, please read carefully the information under “Risk Factors” included
in the Company’s Annual Report on Form 10-K for 2008.  The
identification in this Quarterly Report of factors that may affect future
performance and the accuracy of forward-looking statements is meant to be
illustrative and by no means exhaustive. All forward-looking statements should
be evaluated with the understanding of their inherent uncertainty.





Our
Business





The
Company is a development stage company formed to develop new energy ventures,
directly and through joint ventures and other partnerships in which it may
participate.





Members
of the Company’s senior management team have experience in the fields of
international business development, finance, petroleum engineering, geology,
field development and production, and operations. Several members of the
Company’s management team have held management and executive positions with
Texaco Inc. and with other international energy companies and have managed
energy projects in China, elsewhere in Asia and in other parts of the world.
Members of the Company’s management team also have experience in oil drilling,
operations, geological engineering and government relations in China’s energy
sector.





The
Company was originally incorporated in Delaware on December 12, 1979 as Gemini
Marketing Associates Inc., subsequently changed its name to Pacific East
Advisors, Inc., and on May 7, 2007 consummated a reverse merger involving IMPCO
and ADS (the “Mergers”), in connection with which the Company changed its name
to Pacific Asia Petroleum, Inc.  Under applicable accounting
standards, IMPCO was defined as the acquiring company in the
Mergers.





Accordingly,
the reportable results of operations for the Company through the date of the
Mergers of May 7, 2007 are comprised only of the historical results of the
former IMPCO. Therefore, for purposes of financial reporting, the inception of
the Company is reflected as August 25, 2005, the inception date of IMPCO. The
cumulative net losses of the Company from inception through September 30, 2009
attributable to common stockholders are $16,693,227.  Our losses have
resulted primarily from exploration activities on our Zijinshan Block, as well
as general and administrative expenditures associated with developing a new
enterprise, and consulting, legal and accounting expenses.





During
the three months ending September 30, 2009, the Company generated its initial
revenues totaling $55,409 from sales of specialty chemicals to a single
customer.








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ZIJINSHAN
BLOCK CBM OPERATIONS





On April
2, 2008, the Company received written confirmation that the Ministry of Commerce
of The People’s Republic of China approved the entry by the Company’s
subsidiary, PAPL, into that certain Production Sharing Contract entered into on
October 26, 2007 with China United Coalbed Methane Corp. Ltd. for the
exploitation of coalbed methane (“CBM”) resources in the Zijinshan block, which
is a 175,000 acre area located in the Shanxi Province of China (the “Zijinshan
Block”).





The
Company has completed seismic data acquisition operations on the Zijinshan Block
and spent approximately $1.5 million to shoot 162 kilometers of seismic under
the work program. This seismic data has since been processed and
interpreted.  Based on the seismic interpretation, four potential well
locations have been identified. A regional environmental impact assessment study
(“EIA”) has also been completed. Following completion of a site specific EIA
study the Company spudded well ZJN 001 on September 30, 2009. This well is
targeted at the 4/5 coal seams in the Shanxi formation and 8/9 coal seams in the
Taiyuan formation. The well is anticipated to reach total depth in mid- November
2009, with laboratory and test results expected to be available in early
2010.





OTHER
CBM ACTIVITIES





On
October 5, 2009, Molopo Australia Ltd. (“Molopo”) publicly disclosed that it is
in an advanced stage of negotiations with the Company in respect of the sale of
Molopo’s 26.1% gross interest in Fortune Liulin Gas Company Limited (the “FLG
Interest”), which entity is a party to a production sharing contract covering
the Liulin coalbed methane block (the “Liulin PSC”) located in the Shanxi
Province of the People’s Republic of China.  As currently contemplated
by the parties, as consideration for the FLG Interest, the Company plans to
issue approximately 2.7 million shares of Common Stock of the Company to Molopo
and pay to Molopo a 2% royalty on future production revenue received from the
FLG Interest by the Company.  The sale remains subject to the
finalization of negotiations, terms and documentation, and is subject to waiver
of pre-emptive rights held by the Fortune Oil Group, Molopo’s partner in the
PSC.  There is no certainty the transaction will proceed and be
consummated under the terms currently contemplated, or at all.





HANDAN
GAS DISTRIBUTION VENTURE INTEREST





On July
7, 2009 the Company announced that its China affiliate, Inner Mongolia Sunrise
Petroleum Co. Ltd., had entered into a Letter of Intent with Handan Hua Ying
Company Limited (“Handan”), relating to the acquisition of a 49% ownership
interest in the Handan Chang Yuan Natural Gas Company, Ltd. (“HGC”) held by
Handan.  HGC owns and operates gas distribution assets in and around
Handan City in the Hebei Province of the People’s Republic of
China.  Pursuant to the Letter of Intent, the Company will continue
with its final legal and financial due diligence with a goal of entering into a
final sale and purchase agreement before the end of the year, and will also
enter into negotiations with HGC with the intent of creating a joint venture to
operate and manage the HGC business.  The Letter of Intent supplements
the Letter of Intent entered into by the Company in November 2008 covering the
same gas distribution assets.





ENHANCED
OIL RECOVERY AND PRODUCTION (EORP)





On May
13, 2009, PAP and its wholly-owned Hong Kong subsidiary, PAPE, entered into a
Letter of Understanding (“LOU”), which was amended and further detailed in an
AOC and various other associated agreements that were executed on 7th June
2009, with Mr. Li Xiangdong (“LXD”) and Mr. Ho Chi Kong (“HCK”), pursuant to
which the parties agreed to form a Chinese joint venture company (the “CJVC”),
to be 75.5% owned by PAPE and 24.5% owned by LXD, into which  LXD would
assigned certain pending patent rights related to chemical enhanced oil recovery
(the “LXD Patents”).  The CJVC was officially incorporated under Chinese
law on 24th
September 2009. As required by the LOU, and the certain AOC dated 7th June
2009 and as amended on June 25, 2009, LXD is now required to assign the LXD
Patents to the incorporated CJVC. Once the LXD Patents have been assigned to the
CJVC and as further required by the LOU, and the certain AOC dated 7th June
2009 and as amended on June 25, 2009, then the CJVC will be required to pay to
LXD and HCK US $100,000 each. At the same time, PAPE will be required to issue
shares to HCK to provide him with 30% ownership of PAPE, with the Company
retaining 70% ownership of PAPE. Upon acknowledgement from the Chinese
Government that the CJVC is the registered owner of the LXD patents, the Company
shall issue to HCK up to 100,000 shares of Common Stock of the Company and
options to purchase up to 400,000 additional shares of Common Stock of the
Company at an exercise price coinciding with the Company’s share price on the
day of the issue of the options. The
Company has agreed to issue







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300,000
more shares to HCK upon the signing of certain contracts by the CJVC with
respect to the Fulaerjiqu oilfield.   The options will not vest
immediately, and vesting will be contingent upon the achievement of certain
milestones related to the entry by the CJVC into certain EORP-related
development contracts pertaining to oilfield projects in the Fulaerjiqu
Oilfield. These contracts are anticipated to each deliver to the CJVC a
significant percentage of the oil produced and/or fixed fees per ton for the
incremental production using the technology covered by the LXD Patents. 
According to the Qiqihar City branch of the Chinese Ministry of Land and
Resources, the Fulaerjiqu Oilfield contains 115,000,000 barrels of Original Oil
In Place (“OOIP”), of which only 510,000 barrels of cumulative oil have been
produced to date.





In
addition, LXD has been engaged as a consultant by the CJVC to provide research
and development services, training, and assistance in promoting certain other
opportunities developed by him that target the application of the technology
embodied in the LXD Patents, including assistance with entering into a contract
with respect to the Liaohe Oilfield (the “Liaohe Contract”), and helping to
develop projects in both the Shandong Province and the Xinjiang autonomous
region of the People’s Republic of China for the provision and application of
technology and chemicals developed by LXD.





The
Company has agreed to loan up to $5 million to PAPE, which may then invest up to
RMB 30,000,000 (approximately $ 4.4 million) with portion of this being a
requirement to invest RMB 22,650,000 as PAPE’s share of the registered capital
of the CJVC when and to the extent required under applicable law, to be used by
the CJCV to carry out work projects, fund operations, and to make aggregate
payments of up to $1.5 million in cash to LXD and HCK. The payments of up to
$1.5 million to LXD and HCK shall be subject to the achievement of certain
milestones, including the formation of the CJVC, the transfer of the LXD Patents
to the CJVC, and the signing of the contracts with respect to the Fularjiqu
Oilfield and the Liaohe Contract by the CJVC, as well as certain
production-based milestones resulting from the implementation of these
contracts.


The loan
from the Company to PAPE will be repaid from funds distributed to PAPE by way of
dividends or other appropriate payments from the CJVC.





In
accordance with the terms of the LOU, as amended, on June 7, 2009, PAPE, LXD and
the Company’s Chinese joint venture company, Inner Mongolia Sunrise Petroleum JV
Company (“Sunrise”), entered into an Assignment Agreement of Application Right
for Patent, Consulting Engagement Agreement, and an Interest Assignment
Agreement.





Pursuant
to the Assignment Agreement of Application Right for Patent, LXD will be
transferring all rights related to the LXD Patents to the CJVC.





With
these EORP-related agreements signed and in place, the Company – initially
through Sunrise and then through the CJVC following its incorporation – has
commenced operations in various oil fields located in the Liaoning, Shandong,
and Xinjiang Provinces in China.  In the three months ended September
30, 2009, the Company recorded initial revenues, cost of sales and expenses from
the EORP business activities.





OYO
FIELD PRODUCTION SHARING CONTRACT INTEREST





On
September 1, 2009, the Company entered into a Memorandum of Understanding with
CAMAC Energy Holdings Limited (“CAMAC”) and certain CAMAC subsidiaries,
regarding the Company’s intention to acquire CAMAC’s entire aggregate 60%
participating interest in the Oyo Oilfield, currently held by two of CAMAC’s
wholly-owned subsidiaries, which is covered by production sharing contract
OML120 and located in the Nigerian offshore (the “Oyo Asset”).  The
parties anticipate that the originally proposed total consideration of $198.84
million would be payable by the Company through a combination of shares of the
Company’s Common Stock and a smaller portion of cash (the “Proposed
Transaction”).  The Oyo Oilfield is operated by Eni/Agip, who owns the
balance of the participating interest in the Oyo Oilfield.  If the
Proposed Transaction is consummated, CAMAC would beneficially own approximately
63% of the Company post-closing, resulting in a change of control of the
Company.





The
Company’s entry into the Proposed Transaction is subject to the satisfactory
completion of due diligence, entry into a definitive agreement with CAMAC,
approval by the Company’s Board of Directors and stockholders, and certain other
closing conditions.  In the interim, CAMAC has agreed to a four-month
exclusivity period with respect to the Oyo Asset, and the Company has agreed to
a limited stand-still agreement which limits its ability to engage in certain
material transactions, both of which will expire on December 31,
2009.  There is no certainty the Proposed Transaction will proceed and
be consummated under the terms currently contemplated, or at all.






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FUNDING





To date,
although the Company has generated minimal operating revenue, it has raised
approximately $21.6 million in equity financings to fund its ongoing working
capital requirements, as well as possible acquisition and development
activities. In order to fully implement its business strategy, the Company will
need to raise additional capital.  In the event the Company is unable
to raise such capital on satisfactory terms or in a timely manner, the Company
would be required to significantly revise its business plan.





You
should read the information in this Item 2 together with our unaudited condensed
financial statements and notes thereto that appear elsewhere in this
Report.





Plan
of Operation





The
following describes in general terms the Company’s plan of operation and
development strategy for the twelve-month period ending September 30, 2010 (the
“Next Year”). During the Next Year, the Company plans to focus its efforts by
continuing operations in its 100% owned and operated Zijinshan Block. These
operations will include the completion of drilling of the current well, the
possible drilling of 2 additional wells in 2010 as well as undertaking
appropriate laboratory, testing and other activities. The Company also plans to
continue putting into commercial use the new EORP technology to
produce  incremental oil in oilfields located in the Heilongjiang,
Liaoning, Shandong, Henan and Xinjiang Provinces in China through the operations
of the CJVC entity.  The Company will also assess the applicability of
the new EORP  technology to the Company’s August 2006 Contract for
Cooperation and Joint Development with Chifeng Zhongtong Oil and Natural Gas Co.
(“Chifeng”), pursuant to which drilling operations commenced in October 2006 and
were subsequently suspended in 2007 pending receipt of a production license from
the Chinese government. The Company’s revised strategy with regards to Chifeng
is to seek to enhance all the relevant parties’ economic positions and use these
benefits to acquire the necessary production licenses in order to carry out the
plans under that agreement.





In
addition to these opportunities, the Company is continuing to seek to identify
other opportunities in the energy sectors in China and the Pacific Rim, and
elsewhere around the world that will enhance its production and cash flow,
particularly with respect to oil and gas exploration, development, production,
refining and distribution. Since we are a development stage company, we are
limited in our ability to grow by the availability of capital for our businesses
and each project. The Company’s ability to successfully consummate any of its
projects, including the projects described above, is contingent upon the making
of any required deposits, obtaining the necessary governmental approvals and
executing binding agreements to obtain the rights we seek within limited
timeframes.





The
Company has assembled a management team with experience in the fields of
international business development, petroleum and geologic engineering, geology,
petroleum field development and production, petroleum operations, government
relations and finance. Members of the Company’s management team previously held
positions in similar oil and gas development, and screening roles at Texaco Inc,
and with other international energy companies and will seek to utilize their
contacts in Asia to provide us with access to a variety of energy projects.
Among the strategies that we plan to use are:





·
            Focusing
      on projects that play to the expertise of our management
    team;


·
            Leveraging
      our productive asset base and capabilities to develop
    value;


·
            Actively
      managing our assets and ongoing operations while attempting to limit
      capital exposure;


·
            Enlisting
      external resources and talent as necessary to operate/manage our
      properties during peak operations;
and


·
            Implementing
      an exit strategy with respect to each project with a view to maximizing
      asset values and returns





Product
Research and Development





The
Company has to date not engaged in any product research or development, however,
it does anticipate that the CJVC will engage in research and development related
to its new EORP technology during the Next Year.





Liquidity
and Capital Resources


The
Company has sufficient funds to fund all of its current committed operations for
the Next Year.  The discussion below considers the Company’s ability
to fund its operations and overhead expenses.






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As of
September 30, 2009, the Company had net working capital of $6,935,324 and cash,
cash equivalents and short-term investments of $7,498,280. For the nine months
ended September 30, 2009, the Company incurred a net loss attributable to common
stockholders of $7,725,163. As a result of our operating losses from our
inception through September 30, 2009, we generated a cash flow deficit of
$11,297,157 from operating activities. Cash flows used in investing activities
were $2,663,614 during the period from inception through September 30,
2009.  We met our cash requirements during this period through net
proceeds of $19,671,092 from the private placement of restricted equity
securities.





Net cash
used in operating activities for the first nine months of 2009 was $5,204,158
compared to $2,115,217 for the first nine months of 2008.  The
increase in 2009 versus 2008 was due to increases in expenses, principally for
exploratory expenses incurred on the Zijinshan Block and consulting and PSC
management fees.





Net cash
provided by investing activities was $464,924 for the first nine months of 2009,
as compared to $10,077,016 for the first nine months of 2008.  The net
change was principally due to $468,217 in net purchases of available for sale
short-term securities in the first nine months of 2009 versus net sales of
$10,900,000 of such securities in the first nine months of
2008.  Partly offsetting the decrease in cash flows from activity in
short-term securities were combined refunds of $1,150,000 from Chevron and BHP
in 2009 for amounts the Company had previously deposited with them in connection
with the proposed Baode PSC transaction.  There were no net cash
effects from financing activities in the first nine months of 2009 and a nominal
amount in the first nine months of 2008.





Our
available working capital and capital requirements will depend upon numerous
factors, including progress of our exploration and development programs,
progress of our EORP efforts, market developments and the status of our
competitors. Our continued operations will depend on whether we are able to
raise additional funds through various potential sources, such as equity and
debt financing and strategic alliances. Such additional funds may not become
available on acceptable terms, if at all, and any additional funding obtained
may not be sufficient to meet our needs in the long-term. Through September 30,
2009 virtually all of our financing has been raised through private placements
of equity instruments.  The Company at September 30, 2009 had no
credit lines for financing and no short-term or long-term debt.





We intend
to continue to fund operations from cash on hand and through the similar sources
of capital previously described for the foreseeable future. Any additional
capital that we are able to obtain may not be sufficient to meet our needs. We
believe that we will continue to incur net losses and negative cash flows from
operating activities for the next 1-2 years. Based on the resources available to
us on September 30, 2009, we can sustain operations at the present “burn rate”
for approximately one year. We will need additional equity or debt financing to
expand our operations through 2010 and we may need additional financing
thereafter.





By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during the Next Year or thereafter, we are not successful
in generating sufficient liquidity from operations or in raising sufficient
capital resources, on terms acceptable to us, this could have a material adverse
effect on our business, results of operations, liquidity and financial
condition.





To the
extent the Company acquires additional CBM and other energy related investments
and rights, consistent with its business plan, the Company will need to raise
additional funds for such projects.





Results
of Operations





As a
development stage company, we have had only minimal revenues from operations. We
may experience fluctuations in operating results in future periods due to a
variety of factors, including our ability to obtain additional financing in a
timely manner and on terms favorable to us, our ability to successfully develop
our business model, the amount and timing of operating costs and capital
expenditures relating to the expansion of our business, operations and
infrastructure and the implementation of marketing programs, key agreements, and
strategic alliances, and general economic conditions specific to our
industry.





As a
result of limited capital resources and minimal revenues from operations from
the date of IMPCO’s inception on August 25, 2005, the Company has relied on the
issuance of equity securities as a means of compensating employees and
non-employees for services. The Company enters into equity compensation
agreements with








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non-employees
if it is in the best interest of the Company and in accordance with applicable
federal and state securities laws. In order to conserve its limited operating
capital resources, the Company anticipates continuing to compensate employees
and non-employees partially with equity compensation for services during the
Next Year.  This policy may have a material effect on the Company’s
results of operations during the Next Year.





Revenues





We have
generated $55,409 in revenues from operations since IMPCO’s inception on August
25, 2005.  Revenues commenced in the three months ended September 30,
2009.  We expect to generate  additional revenues from
operations in the remainder of 2009 and in 2010, as the Company transitions from
a development stage company to an active growth stage company.





Cost of
sales associated with these revenues totaled $53,207, resulting in a gross
profit of $2,202.








ExpensesNine
      months ended
            Three
      months endedSeptember
      30,
            September
      30,2009
            2008
            
            2009
            
            2008DescriptionSalaries
            
            $
            1,289,500
            
            
            $
            960,570
            
            
            $
            425,099
            
            
            $
            339,950Consulting
      and PSC management fees
            
            
            1,460,255
            
            
            
            428,843
            
            
            
            803,108
            
            
            
            133,326Stock-based
      compensation
            
            
            1,681,076
            
            
            
            963,187
            
            
            
            648,353
            
            
            
            362,515Exploratory
      expenses
            
            
            1,457,255
            
            
            
            -
            
            
            
            70,970
            
            
            
            -Legal
      fees
            
            
            288,460
            
            
            
            245,396
            
            
            
            69,805
            
            
            
            58,261Travel,
      meals and entertainment
            
            
            218,720
            
            
            
            272,168
            
            
            
            96,354
            
            
            
            111,645Auditing
            
            
            135,334
            
            
            
            143,633
            
            
            
            23,746
            
            
            
            27,150All
      other operating expenses
            
            
            1,256,832
            
            
            
            588,604
            
            
            
            561,498
            
            
            
            218,076Total Operating Expenses
            
            $
            7,787,432
            
            
            $
            3,602,401
            
            
            $
            2,698,933
            
            
            $
            1,250,923





Nine months ended September
30, 2009 versus nine months ended September 30, 2008





For the
nine months ended September 30, 2009, total operating expenses before income
taxes were $7,787,432.  For the nine months ended September 30, 2008,
the comparable amount was $3,602,401.  The increase in expenses reflects
increased effort in identifying potential oil and gas opportunities, seeking
related financing, increased administrative costs, initial EORP operations in
2009, and the continuing of seismic work (Exploratory Expenses) which commenced
in December 2008 on the Zijinshan Block.  The major components of the
expense differences are as follows:





·
            Salaries: For the nine
      months ended September 30, 2009, salaries totaled $1,289,500 versus
      $960,570 for the nine months ended September 30, 2008, an increase of
      $328,930.  The increase is principally due to additional
      personnel and increased
compensation.





·
            Consulting and PSC management
      fees:  For the nine months ended September 30, 2009,
      consulting and PSC management fees totaled $1,460,255 versus $428,843 for
      the nine months ended September 30, 2008, an increase of
      $1,031,412.  Expense for such fees payable in cash totaled
      $1,065,779 versus $290,843 for the nine month periods  ended
      September 30, 2009 and September 30, 2008 respectively.  The
      increase in cash fees of $774,936 was principally due to additional fees
      in connection with the Company’s activities in China, including PSC
      management fees for a CBM project under exploration for future
      development.  Consulting fees expense for amounts paid as vested
      equity was $394,446 versus $138,000  for the nine month periods
      ended September 30, 2009 and September 30, 2008 respectively, an increase
      of $256,446.  The increase was principally due to additional
      equity fees in connection with assistance on possible oil and gas
      investment opportunities, investor relations and public
      relations.





·
            Stock-based
      compensation:For the nine months ended September 30,
      2009, expense was $1,681,076 for stock options and restricted stock
      compensation, versus $963,187 for the nine months ended September 30,
      2008.  The increase of $717,889 was due to increased fair value
      amortization of option and restricted
stock








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awards.
The increase is the comparative effects of the number of options and restricted
shares subject to amortization in each period, their respective individual
per-unit fair values applicable for expense, and the number of months of
amortization applied in each case in the respective periods.





·
            Exploratory Expenses:During the nine months ended September 30, 2009,the Company continued
      seismic data acquisition, interpretation and evaluation work on the
      Zijinshan Block and expects to undertake further exploration activities,
      including core sample drilling, on the Zijinshan Block during
      2009.





·
            Legal
      fees:For the nine months ended September 30, 2009,
      these fees totaled $288,460 versus $245,396 for the nine months ended
      September 30, 2008, an increase of $43,064.  The increase was
      due to increased legal work in 2009 related to possible
      acquisitions.





·
            Travel, meals and
      entertainment:For the nine months ended September 30,
      2009, this expense totaled $218,720 versus $272,168 for the nine
      months ended September 30, 2008, a decrease of $53,448.  There was a
      high level of activity in both periods relative to possible
      acquisitions.





·
            Auditing: For the nine
      months ended September 30, 2009, auditing expense totaled $135,334 versus
      $143,633 for the nine months ended September 30, 2008, a decrease of
      $8,299.





·
            Other Operating
      Expenses:For the nine months ended September 30, 2009,
      all other operating expenses totaled $1,256,832 versus $588,604 for the
      nine months ended September 30, 2008, an increase of
      $668,228.  The principal items causing the increase were
      corporate recognition and promotion, payroll taxes and benefits, rent, and
      EORP operations expenses that commenced in
2009.





Three months ended September
30, 2009 versus three months ended September 30, 2008





For the
three months ended September 30, 2009, total operating expenses before income
taxes were $2,698,933.  For the three months ended September 30, 2008,
the comparable amount was $1,250,923.  The increase in expenses reflects
increased effort in identifying potential oil and gas opportunities, seeking
related financing, increased administrative costs, initial EORP operations in
2009, and the continuation of seismic work (Exploratory Expenses), which
commenced in December 2008 on the Zijinshan Block.  The major
components of the expense differences are as follows:





·
            Salaries: For the three
      months ended September 30, 2009, salaries totaled $425,099 versus
      $339,950 for the three months ended September 30, 2008, an increase
      of $85,149. The increase was due to increased personnel and increased
      compensation.





·
            Consulting and PSC management
      fees:  For the three months ended September 30, 2009,
      consulting  and PSC management fees totaled
      $803,108  versus $133,326 for the three months ended September
      30, 2008, an increase of $669,782. Expense for amounts payable in cash
      totaled $572,339 for the three months ended September 30, 2009 versus
      $109,826 for the three months ended September 30, 2008, an increase of
      $462,513.  The increase in cash fees was principally due to
      additional consulting fees in connection with the Company’s activities in
      China, including management contract fees for a CBM project under
      exploration for future development. Consulting fees expense for amounts
      paid as vested equity was $230,769 for the three months ended September
      30, 2009 versus $23,500 for the three months ended September 30, 2008, an
      increase of $207,269.  The increase was principally due to
      additional equity fees in connection with assistance on possible oil and
      gas investment opportunities.





·
            Stock-based
      compensation:For the three months ended September 30,
      2009, expense was $648,353 for stock options and restricted stock
      compensation, versus $362,515 for the three months ended September 30,
      2008, an increase of $285,838.  The increase is the comparative
      effects of the number of options and restricted shares subject to
      amortization in each period, their respective individual per-unit fair
      values applicable for expense, and the number of months of amortization
      applied in each case in the respective
  periods.





·
            Exploratory Expenses:
      During the three months ended September 30, 2009,the Company
      continued seismic data acquisition, interpretation and evaluation work on
      the Zijinshan Block and expects to undertake further exploration
      activities, including core sample drilling, on the Zijinshan Block during
      2009.






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·
            Legal
      fees:For the three months ended September 30, 2009,
      these fees totaled $69,805 versus $58,261 for the three months ended
      September 30, 2008, an increase of $11,544.  The increase was
      due to increased legal work in 2009 related to possible
      acquisitions.





·
            Travel, meals and
      entertainment:For the three months ended September 30,
      2009, this expense totaled $96,354 versus $111,645 for the three
      months ended September 30, 2008, a decrease of $15,291. There was a high
      level of activity in both periods relative to possible
      acquisitions.





·
            Auditing: For the three
      months ended September 30, 2009, auditing expense totaled $23,746 versus
      $27,150 for the three months ended September 30, 2008, a decrease of
      $3,404.





·
            Other Operating Expenses:For the nine months ended September 30, 2009, all other operating
      expenses totaled $561,498 versus $218,076 for the nine months ended
      September 30, 2008, an increase of $343,422.   The
      principal items causing the increase were corporate recognition and
      promotion, rent, and EORP operations commencing in
  2009.





Off-Balance
Sheet Arrangements





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





Inflation





It is the
opinion of the Company that inflation has not had a material effect on its
operations.





Tabular
Disclosure of Contractual Obligations





Refer to
Part II, Item 7 of the Company’s year 2008 Annual Report on Form 10-K for a
table summarizing the Company’s significant contractual obligations as of
December 31, 2008.   On June 12, 2009, the Company entered into a two
year lease agreement for office space in Beijing, China, beginning on September
1, 2009.  Aggregate rental and management payments due under this
agreement will equal approximately $129,268 during the first year and $157,712
during the second year.





Recently
Issued Accounting Standards Not Yet Adopted





Information
on accounting standards not yet adopted is contained in Note 6 to the condensed
consolidated financial statements in this Form 10-Q.





Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Information
about market risks relative to foreign currency denominated financial
instruments owned for the nine months ended September 30, 2009, is not
materially different from that provided in Item 7A of the Company’s 2008 Annual
Report on Form 10-K.





At
September 30, 2009, the Company’s exposure to a decrease in income on its
short-term investments if interest rates decline was not materially different as
compared to December 31, 2008.





Item 4.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls
and Procedures.





We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.




As
required by Rule 13a-15 under the Exchange Act, our management, including Mr.
Frank C. Ingriselli, our Chief








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Executive
Officer and Mr. Stephen F. Groth, our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2009.  Based on that evaluation, Mr.
Ingriselli and Mr. Groth concluded that as of September 30, 2009, and as of the
date that the evaluation of the effectiveness of our disclosure controls and
procedures was completed, our disclosure controls and procedures were effective
to satisfy the objectives for which they are intended.





Changes in Internal Control Over
Financial Reporting.





During
the fiscal quarter ended September 30, 2009, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





PART II.   OTHER INFORMATION





Item
1.                    Legal
Proceedings





None.





ITEM 1A.RISK FACTORS





In
addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the factors discussed in Part I, "Item 1A.
Risk Factors" in our 2008 Annual Report, as well as the risk factors described
below, which could materially affect our business, financial condition, or
future results.  The risks described in our 2008 Annual Report and below
are not the only risks facing our company.  Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.





Continued
disruption in national and international investment and credit markets may
adversely affect our business, financial condition and results of
operation.





Recent
disruptions in national and international markets have led to a significant
slowdown in capital market activities, a scarcity of credit, tighter lending
standards and higher interest rates and costs of investment. Current market
conditions may continue or worsen.  We can make no assurances that we will
be able to obtain additional equity or debt financing to fund our anticipated
drilling, exploration and operation costs on terms that are acceptable to us or
at all.  In the absence of capital obtained pursuant to the consummation of
a strategic relationship or transaction with one or more interested companies,
failure to obtain sufficient equity or debt financing would constrain our
ability to operate and to meet our obligations under our current business plans,
if executed, which would have a material adverse effect on our business,
financial condition and results of operation.





Item 2.





Unregistered
Sales of Equity Securities and Use of Proceeds





Unregistered Sales to United
States Persons





On July
6, 2009, the Company entered into an amended Engagement Agreement for services
with Humanity Worldwide, LLC (“Humanity”) under which the Company was obligated
to issue to Humanity as partial compensation thereunder 90,000 shares of Common
Stock, in addition to 10,000 shares of Common Stock required to be issued by the
Company to Humanity as final compensation due under the original Letter
Agreement of October 31, 2008 (the “Original Agreement”).  On July 16,
2009, the Company issued to Humanity an aggregate of 100,000 shares of Common
Stock.  90,000 shares of the Common Stock was issued at a price of
$1.92 per share, the fair market value per share as determined by the Board of
Directors at July 6, 2009, the date the Company was obligated to issue such
shares pursuant to the Engagement Agreement, and 10,000 shares of the Common
Stock was issued at a price of $0.65 per share, the fair market value per share
as determined by the Board of Directors at December 31, 2008, the date the
Company was obligated to issue such shares pursuant to the Original
Agreement.





On August
27, 2009, the Company issued an aggregate of 6,591shares of Common Stock to one
person, and on September 14, 2009, the Company issued an aggregate of 31,862
shares of Common Stock to two persons upon the







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cashless
"net" exercise by such persons of placement agent warrants held by them
exercisable for aggregates of 15,000 and 52,500 shares of the Company's Common
Stock at the respective dates at a price of $1.25 per share.  The aggregate
number of shares of Common Stock issued upon exercise of the warrants was
reduced from 15,000 to 6,591 shares of Common Stock and from 52,500 to 31,862
shares of Common Stock to effect the cashless "net" exercise of the warrants in
accordance with their terms, assuming a deemed fair market value of $2.23 per
share in the first instance, and $3.18 per share in the second instances, as
calculated under the warrants as the closing price quoted for one share of the
Company's Common Stock as reported on the National Association of Securities
Dealers, Inc. OTC Bulletin Board on the last trading day prior to the exercise
date.  The warrants were originally issued to Garden State Securities, Inc.
(the “Original Holder”) in its role as a placement agent for the Company on May
7, 2007, and subsequently assigned to the individual warrant holders in August
2007.





No
underwriters were involved in the transactions described above.  All
of the securities issued in the foregoing transactions were issued by the
Company in reliance upon the exemption from registration available under Section
4(2) of the Securities Act, including Regulation D promulgated thereunder, in
that the transactions involved the issuance and sale of the Company’s securities
to financially sophisticated individuals or entities that were aware of the
Company’s activities and business and financial condition and took the
securities for investment purposes and understood the ramifications of their
actions.  The Company did not engage in any form of general
solicitation or general advertising in connection with the
transaction.  Each of Humanity and the Original Holder of the warrants
represented that they were an “accredited investor” as defined in Regulation D
at the time of issuance of the shares and the original warrants, respectively,
and that they were acquiring such securities for their own account and not for
distribution.  All certificates representing the securities issued
have a legend imprinted on them stating that the shares have not been registered
under the Securities Act and cannot be transferred until properly registered
under the Securities Act or an exemption applies.





Unregistered Sales to
Non-United States Persons





On June
17, 2009, the Company entered into a Letter Agreement for consulting services
with Somerley Limited, pursuant to which the Company was obligated to issue to
Somerley Limited as partial compensation 15,000 shares of Common
Stock.  This Common Stock was issued on September 15, 2009 at a price
of $1.90 per share, the fair market value per share as determined by the Board
of Directors at July 17, 2009, the date the Company was obligated to issue the
Common Stock pursuant to the Letter Agreement.





On July
30, 2009, the Company entered into an amended Advisor Agreement with Somerley
Limited, amending the original Advisor Agreement dated August 4,
2008.  Under the amended Advisor Agreement, the Company was obligated
to issue to Somerley 15,000 shares of Common Stock as partial compensation upon
the achievement of certain milestones set forth in that
agreement.  The Common Stock was issued on September 15, 2009 at a
price of $2.09 per share, the fair market value per share as determined by the
Board of Directors at July 30, 2009, the date the Company was obligated to issue
the Common Stock pursuant to the Letter Agreement.





No
underwriters were involved in the transactions described above.  All
of the securities issued in these transactions were issued by us in reliance
upon the exemption from registration under Regulation S of the Securities Act,
in that the transactions involved the issuance and sale of our securities
outside the United States in offshore transactions that did not involve directed
selling efforts within the United States.  All certificates
representing the securities issued have a legend imprinted on them stating that
the shares have not been registered under the Securities Act and cannot be
transferred until properly registered under the Securities Act or an exemption
applies.





Stock
Repurchases





None.





Item
3.                     Defaults
Upon Senior Securities





None.





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





On July
21, 2009, the Company held the annual meeting of its stockholders.  The
annual meeting of stockholders was not classified through the Depository Trust
Company (“DTC”) as a routine matter so there were no








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“broker
non-votes.”  At the meeting, the holders of the Company’s outstanding
Common Stock acted on the following matters:





A. Total
shares voted.........................................................24,600,000





(1)         
The stockholders voted for five directors, each to serve for a term of one year
and until his/her successor is elected.  Each nominee received the
following votes:





Name
            For
            Against
            WithholdFrank
      C. Ingriselli
            24,594,932
            10,040
            --William
      E. Dozier
            24,594,932
            10,040
            --Elizabeth
      P. Smith
            24,593,932
            10,040
            1,000Robert
      C. Stempel
            24,427,745
            176,227
            1,000James
      F. Link, Jr.
            24,593,932
            10,040
            1,000





(2)       
The stockholders voted to ratify the appointment of RBSM LLP as the Company’s
independent registered accounting firm for the fiscal year ending December 31,
2009.  Votes cast were as follows:





For
            Against
            Abstain24,353,267
            11,505
            240,200





(3)       
The stockholders voted to approve the adoption of the 2009 Equity Incentive
Plan.  Votes cast were as follows:





For
            Against
            Abstain24,162,398
            432,724
            9,850





Item
5.                     Other
Information





None.








Item
6.                      Exhibits





ExhibitNumber
            Description31.1
            Certification
      of the Registrant’s Principal Executive Officer under Exchange Act Rule
      15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            Certification
      of the Registrant’s Principal Financial Officer under Exchange Act Rule
      15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            Certification
      of the Registrant’s Principal Executive Officer under 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            Certification
      of the Registrant’s Principal Financial Officer under 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





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SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.








Dated:
November 9,
2009                                                                                    Pacific
Asia Petroleum, Inc.


/s/
Frank C.
Ingriselli


Frank
Ingriselli


President
and Chief Executive Officer








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