UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C. 20549











FORM
10-Q








QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES


EXCHANGE
      ACT OF 1934





For
      the quarterly period ended March 31,
2009





OR





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


EXCHANGE
      ACT OF 1934





For the
transition period from ________________ to





Commission
      File Number: 000-52786





ZHAOHENG
      HYDROPOWER COMPANY


(Exact
name of registrant as specified in its charter)





Nevada
            41-1484782(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)F/19,
      Unit A, JinFengCheng Building
              5015
      Shennan Road
              Shenzhen
      PRC
            518015(Address
      of principal executive offices)
            (Zip
      Code)





Registrant’s
      telephone number, including area code: (011-86)
      755-8207-0966





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 o





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 o  No o





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. (Check one):





Large
      Accelerated Filer o
            Accelerated
      filer oNon-Accelerated
      Filer o  (Do
      not check if a smaller reporting company)
            Smaller
      Reporting Company x





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





As of May
8, 2009, there were 76,640,695 shares of the issuer’s common stock, $0.001 par
value per share, outstanding.









INDEX





PagePART
      I     FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                1Consolidated
      Balance Sheets as of March 31, 2009 (unaudited) and December 31,
      2008
                1Consolidated
      Statements of Operations for the Three Months Ended March 31, 2009
      and 2008 (unaudited)
                2Consolidated
      Statement of Changes in Stockholders' Equity for the Three Months Ended
      March 31, 2009 (unaudited)
                3Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2009
      and 2008 (unaudited)
                4Notes
      to Condensed Consolidated Financial Statements (unaudited)
                5Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                22Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                31Item
      4.
                Controls
      and Procedures
                31PART
      II
                OTHER
      INFORMATIONItem
      1.
                Legal
      Proceedings
                33Item
      1A.
                Risk
      Factors
                33Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                33Item
      3.
                Defaults
      Upon Senior Securities
                33Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                33Item
      5.
                Other
      Information
                33Item
      6.
                Exhibits
                34SIGNATURES









PART
I — FINANCIAL INFORMATION





ITEM
1.                      FINANCIAL
STATEMENTS





ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





March
      31,
              
              
              December
      31,2009
              
              
              2008(unaudited)$
              
              
              $ASSETSCurrent
      Assets:Cash
      and cash equivalent
              
              
              1,632,963
              
              
              
              5,804,797Accounts
      receivable, net of allowance for doubtful accounts $309,949 and $309,521
      respectively
              
              
              2,603,781
              
              
              
              4,214,919Other
      receivables
              
              
              737,560
              
              
              
              50,751Prepaid
      expenses and other current assets
              
              
              114,104
              
              
              
              196,507Total
      current assets
              
              
              5,088,408
              
              
              
              10,266,974Long-term
      Investment
              
              
              572,631
              
              
              
              571,912Property,
      plant and equipment, net of accumulated depreciation of $48,854,827 and
      $41,288,337 respectively
              
              
              86,608,957
              
              
              
              75,152,685Due
      from related parties
              
              
              1,213,654
              
              
              
              5,245,481Other
      assets
              
              
              366,449
              
              
              
              325,678Long-term
      deferred expense
              
              
              62,375Construction
      in progress
              
              
              1,759,915
              
              
              
              1,173,415Property
      use rights, net
              
              
              1,309,509
              
              
              
              1,220,157Total
      assets
              
              
              96,981,898
              
              
              
              93,956,302LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable and accrued expenses
              
              
              389,418
              
              
              
              72,483Other
      payables
              
              
              4,814,102
              
              
              
              2,427,345Salary
      payable and judgments payable
              
              
              229,082
              
              
              
              219,048Taxes
      payable
              
              
              727,070
              
              
              
              841,318Interest
      payable
              
              
              117,711
              
              
              
              143,598Due
      to related parties
              
              
              2,262,037
              
              
              
              259,503Advances
      from customers
              
              
              65,005Total
      current liabilities
              
              
              8,604,425
              
              
              
              3,963,295Loans
      payable-long term
              
              
              61,061,120
              
              
              
              63,172,945Minority
      interest
              
              
              435,930
              
              
              
              195,384Stockholders’
      Equity:Preferred
      Stock: $.001 par value; 20,000,000 authorized, no shares issued and
      outstanding at December 31, 2008 and 2007, respectively
              
              
              —
              
              
              
              —Common
      Stock: $.001 par value, 780,000,000 authorized, 71,692,999
      issued  and outstanding at March 31, 2009 and  2008,
      respectively
              
              
              71,693
              
              
              
              71,693Additional
      paid-in capital
              
              
              15,371,094
              
              
              
              15,371,094Statutory
      surplus reserve
              
              
              666,952
              
              
              
              666,952Retained
      earnings
              
              
              6,831,916
              
              
              
              6,621,983Accumulated
      other comprehensive income
              
              
              3,938,768
              
              
              
              3,892,956Total
      stockholders’ equity
              
              
              26,880,423
              
              
              
              26,624,678Total
      liabilities and stockholders’ equity
              
              
              96,981,898
              
              
              
              93,956,302  See
      notes to audited consolidated financial statements
  1


ZHAOHENG
HYDROPOWER COMPANY AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS








For
      the Three Months Ended March 31,2009
              
              
              2008(unaudited)$
              
              
              $Revenues
              
              
              3,184,487
              
              
              
              1,290,939Cost
      of revenues
              
              
              1,281,181
              
              
              
              464,377Gross
      profit
              
              
              1,903,306
              
              
              
              826,562Operating
      expenses:Selling
      , general and administrative expenses
              
              
              499,224
              
              
              
              320,228Operating
      income
              
              
              1,404,082
              
              
              
              506,334Other
      income (expenses):Interest
      income
              
              
              29,221
              
              
              
              1,167Interest
      expense
              
              
              (1,265,276
              )
              
              
              (309,665
              )Non-operating
      income
              
              
              61,982Other
      income
              
              
              476
              
              
              
              538Other
      expense
              
              
              -
              
              
              
              (18,165
              )Investment
      income
              
              
              28,630
              
              
              
              27,377Total
      other expenses
              
              
              (1,144,967
              )
              
              
              (298,748
              )Income
      before income taxes
              
              
              259,115
              
              
              
              207,586Income
      taxes
              
              
              75,556
              
              
              
              11,533Income
      before minority interest
              
              
              183,559
              
              
              
              196,053Minority
      interest
              
              
              (26,374
              )Net
      income
              
              
              209,933
              
              
              
              196,053Unrealized
      foreign currency translation gain
              
              
              45,812
              
              
              
              836,996Comprehensive  income
              
              
              255,745
              
              
              
              1,033,049Net
      income per common share- basic and diluted
              
              
              0.003
              
              
              
              0.003Weighted
      average number of sharesoutstanding-basic
      and diluted
              
              
              71,692,999
              
              
              
              71,692,999  See
      notes to audited consolidated financial statements.
  2


ZHAOHENG
HYDROPOWER COMPANY AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY








Common
      Stock
              
              
              Additional
              
              
              Statutory
      Surplus Reserve
              
              
              Retained
      Earnings
              
              
              Accumulated
      Other Comprehensive Income
              
              
              TotalShares
              
              
              Amount
              
              
              Paid-in
      Capital$
              
              
              
              
              
              $
              
              
              
              
              
              
              
              
              $Balance,
      January 1, 2008
              
              
              71,692,999
              
              
              
              71,693
              
              
              
              15,371,094
              
              
              
              666,952
              
              
              
              628,704
              
              
              
              2,541,949
              
              
              
              19,280,392Recapitalization
      of reserve acquisition
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Interest
      forgiveness to related party
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Dividends
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Deemed
      dividends for minority interest purchase
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              5,993,279
              
              
              
              —
              
              
              
              5,993,279Unrealized
      foreign currency translation
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              —
              
              
              
              1,351,007
              
              
              
              1,351,007Subtotal
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,344,286Balance,
      December 31, 2008
              
              
              71,692,999
              
              
              
              71,693
              
              
              
              15,371,094
              
              
              
              666,952
              
              
              
              6,62,983
              
              
              
              3,892,956
              
              
              
              26,624,678Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              209,933
              
              
              
              —
              
              
              
              209,933Unrealized
      foreign currency translation
              
              
              —
              
              
              
              —
              
              
              
              —-
              
              
              
              —
              
              
              
              —
              
              
              
              45,812
              
              
              
              45,812Subtotal
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              255,74571,692,999
              
              
              
              71,693
              
              
              
              15,371,094
              
              
              
              666,952
              
              
              
              6,831,916
              
              
              
              3,938,768
              
              
              
              26,880,423
  3


ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS








For
      the Three Months Ended March 31,2009
              
              
              2008(uaaudited)$
              
              
              $CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
              
              
              209,933
              
              
              
              177,108Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
              
              
              814,414
              
              
              
              276,409Minority
      interest
              
              
              (26,374
              )Loss
      on disposal of fix assets
              
              
              456Changes
      in operating assets and liabilities:Notes
      receivable
              
              
              
              
              
              
              45,632Accounts
      receivable
              
              
              1,723,922
              
              
              
              331,358Dividend
      receivable
              
              
              
              
              
              
              71,460Other
      receivables
              
              
              (664,427
              )
              
              
              (3,132
              )Prepaid
      expense and other current assets
              
              
              230,022
              
              
              
              (335,822
              )Other
      assets
              
              
              (67,521
              )
              
              
              584Long-term
      deferred expense
              
              
              (35,592
              )
              
              
              —Accounts
      payable and accrued expenses
              
              
              (88,294
              )
              
              
              (84,071
              )Other
      payables
              
              
              2,348,156
              
              
              
              (60,199
              )Salary
      payable and judgment payable
              
              
              (102,599
              )Taxes
      payable
              
              
              (256,851
              )
              
              
              (40,200
              )Interest
      payable
              
              
              (25,887
              )Dividend
      payable
              
              
              —Total
      adjustments
              
              
              3,849,425
              
              
              
              202,019Net
      cash provided by operating activities
              
              
              4,059,358
              
              
              
              379,127CASH
      FLOWS FROM INVESTING ACTIVITIESDue
      from related parties
              
              
              4,031,827
              
              
              
              1,454,955Due
      to related parties
              
              
              (5,427,895
              )
              
              
              78,698Acquisition
      of minority interestsAcquisition
      of Hubei subsidiary
              
              
              (3,355,753
              )Acquisition
      of Guizhou subsidiaryCash
      of subsidiaries on date of acquisition
              
              
              897,072Proceeds
      from sale of Juili subsidiaryPurchase
      of intangible assets
              
              
              (94,889
              )Purchase
      of property, plant and equipment
              
              
              (59,271
              )
              
              
              (376
              )Construction
      in progress
              
              
              (586,500
              )
              
              
              (1,389,099
              )Net
      cash provided by (used in) investing activities
              
              
              (4,595,409
              )
              
              
              144,178CASH
      FLOWS FROM FINANCING ACTIVITIESDividend
      paid
              
              
              —Repayment
      of current portion of long-term loans
              
              
              (3,651,981
              )Proceeds
      from long-term loans
              
              
              —Net
      cash (used in) provided by financing activities
              
              
              (3,651,981
              )
              
              
              —NET
      INCREASE (DECREASE) IN CASH
              
              
              (4,188,032
              )
              
              
              523,305EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
              
              
              16,198
              
              
              
              559,039CASH,
      BEGINNING OF YEAR
              
              
              5,804,797
              
              
              
              994,719CASH,
      END OF PERIOD
              
              
              1,632,963
              
              
              
              2,077,063SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the year for:Interest
      paid
              
              
              1,262,098
              
              
              
              309,665Income
      tax paid
              
              
              75,556
              
              
              
              11,533




4





ZHAOHENG
HYDROPOWER COMPANY AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED


FINANCIAL
STATEMENTS





Note
1 – ORGANIZATION AND BUSINESS OPERATIONS





Business and
Organization





Zhaoheng
Hydropower Company, a Nevada corporation formerly known as Certified
Technologies Corporation (“Certified”), and its subsidiaries are referred to in
this report as the “Company”, “we”, “us”, “our”, or “Zhaoheng
Hydropower”.  Zhaoheng Investment Limited, a British Virgin Island
corporation and a wholly owned subsidiary of Zhaoheng Hydropower Company is
referred to in this report as “Zhaoheng BVI”.  Zhaoheng Hydropower
(Hong Kong) Limited, a Hong Kong corporation and a wholly owned subsidiary of
Zhaoheng BVI is referred to in this report as “Zhaoheng HK”.





On May
13, 2008, Zhaoheng BVI entered into a share exchange agreement (the “Share
Exchange Agreement”) with Certified resulting in a change of control of
Certified. Pursuant to the Share Exchange Agreement, Certified issued an
aggregate of 69,686,970 shares of common stock, par value $0.001 (the “Common
Stock”), to Embedded Internet Solutions Limited (“Embedded Internet”), a Cayman
Islands company wholly owned by Guosheng Xu, our current Chief Executive Officer
and Chairman of Board of Directors, in exchange for all of the common stocks of
Zhaoheng BVI (the “Share Exchange”). The Share Exchange has been accounted for
as a reverse acquisition and accordingly the Share Exchange has been treated as
a recapitalization of Zhaoheng BVI, with Zhaoheng BVI as the
acquirer.  On July 17, 2008, Certified reincorporated in the State of
Nevada and changed the name to Zhaoheng Hydropower Company.





Contemporaneously
with the closing of the Share Exchange, some shareholders of Certified also
transferred approximately 572,170 shares of common stock to Embedded Internet
pursuant to a stock purchase agreement (“Stock Purchase”). As a result of the
completion of the Share Exchange and the Stock Purchase, Embedded Internet owns
approximately 98% interest of our outstanding common stocks.





The
Company is the sole stockholder of Zhaoheng BVI. Zhaoheng BVI owns 100% Zhaoheng
HK, which is a wholly foreign-owned enterprise organized under the laws of the
People’s Republic of China (“PRC” or “China”). Zhaoheng HK is a holding company
of the following four operating companies in November 2007(collectively, the
“Operating Entities”): (1) Shenzhen Zhaoheng Hydropower Co., Ltd., (“Shenzhen
Zhaoheng”) (2) Hunan Zhaoheng Hydropower Co., Ltd. (“Hunan Zhaoheng”), (3) Hunan
Sanjiang Electric Power Co., Ltd., (“Hunan Sanjiang”) and (4) Hunan Jiuli
Hydropower Construction Co., Ltd. (“Hunan Juili”), all of which are limited
liability companies headquartered in, and organized under the laws of the
PRC.





In
December 2007, the Company entered into an equity transfer agreement to transfer
its 100% interest in Hunan Juili to its related party, Shenzhen Zhaoheng
Industrial Co., Ltd. All relevant procedures were completed in April
2008.





On June
15, 2008, the Company acquired Guizhou Jingrong Industrial Development Co., Ltd
(“Jingrong”), which operates Yongfu Hydropower Station in Rongjiang County,
Guizhou Province, China. This acquisition was undertaken to allow Jingrong to
become one of fully owned subsidiaries of the Company and to diversify
operations, improve financial condition and increase shareholder
value.





In November 2008, the Company acquired
88% equity interest of Hubei Minyuan Huohe Hydropower Development Co., Ltd.
(“Hubei Huohe”) from third parties, which operates Huohe Cascade II and Huohe
Cascade III hydropower stations.





In
January 2009, the Company acquired 85% equity interest of Hubei Hongping Power
Generation Co., Ltd.  (“Hongping”) from third parties, which operates
Qiujiabang Hydropower Station, Shunshuiping Hydropower Station and Huangjiawang
Hydropower Station.





As of
March 31, 2009, the Company owned eight hydropower stations (Hunan Sanjiang
Hydropower Station, Hunan Zhaoheng Hydropower Station, Guizhou Jingrong
Industrial Development Station, Hubei Huohe Cascade II hydropower station, Hubei
Huohe Cascade III hydropower station, Qiujiabang Hydropower Station,
Shunshuiping Hydropower Station and Huangjiawang Hydropower Station) and other
relevant operating assets located in the PRC.





5


We are
engaged in the generation and supply of hydropower in Southwestern and
Midwestern China. We focus on small- to medium-sized hydropower plants and aim
to become a leader in our industry.





We also
acquire controlling interest of Chinese hydropower plants which we consolidate
as either our wholly or majority owned subsidiaries. Through this ownership
control, we can expand our operation in different areas in China through
acquired hydropower plants and equipments and existing long-term power purchase
agreements.





Basis of
Presentation





The
consolidated financial statements include Zhaoheng Hydropower Company and all
its subsidiaries, including those operating outside the United States of
America.  The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The company‘s year end is December 31. The company‘s consolidated
statements include the financial statements of the Company and its controlled
entities, including wholly owned subsidiaries, Zhaoheng BVI and Zhaoheng HK, as
well as the financial statements of Shenzhen Zhaoheng, Hunan Zhaoheng, Hunan
Sanjiang, Jingrong, Hubei Huohe and Hubei Hongping. All significant
inter-company accounts and transactions have been eliminated in
consolidation.





In
November 2007, Guosheng Xu, the sole shareholder of Zhaoheng BVI, combined his
equity interests in the following four operating companies (collectively, the
“Operating Entities”): (1) Shenzhen Zhaoheng Hydropower Co., Ltd., (“Shenzhen
Zhaoheng”) (2) Hunan Zhaoheng Hydropower Co., Ltd. (“Hunan Zhaoheng”), (3) Hunan
Sanjiang Electric Power Co., Ltd., (“Hunan Sanjiang”) and (4) Hunan Jiuli
Hydropower Construction Co., Ltd. (“Hunan Juili”), each incorporated under laws
of the PRC, and injected them into the Company in December 2007. This
combination of ownership is collectively referred to as “Capital
Injection”.





Hereafter,
Zhaoheng BVI, Zhaoheng HK, the Operating Entities, Zhaoheng Hydropower Company,
and any subsequent acquisition to the Capital Injection are referred to as the
“Company”, unless specific reference is given to a specific company. All assets
and liabilities are recorded at their historical costs.





In
December 2007, one of the Company’s subsidiaries Hunan Sanjiang entered into an
equity transfer agreement to transfer its 100% interest in Hunan Jiuli to
related party, Shenzhen Zhaoheng Industrial Co., Ltd. All relevant procedures
were completed in April 2008.





On June
15, 2008, the Company acquired Jingrong in Rongjiang County, Guizhou Province,
China. The acquisition was undertaken to allow the Company to diversify
operations, improve financial condition and increase shareholder
value.





The
Company uses the purchase method to account for qualifying business
combinations. Under the purchase method, the assets and liabilities of acquired
entities are recorded at their estimated fair values at the date of acquisition.
The excess of cost over their fair values is recognized as an intangible asset.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,
identified intangible assets are amortized over their estimated useful lives.
The equity consideration for acquisition of Jingrong was initially estimated at
$2,334,335 and the amount was paid on June 30, 2008. Based on the acquisition
agreement, the Company may have contingency payments for assumed liabilities or
potential liabilities of Jingrong. On March 31, 2009, the final acquisition cost
for Jingrong of $2,693,961 was paid. The Company had paid the difference of
initial estimate and final cost by March 31, 2009. The total acquisition cost
for Jingrong acquisition was $430,659 higher than the net book value, but lower
than the appraisal value assessed by Jones Lang LaSalle Sallmanns Limited. The
excess cost of $430,659 was allocated to the acquired identified assets and
amortized through the useful lives of the allocated identified
assets.





In
November 2008, the Company acquired 88% equity interest of Hubei Minyuan Huohe
Hydropower Development Co., Ltd. (“Hubei Huohe”) from third parties, which
operates Huohe Cascade II and Huohe Cascade III hydropower
stations.  The total cost the Company paid for Hubei Huohe acquisition
was $1,143,701 higher than the net book value of Hubei Huohe, $3,818,726, but
lower than the appraisal value assessed by Jones Lang LaSalle Sallmanns Limited.
The excess cost of $1,143,701 was allocated to the acquired identified assets
and amortized through the useful lives of the allocated identified
assets.





6


In
January 2009, the Company acquired 85% equity interest of Hubei Hongping Power
Generation Co., Ltd. (“Hubei Hongping”) for $3,359,968 from third parties, which
operates Qiujiabang Hydropower Station, Shunshuiping Hydropower Station and
Huangjiawang Hydropower Station. On the date of acquisition, the book value of
Hubei Hongping was $1,511,163. Thus, the total acquisition cost of Hubei
Hongping was $1,848,805 higher than the net book value of Hubei Hongping, but
lower than the appraisal value assessed by Jones Lang LaSalle Sallmanns Limited.
The excess cost of   $1,848,805 was allocated to the acquired
identified assets and amortized through their useful lives of the allocated
identified assets.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Use of
Estimates





The
preparation of the financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses, and the related disclosures at the date of the financial statements
and during the reporting period. Actual results could materially differ from
these estimates. Significant estimates include the allowance for doubtful
accounts of accounts receivable, and the useful life of property, plant and
equipment, and intangible assets, assumptions used in assessing impairment of
long-term assets and valuation of deferred assets, accruals for taxes
due.





Fair Value of Financial
Instruments





The
Company adopted SFAS 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to
classify the inputs used in measuring fair value as follows:





Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.




Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.




Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.





The
carrying amounts reported in the balance sheets for cash, accounts receivable,
notes receivables, loans payable-long term, accounts payable and accrued
expenses, and amounts due from/to related parties approximate their fair market
value based on the short-term maturity of these instruments. The Company did not
identify any assets or liabilities that are required to be presented on the
consolidated balance sheets at fair value in accordance with SFAS
157.





Cash and Cash
Equivalents





For
purposes of the consolidated cash flow statements, the Company considers all
highly liquid investments with original maturities of three months or less at
the time of purchase to be cash equivalents. The Company maintains cash and cash
equivalents with various financial institutions mainly in the
PRC.  Balances in banks in the PRC are uninsured.





Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People’s Republic of China. Total cash in
state-owned banks at March 31, 2009 and December 31,2008 amounted to
$1,632,963 and $5,804,797 respectively, of which no deposits are covered by
insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank
accounts.





Concentrations of Credit
Risk





7


The
Company's operations are carried out in the PRC. Accordingly, the Company's
business,  financial condition and results of operations may be
influenced by the political, economic and legal environment in the PRC, and by
the general state of the PRC’s economy. The Company's operations in the PRC are
subject to specific considerations and significant risks not typically
associated with companies in North America. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.





Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. Substantially
all of the Company’s cash is maintained with state-owned banks within the
People’s Republic of China of which no deposits are covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any risks on its cash in bank accounts. A significant portion of the
Company's sales are credit sales which are primarily to customers whose ability
to pay is dependent upon the industry economics prevailing in these areas;
however, concentrations of credit risk with respect to trade accounts
receivables is limited due to generally short payment terms.  The
Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk.  At March 31, 2009 and December 31, 2008,
the Company’s bank deposits by geographic area were as follows:





March
      31,
              
              
              December
      31,2009
              
              
              2008Country:United
      States
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —China
              
              
              1,632,963
              
              
              
              100
              %
              
              
              5,804,797
              
              
              
              100
              %Total
      cash and cash equivalents
              
              
              1,632,963
              
              
              
              100
              %
              
              
              5,804,797
              
              
              
              100
              %





Accounts
Receivable





Accounts
receivable are presented net of an allowance for doubtful accounts. The company
maintains allowances for doubtful accounts for estimated losses. The company
reviews the accounts receivable on a periodic basis and makes general and
specific allowance when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, customer’s
historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. At
March 31, 2009 and 2008, the Company has established, based on a review of its
outstanding balances, an allowance for doubtful accounts in the amount of
$309,947 and $309,521 respectively.





Long-term
Investment




Long-term
investment is carried at cost. Dividends received are included in
investment income. Dividends received in excess of the Company’s
proportionate share of accumulated earnings of an investment are recorded as a
reduction of the cost of the investment. There were no reductions in excess of
the investment cost for the three months ended March 31, 2009 and
2008.





Property, Plant and
Equipment





Property,
plant and equipment are carried at cost and are depreciated on a straight-line
basis over the estimated useful lives of the assets. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized.  When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gains
or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not
be recoverable.





8


Property
and equipment have a residual value of 10% of actual cost. The estimated lives
used in determining depreciation are:





Classification
            
            Useful
      YearsDams
            
            50
      yearsBuildings
            
            20
      -50 yearsMachine
      equipment
            
            10-30
      yearsElectronic
      and other equipment
            
            3-10
      years





Construction in
Progress





Construction
in progress consists of factories and office buildings under construction and
machinery pending installation and includes the costs of construction, machinery
and equipment, and any interest charges arising from borrowings used to finance
these assets during the period of construction or installation. No provision for
depreciation is made on construction in progress until such time as the relevant
assets are completed and ready for their intended use.





For the
Hunan Zhaoheng Hydropower Station construction, the Company separated it into
two projects, central unit project and auxiliary project. The central unit
project mainly included the constructions of buildings, plant and equipment. The
auxiliary project was for landscaping and environment decoration of the station.
The central unit project was completed for operation in April 2008 and the
auxiliary project was expected to be finished in 2009.





As of
March 31, 2009, construction in progress consists of the auxiliary project of
the Hunan Zhaoheng Hydropower Station, Jingrong’s expansion project which the
Company is planning to expand its installed capacity for more electricity output
and the construction project of Huangjiawang Hydropower Station operated by
Hongping.





Intangible
Assets





Intangible
assets represent property use rights and Management Software. Property use
rights represent the land use rights in China. There is no private ownership of
land in China. Land is owned by the government and the government grants land
use rights for specified terms. Property use rights are carried at cost and are
amortized on a straight-line basis over the specified terms of the land use
rights granted by China government. The Company examines the possibility of
decreases in the value of intangible assets when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable.





The
Management Software is a new software used to help us remotely and efficiently
control our cost, budget and internal control..





Impairment of Long-lived
Assets





In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets”, the Company reviews, long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable, or at least
annually. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. The Company did not record any
impairment charges during the three months ended March 31, 2009 and
2008.





Minority
Interest





Under
generally accepted accounting principles when losses applicable to the minority
interest in a subsidiary exceed the minority interest in the equity capital of
the subsidiary, the excess is not charged to the majority interest since there
is no obligation of the minority interest to assume liability on such losses.
The Company, therefore, has absorbed all losses applicable to a minority
interest where applicable. If future earnings do materialize, minority interest
shall be credited to the extent of such losses previously absorbed.





9


Derivative Instruments and
Hedging Activities





The
Company accounts for derivative instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS
133”).  SFAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value.  Changes in the fair value
of derivatives are recorded each period in current earnings or in other
comprehensive income, depending on whether a derivative is designated as part of
a hedging relationship and, if it is, depending on the type of hedging
relationship.





The
Company engages in activities that expose it to market risks, including the
effects of changes in interest rates and fuel prices. Financial exposures
are evaluated as an integral part of the Company's risk management program,
which seeks, from time to time, to reduce potentially adverse effects that the
volatility of the interest rate and fuel markets may have on operating
results. The Company does not regularly engage in speculative transactions, nor
does it regularly hold or issue financial instruments for trading purposes. At
March 31, 2009, there were no outstanding derivatives. In addition, management
has reviewed their financial obligations as of March 31, 2009, and has
determined that there are no derivative liabilities that can be readily
determined or valued.





Income
Taxes





The
Company is governed by the Income Tax Law of the People’s Republic of China and
the United States.  Income taxes are accounted for under Statement of
Financial Accounting Standards No. 109, “Accounting for Income Taxes”,
which is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns.





The
Company adopted FIN 48, “Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statements No. 109”, as of January 1,
2007.  Under FIN 48, the evaluation of a tax position is a two-step
process. The first step is to determine whether it is more likely than not that
a tax position will be sustained upon examination, including the resolution of
any related appeals or litigation based on the technical merits of that
position. The second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of benefit to be
recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50% likelihood of being realized
upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition.  The adoption had no effect on the
Company’s consolidated financial statements.





Value Added Taxes
(VAT)





The
Company is required to charge and to collect for value added taxes on their
sales. In addition, the Company pays value added taxes on their primary
purchases, recorded as a receivable. These amounts are netted for financial
statement purposes.





Revenue
Recognition





The
Company follows the guidance of the Securities and Exchange Commission’s Staff
Accounting Bulletin No. 104 for revenue recognition.  In general, the
Company records revenue when persuasive evidence of an arrangement exists, power
have been delivered , the sales price to the customer is fixed or determinable,
and collectability is reasonably assured.





Employee
Benefits





The
Company’s operations and employees are all located in the PRC.  The
Company makes mandatory contributions to the PRC government’s health, retirement
benefit and unemployment funds in accordance with the relevant Chinese social
security laws, which is approximately 25% of salaries. The costs of these
payments are charged to income in the same period as the related salary costs
and are not material.





10


Foreign Currency
Translation





The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
operations and cash flows are translated at average exchange rates during the
period, assets and liabilities are translated at the unified exchange rate at
the end of the period, and equity is translated at historical exchange rates.
Translation adjustments resulting from the process of translating the local
currency financial statements into U.S. dollars are included in determining
comprehensive income.  The cumulative translation adjustment and effect of
exchange rate changes at March 31, 2009 and December 31, 2008 was $3,938,768 and
$3,892,956 respectively. Transactions denominated in foreign currencies are
translated into the functional currency at the exchange rates prevailing on the
transaction dates. Assets and liabilities denominated in foreign currencies are
translated into the functional currency at the exchange rates prevailing at the
balance sheet date with any transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in the functional
currency. The Company does not enter any material transaction in foreign
currencies and accordingly, transaction gains or losses have not had, and are
not expected to have, a material effect on the results of operations of the
Company.





Asset and
liability accounts at March 31, 2009 and December 31, 2008 were translated at
RMB6.8456 to $1.00 and at RMB6.8542 to $1.00, respectively. Equity accounts were
stated at their historical rate. The average translation rates applied to the
statements of income for the three months ended March 31, 2009 and 2008 were
RMB6.8459 and RMB7.1593 to $1.00, respectively.  In accordance with
Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows”,
cash flows from the Company's operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheets.





Income per Share of Common
Stock





Basic net
income per share is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted income per share is computed by dividing
net income by the weighted average number of shares of common stock, common
stock equivalents and potentially dilutive securities outstanding during each
period. The Company not issued any preferred stock, common stock warrants, or
options during the three months March 31, 2009 and 2008, thus, has no the
potentially dilutive common shares.





The
following table presents a reconciliation of basic and diluted net income per
share:





For
      the three months ended March 31,2009
              
              
              2008$
              
              
              $Net
      income available to common shareholders for basic and diluted net income
      per common share
              
              
              255,744
              
              
              
              1,033,049Weighted
      average common shares outstanding – basic
              
              
              71,692,999
              
              
              
              71,692,999Effect
      of dilutive securities:Preferred
      stock
              
              
              —
              
              
              
              —Unexercised
      warrants
              
              
              —
              
              
              
              —Weighted
      average common shares outstanding– diluted
              
              
              71,692,999
              
              
              
              71,692,999Net
      income per common share  - basic
              
              
              0.003
              
              
              
              0.003Net
      income per common share  - diluted
              
              
              0.003
              
              
              
              0.003




11




Accumulated Other
Comprehensive Income





The
Company follows Statement of Financial Accounting Standards No. 130 (“SFAS
130”) “Reporting Comprehensive
Income” to recognize the elements of comprehensive income. Comprehensive
income is comprised of net income and all changes to the statements of
stockholders' equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company,
comprehensive income for the three months ended March 31, 2009 and 2008 included
net income and unrealized gains from foreign currency translation
adjustments.





Related
Parties





Parties
are considered to be related to the Company if the parties that, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests. The Company shall disclose all related party transactions.
All transactions shall be recorded at fair value of the goods or services
exchanged. Property purchased from a related party is recorded at the cost to
the related party and any payment to or on behalf of the related party in excess
of the cost is reflected as a distribution to related party.





Major
Suppliers





The
Company’s supplies are mainly related to spare parts of low value that are used
for maintenance of the hydropower factories. As the Company could source the
supplies from various suppliers on comparable terms, no concentration risk is
perceived.





Major
Customers





For the
three months March ended 31, 2009 and 2008, the major five customers accounted
for approximately 100% and 88%, respectively, of the Company’s total sales. As
at March 31, 2009 and December 31, 2008, accounts receivables from these
customers were 100% and 83% of the total outstanding balance.





Acquisitions





The
Company accounts for acquisitions using the purchase method of accounting in
accordance with SFAS No. 141.  In each of our acquisitions we
determined that fair values were equivalent to the acquired historical carrying
costs. The estimated purchase price and the preliminary adjustments to
historical book value of business entities acquired were recorded by the Company
at the pre-acquisition carrying amount.





Recent Accounting
Pronouncements





In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 141(R), “Business
Combinations” (“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No.
141(R) establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effects of the business
combination. SFAS 141(R) is effective for fiscal years beginning after December
15, 2008, and applies to any business combinations which occur after December
31, 2008. The adoption of SFAS 141(R), effective January 1, 2009, may have an
impact on accounting for future business combinations.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements; rather, it applies
under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of SFAS
157 are effective for the fiscal years beginning after November 15, 2007.
Therefore, the Company adopted this standard on January 1, 2008, and the
adoption of this statement did not have a material impact to the Company’s
financial condition or results of operations.





12


On
October 10, 2008, the FASB issued SFAS No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active”. This FASB
Staff Position (“FSP”) clarifies the application of FASB Statement No. 157, Fair
Value Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. Statement 157 was issued
in September 2006, and is effective for financial assets and financial
liabilities for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
adopted SFAS 157-3 and determined that it had minimal impact, if any, as of
December 31, 2008 and for the year then ended. The Company will continue to
evaluate the impact, if any, of SFAS 157-3 on the Company’s financial
statements.





In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (“SFAS 158”), an
amendment of FASB Statements No. 87, 88, 106 and 132(R).
SFAS No. 158 requires (a) recognition of the funded status
(measured as the difference between the fair value of the plan assets and the
benefit obligation) of a benefit plan as an asset or liability in the employer’s
statement of financial position, (b) measurement of the funded status as of
the employer’s fiscal year-end with limited exceptions, and (c) recognition
of changes in the funded status in the year in which the changes occur through
comprehensive income. The requirement to recognize the funded status of a
benefit plan and the disclosure requirements are effective as of the end of the
fiscal year ending after December 15, 2006. The requirement to measure the
plan assets and benefit obligations as of the date of the employer’s fiscal
year-end statement of financial position is effective for fiscal years ending
after December 15, 2008. This Statement has no current applicability to the
Company’s financial statements. Management adopted this Statement on January 1,
2007, and the adoption of SFAS 158 did not have a material impact to the
Company’s financial position, results of operations, or cash flows.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). This statement permits
companies to choose to measure many financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. Therefore, the Company adopted this standard
on January 1, 2008, and the adoption of this statement did not have a
material impact on the Company’s financial condition or results of
operations.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the non-controlling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
does not expect SFAS No. 160 to have a material impact on the preparation of its
consolidated financial statements.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company does not expect SFAS No. 161 to have a material impact
on the preparation of its consolidated financial statements.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with generally accepted accounting principles in the
United States for non-governmental entities. SFAS No. 162 is effective 60 days
following approval by the U.S. Securities and Exchange Commission of the Public
Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.
The Company does not expect SFAS No. 162 to have a material impact on the
preparation of the Company’s consolidated financial statements.




13


Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the financial statements upon
adoption.





Note
2 – ACCOUNTS RECEIVABLE





At March
31, 2009 and December 31, 2008, accounts receivable consisted of the
following:





March
      31
                
                
                December
      31,2009
                
                
                2008$
                
                
                $Accounts
      receivable
                
                
                2,913,730
                
                
                
                4,524,480Less:
      allowance for doubtful accounts
                
                
                -309,949
                
                
                
                -309,5612,603,781
                
                
                
                4,214,919





Note
3 – OTHER RECEIVABLES





Other
receivables at March 31, 2009 and December 31, 2008 amounted to $737,560 and
$50,751, respectively. Other receivables primarily consist of payments to secure
green field development rights of Baishadu Hydropower Station and Huanghugang
Hydropower Station and advances to employees for business travel
purpose.





Note
4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS





Prepaid
expenses and other current assets consist of advances to suppliers and tax
refund. Prepaid expenses and other current assets at March 31, 2009 and December
31, 2008 amounted to $114,104 and $196,507, respectively.





Note
5 – LONG-TERM INVESTMENT





As of
March 31, 2009 and December 31, 2008, Hunan Zhaoheng invested $572,631 and
$571,912 respectively for a 49% equity interests in Zhaoheng Winner Tungsten
(Shimen), Ltd. (“Winner”). According to memorandum and articles of association
of Winer, Hunan Zhaoheng does not participate in the management of Winner, but
receives annual dividend at a fixed rate of 20% of its investment in Winner
starting from the date Winner commenced production. The other shareholders of
Winner committed to buy back equity interests held by Hunan Zhaoheng
progressively at historical cost, the investment income was then adjusted in
accordance with Hunan Zhaoheng’s equity interest in Winner based on the above
investment term. Winner commenced its operation in October 2007.





The
investment was accounted for at cost basis. The dividend generated from this
investment was presented as investment income in our unaudited consolidated
financial statements. The dividend income was then calculated based on the above
investment term. Total dividend incomes for the three months ended March 31,
2009 and 2008, were $28,630 and $27,377, respectively.





Note
6 – PROPERTY, PLANT AND EQUIPMENT





14


Property,
plant and equipment as of March 31, 2009 and December 31, 2008 are summarized as
follows:





March
      31
                
                
                December
      31,2009
                
                
                2008$
                
                
                $Dams
                
                
                95,093,123
                
                
                
                76,382,522Buildings
                
                
                847,335
                
                
                
                762,976Machine
      equipment
                
                
                38,502,419
                
                
                
                37,036,230Electronic
      and other equipment
                
                
                1,020,906
                
                
                
                2,259,294Total
                
                
                135,463,784
                
                
                
                116,441,022Less:
      Accumulated Depreciation
                
                
                (48,854,827
                )
                
                
                (41,288,337
                )86,608,957
                
                
                
                75,152,685





As of
March 31, 2009, $3,423,165 of dam was allocated from the excess cost in the
acquisition of Jingrong, Hubei Huohe and Hongping. Depreciation expenses for the
three months March ended 31, 2009 and 2008 amounted to $807,344 and $270,343,
respectively.





Note
7 – OTHER ASSETS





Other
assets consisted of the following:





March
      31
                
                
                December
      31,2009
                
                
                2008$
                
                
                $Spare
      parts
                
                
                366,449
                
                
                
                294,308Deposit
                
                
                —
                
                
                
                4,620Setup
      expenses
                
                
                —
                
                
                
                26,750366,449
                
                
                
                325,678








Note
8 – CONSTRUCTION IN PROGRESS





As of
March 31, 2009, construction in progress amounted to $1,759,915 and consists of
auxiliary project of Hunan Zhaoheng Hydropower Station such as landscaping and
slope, Jingrong’s Expansion project which the Company is planning to expand its
hydropower station for more electricity and construction project of Huangjiawang
Hydropower Station.





As of
December 31, 2008, construction in progress amounted to $1,173,415 and consists
of auxiliary project of Hunan Zhaoheng Hydropower Station such as landscaping
and slope and Jingrong’s Expansion project.





Note
9 –INTANGIBLE ASSETS





Intangible
assets consist of the following as of March 31, 2009 and December 31,
2008.





March
      31
                
                
                December
      31,2009
                
                
                2008$
                
                
                $Property
      use right
                
                
                1,414,047
                
                
                
                1,412,273Management
      software
                
                
                94,889
                
                
                
                —Less:
      Accumulated amortization
                
                
                (199,427
                )
                
                
                (192,116
                )1,309,509
                
                
                
                1,220,157





Amortization
expenses for the three months March ended 31, 2009 and 2008 amounted to $7,070
and $6,066 respectively.





Note
10 – TAXES PAYABLE





15


Taxes
payable at March 31, 2009 and December 31, 2008 amounted to $727,070 and
$841,318 respectively. Taxes payable are summarized below:





March
      31
                
                
                December
      31,2009
                
                
                2008$
                
                
                $Business
      tax payable
                
                
                23,953
                
                
                
                154,295Value
      added tax payable
                
                
                114,328
                
                
                
                185,161Property
      tax payable
                
                
                29,448
                
                
                
                29,002Income
      tax payable
                
                
                88,883
                
                
                
                71,318Government
      fees
                
                
                450,060
                
                
                
                362,188Other
      taxes
                
                
                20,398
                
                
                
                39,354727,070
                
                
                
                841,318





Note
11 – OTHER PAYABLES





Other
payables at March 31, 2009 and December 31, 2008 amounted to $4,814,102 and
$2,427,345, respectively. Other payables primarily consisted of payables to
contractors and suppliers as quality warrant bond for the construction of Hunan
Zhaoheng Hydropower Station, as well as payables in the amount of $3,703,576 to
the original shareholders in the acquisition of Hubei Huohe and
Hongping.





Note
12 – LONG-TERM LOANS





The
Company was obligated for the following long-term loans as of March 31, 2009 and
December 31, 2008:





March
      31
              
              
              December
      31Lenders
      and Terms
              
              2009
              
              
              2008$
              
              
              $Due
      to Construction Bank of China on April 30, 2010. Interest rate is adjusted
      every 12 months based on the bench mark rate set by the People’s Bank of
      China. For the years of 2008 and 2007, the average interest rate was 7.65%
      and 7.2% respectively. Pledged with property, plant and
      equipment.
              
              
              6,281,407
              
              
              
              6,273,525Due
      to Construction Bank of China on July 30, 2011. Interest rate is adjusted
      every 12 months based on the bench mark rate set by the People’s Bank of
      China. For the years of 2008 and 2007, the average interest rate was 7.65%
      and 6.8% respectively. Pledged with property, plant and equipment and
      guaranteed by Shenzhen Zhaoheng Industrial Co., Ltd., one of our related
      companies.
              
              
              2,921,585
              
              
              
              2,917,919Due
      to Construction Bank of China on August 30, 2011. Interest rate is
      adjusted every 12 months based on the bench mark rate set by the People’s
      Bank of China. For the years of 2008 and 2007, the average interest rate
      was 7.65% and 7.02% respectively. Pledged with property, plant and
      equipment and guaranteed by Shenzhen Zhaoheng Industry Co.,
      Ltd.
              
              
              8,764,754
              
              
              
              8,753,757Due
      to Bank of China on March 3, 2012. Interest rate is Floated based on the
      prime rate set by the People’s Bank of China. For the years of 2008 and
      2007, the average interest rate are 7.74% and 6.84% respectively. Pledged
      with 66.7% ownership of Hunan Zhaoheng Hydropower Co., Ltd, one of our
      subsidiaries, and guaranteed by Shenzhen Zhaoheng Industry Co.,
      Ltd.
              
              
              18,259,904
              
              
              
              21,884,392Due
      to Industrial & Commerce Bank of China on March 23, 2022. Fixed
      interest rate of 7.11% in 2008. Guaranteed by Shenzhen Zhaoheng Industry
      Co., Ltd.
              
              
              23,372,678
              
              
              
              23,343,352Due
      to Zhushan Rural Credit Cooperative on November 24,2010. For the years of
      2008,the average interest rate are 7.56%.
              
              
              1,460,792Total
              
              
              61,061,120
              
              
              
              63,172,945Less:
      short-term loans
              
              
              
              
              
              
              –Long-term
      loans
              
              
              61,061,120
              
              
              
              63,172,945





16


For the
three months ended March 31, 2009, the Company had repaid $3,651,981 loan to
Bank of China.





Note
13 – STOCKHOLDERS’ EQUITY





Reverse
Merger




On May
13, 2008, Zhaoheng BVI entered into a share exchange agreement (the “Share
Exchange Agreement”) with Certified resulting in a change of control of
Certified. Pursuant to the Share Exchange Agreement, Certified issued an
aggregate of 69,686,970 shares of common stock, par value $0.001 (the “Common
Stock”), to Embedded Internet Solutions Limited (“Embedded Internet”), a Cayman
Islands company wholly owned by Guosheng Xu, the Company’s current Chief
Executive Officer and Chairman of Board of Directors, in exchange for all of the
common stocks of Zhaoheng BVI (the “Share Exchange”). The Share Exchange has
been accounted for as a reverse acquisition and accordingly the Share Exchange
has been treated as a recapitalization of Zhaoheng BVI, with Zhaoheng BVI as the
acquirer.  On July 17, 2008, Certified reincorporated in the
State of Nevada and changed the name to Zhaoheng Hydropower
Company.





Contemporaneously
with the closing of the Share Exchange, some shareholders of Certified also
transferred approximately 572,170 shares of common stock to Embedded Internet
pursuant to a stock purchase agreement (“Stock Purchase”). As a result of the
completion of the Share Exchange and the Stock Purchase, Embedded Internet owns
approximately 98% interest of the Company’s outstanding common
stocks.





Statutory
Reserve





Shenzhen
Zhaoheng, Hunan Zhaoheng and Hunan Sanjiang are foreign-invested companies in
PRC, according to relevant laws and regulations in China, the companies reserve
some profit as reserve fund, enterprise development fund with the exact amount
decided by the board of directors. As of March 31, 2009 and December 31, 2008,
the Company had a statutory surplus reserve of $666,952.





Domestic
companies located in the PRC are required to make appropriations to statutory
surplus reserve and discretionary surplus reserve, based on after-tax net income
determined in accordance with law of the PRC. Appropriation to the statutory
surplus reserve should be 10% of the after tax net income determined in
accordance with the generally accepted accounting principles of the People’s
Republic of China(“PRC GAAP) until the reserve is equal to 50% of the entitles’
registered capital or members’ equity.





The
company, as an entity registered in Nevada, does not need to provide statutory
reserves.





Retained
Earnings





As of
March 31, 2009 and December 31, 2008, the details of retained earnings are
listed as below:





March
      31
                
                
                December
      31,2009
                
                
                2008$
                
                
                $Retained
      earnings
                
                
                6,831,916
                
                
                
                6,621,983Statutory
      surplus reserve
                
                
                666,952
                
                
                
                666,9527,498,868
                
                
                
                7,288,935




17





Note
14 – INCOME TAXES





Refer to
the table below for general description of tax treatments for each of the six
major operating entities as mentioned.





Entity
            Tax
      treatmentsHunan
      Zhaoheng
            -Preferential
      rate of 15%, and will be increased to 25% progressively within the next
      five years from January 1, 2008 onwards.
              -40%
      purchase price of domestic equipments can be used as tax
      credit.
              -Based
      on related regulation of PRC, this company fulfills the condition of
      applying 2 years tax exemption and subsequently 3 years 50% reduction in
      income tax from January 1, 2008 onwards.Hubei
      Huohe
            -25%
      of income tax rate from January 1, 2008.Hongping
            -25%
      of income tax rate from January 1, 2008.Jingrong
            -Preferential
      rate of 15% and will be increased to 25% progressively within the next
      five years from January 1, 2008 onwards.
              -Based
      on related regulation of PRC, this company fulfills the condition of
      applying 2 years tax exemption and subsequently 3 years 50% reduction in
      income tax from January 1, 2008 onwards, However, we still need to get
      final approval from tax authorities and we are currently in the process of
      the application.Hunan
      Sanjiang
            -Preferential
      rate of 15% and will be increased to 25% progressively within the next
      five years from January 1, 2008 onwards.
              -Two
      years tax exemption from the first profitable year (2005) and subsequently
      50% reduction in income tax for the next 3 years including years ended
      December 31, 2007, 2008 and 2009.Shenzhen
      Zhaoheng
            -15%
      of income tax rate for the years ended December 31, 2007 and 2006 and will
      increase to 25% progressively within the next five years from January 1,
      2008 onwards.





Deferred
income taxes arise from temporary timing differences in the recognition of
income and expenses for financial reporting and tax purposes. The Company's
deferred tax assets consist entirely of the benefit from net operating loss
(“NOL”) carryovers of our subsidiaries Shenzhen Zhaoheng, Guizhou Jingrong and
Hubei Hongping in prior years. As of March 31, 2009 and December 31, 2008, the
net operating losses for Shenzhen Zhaoheng, Hubei Huohe and Hubei Hongping were
$2,531,686 and $811,336 respectively. According to the PRC regulations, all
unused net operating loss can be carried forward for a time frame of five years.
The Company's deferred tax assets are offset by a valuation allowance due to the
uncertainty of the realization of net operating loss carryovers. Net operating
loss carryovers may be further limited by other provisions of tax laws in China.
With regards to the Company’s US corporate parent, they have incurred an
aggregate net operating loss, since the May 13, 2008 Share Exchange, of
approximately $493,000. This loss carry forward will expire, if not utilized,
through 2028. Management believes that the realization of benefits from this
loss appears not more than likely, due to the Company’s limited operating
history. Accordingly, the Company has provided a 100% valuation allowance on
this US deferred tax asset. Management has determined that losses incurred by
the US corporate parent prior to the Share Exchange might be subject to rules
under Internal Revenue Code Section 382, which places a limitation on the amount
of taxable income that can be offset by net operating losses after a change in
ownership. Such change might have occurred as a result of the Share
Exchange.





18


The
components of income (loss) before income tax consist of the
following:





For
      the three months Ended March 31,2009
                
                
                2008$
                
                
                $U.S.
      Operations
                
                
                (38,442
                )
                
                
                —Chinese
      Operations
                
                
                297,557
                
                
                
                207,586259,115
                
                
                
                207,586








Note
15 – RELATED PARTY TRANSACTIONS





Due from related
party





The
Company distributed power to its related party Hunan Jiuli at market price. For
the three months ended March 31, 2009 and 2008, the total sales amounted to
$353,800 and $341,859 respectively.





The
Company leases its warehouse, plant and operating space to its related party
Zhaoheng Winner Tungsten (Shimen) Company limited for 5 years since June 1, 2006
under operating lease agreements. The rental is $1,340 each month with exemption
period of 5 months.





At March
31, 2009 and December 31, 2008, due from related parties was due from the
following:





March
      31
              
              
              December
      31Related
      party
              
              Relationship
              
              2009
              
              
              2008
              
              Interest
      rate$
              
              
              $Zhaoheng
      Winner Tungsten (Shimen) Co., Ltd.
              
              49%
      owned by the Company as long-term investment
              
              
              1,213,654
              
              
              
              1,155,072
              
              12%
      annual; without securityHunan
      Jiuli Hydropower Construction Co., Ltd.
              
              Both
      Jiuli and the Company are beneficially controlled by our Chairman and CEO
      Mr. Guosheng Xu
              
              
              
              
              
              
              178,778
              
              Interest
      free; without securityShenzhen
      Zhaoheng Industrial Co., Ltd.
              
              Both
      Zhaoheng Industrial and the Company are beneficially controlled by our
      Chairman and CEO Mr. Guosheng Xu
              
              
              
              
              
              3,911,631
              
              120%
      of the bench mark rate set the People’s Bank of China and adjusted
      annually; without security1,213,654
              
              
              
              5,245,481





As of
March 31, 2009, due from Zhaoheng Winner consisted of the amount of $12,493 for
factory building lease and $1,201,161 for non-operating fund disposition; due
from Hunan Jiuli consisted of due to Hunan Sanjiang in the amount of $439,341
for electricity purchase; due from Hunan Jiuli consisted of the amount of
$439,341 for electricity sold from the Company.





Due to related
party





19


At March
31, 2009 and December 31, 2008, due to related parties was due from the
following:





March
      31
              
              
              December
      31Related
      party
              
              Relationship
              
              2009
              
              
              2008
              
              Interest
      rate$
              
              
              $Shenzhen
      Zhaoheng Industrial Co., Ltd.
              
              Both
      Zhaoheng Industrial and the Company are beneficially controlled by our
      Chairman and CEO Mr. Guosheng Xu
              
              
              1,122,044
              
              
              
              
              Interest
      free; without securityHubei
      JinYuan Hydropower Development Co., Ltd.
              
              15%
      shareholder of our subsidiary Hongping
              
              
              898,485
              
              
              
              
              Benmark
      rate of People’s Bank of ChinaZhushan
      Jinfeng Industrial Co., Ltd.
              
              12%
      shareholder of Hubei Huohe
              
              
              241,508
              
              
              
              259,503
              
              Benmark
      rate of People’s Bank of China2,262,037
              
              
              
              259,503





Note
16 – OPERATING RISKS





(a)
            Country
      risk





Currently,
the Company's revenues are derived fully from distribution of power in the
Peoples Republic of China (“PRC”). A change in relevant regulations or downturn
in the economic environment of the PRC could have a material adverse effect on
the Company's financial condition.





(b)
            Products
      risk





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





(c)
            Exchange
      risk





The
Company generates and distributes power locally in the PRC. All transactions are
settled in local currency. Therefore, the Company believes that the relevant
exchange risk exposure should not be significant.





(d)
            Political
      risk





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





(e)
            Key
      personnel risk





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




20




(f)
            Governmental
      regulation risk





Despite
efforts to develop the legal system over the past several decades, including but
not limited to legislation dealing with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade,
the PRC continues to lack a comprehensive system of laws. Further, the laws that
do exist in the PRC are often vague, ambiguous and difficult to enforce, which
could negatively affect the Company’s ability to do business in China and
compete with other companies in the Company’s hydropower subsidiaries. Legal
protections afforded to the Company and its shareholders in the US might not be
available in the PRC.





In
September 2006, the Ministry of Commerce (“MOFCOM”) promulgated the
Regulations on Foreign Investors' Mergers and Acquisitions of Domestic
Enterprises (“M&A Regulations”) in an effort to better regulate foreign
investment in China. The M&A Regulations were adopted in part as a needed
codification of certain joint venture formation and operating practices, and
also in response to the government's increasing concern about protecting
domestic companies in perceived key industries and those associated with
national security, as well as the outflow of well-known trademarks, including
traditional Chinese brands.





As a U.S.
based company doing business in China, we seek to comply with all PRC laws,
rules and regulations and pronouncements, and endeavor to obtain all necessary
approvals from applicable PRC regulatory agencies such as the MOFCOM, the State
Assets Supervision and Administration Commission, the State Administration for
Taxation, the State Administration for Industry and Commerce, the China
Securities Regulatory Commission, and the State Administration of Foreign
Exchange.





Note
17 – SUBSEQUENT EVENTS





On April
10, 2009, two of the Company’s subsidiaries, Shenzhen Zhaoheng and Hunan
Zhaoheng, entered into an equity transfer agreement (“Transfer Agreement”).
Pursuant to Transfer Agreement, Hunan Zhaoheng transferred 100% interest of
Jingrong to Shenzhen Zhaoheng.  Jingrong owns Yongfu Hydropower
Station which is located in Rongjiang County of Guizhou Province in
China.  The total installed capacity of Jingrong is
7.5MW.





On April
24, 2009, the Company completed a private placement of equity to 52 investors
for an aggregate purchase price of $5,689,853, agreeing to issue 4,947,699
shares of its Common Stock, par value $0.001 per share pursuant to a
Subscription Agreement signed by and between the Investors and the Company on
April 24, 2009.





21





ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Cautionary
Statement Regarding Forward-Looking Statements





The
following discussion of our financial condition and results of operations should
be read in conjunction with our condensed consolidated financial statements and
related notes thereto included elsewhere in this quarterly report. This
discussion, as well as various other sections of this quarterly report, contains
statements that constitute “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements include statements
regarding, among other things, (a) our future financial performance, (b) our
growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans, and (e) our anticipated needs for working capital. In some
cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expect,” “plan,” “anticipate,” “estimate,” “believe,”
“intend,” “objective,” “predict,” “potential,” “project” or “continue,” or the
negative of these words or other variations on these words or comparable
terminology. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by
forward-looking statements. These statements are only predictions and actual
events or results may differ materially.





Readers
are urged to carefully review and consider the various disclosures made by us in
this quarterly report and our other public filings with the United States
Securities and Exchange Commission (the “SEC”), including the risks and
uncertainties described in the Risk Factors section in Part I, Item 1A of our
Form 10-K filed on April 15, 2009. You should not place undue reliance on any
forward-looking statement as a prediction of actual results or developments. We
undertake no duty to update or revise any forward-looking statement after the
date of this report to reflect actual results or to changes in our expectations
or future events.





Company
Overview





We were
incorporated under the laws of the State of Minnesota in January 1984 with
registered name of “Certified Technologies Corporation” (“Certified”). On
February 21, 2008, we reincorporated in the State of Nevada. As a result of a
share exchange or “reverse acquisition” transaction consummated on May 13,
2008, we are now engaged in the investment, operation, and development of
environmentally friendly small- to medium-sized hydropower plants in China
through an indirect operating subsidiary, Zhaoheng Hydropower (Hong Kong)
Limited (“Zhaoheng HK”), a company operating in China. As our wholly owned
subsidiary, Zhaoheng Investment Limited (BVI), a British Virgin Islands
corporation (“Zhaoheng BVI”), owns 100% of the capital stock of Zhaoheng
HK.





On July
17, 2008, Certified changed its corporate name from “Certified Technologies
Corporation” to our current corporate name, “Zhaoheng Hydropower
Company”.





Our
Common Stock is currently traded on the Over-The-Counter Bulletin Board
(“OTCBB”) under the symbol “ZHYP.OB”.





Results
of Operations





With the
commencement of operations of two new generating units at Hunan Zhaoheng
Hydropower Co., Ltd. (“Hunan Zhaoheng”) in April 2008, the acquisition of
Jingrong Industrial Development Co., Ltd. (“Jingrong”), Hubei Minyuan Huohe
Hydropower Development Co., Ltd. (“Hubei Huohe”) and Hubei Hongping Power
Generation Co., Ltd. (“Hongping”) in June 2008, November 2008 and January 2009,
respectively, we currently own and operate eight facilities in Hunan, Hubei and
Guizhou Provinces, including Hunan Sanjiang Hydropower Station, Hunan Zhaoheng
Hydropower Station, Guizhou Yongfu Hydropower Station, Huohe Cascade II
Hydropower Station and Huohe Cascade III Hydropower Station, with a total
installed capacity of 149.3MW, an increase of 139% from March 31, 2008.
Currently, all generating units are in good working condition.





22


The
following table sets forth certain operating data for the periods
indicated:





For
      Three Months Ended March 312009
              
              
              2008$
              
              
              $Revenues
              
              
              3,184,487
              
              
              
              1,290,939Cost
      of revenues
              
              
              1,281,181
              
              
              
              464,377Gross
      profit
              
              
              1,903,306
              
              
              
              826,562Operating
      Expenses
              
              
              499,224
              
              
              
              320,228Operating
      income
              
              
              1,404,082
              
              
              
              506,334Interest
      Income
              
              
              29,221
              
              
              
              1,167Interest
      Expense
              
              
              (1,265,276
              )
              
              
              (309,665
              )Net
      Income
              
              
              209,933
              
              
              
              196,053Gross
      Margin
              
              
              59.8
              %
              
              
              64.0
              %Operating
      Margin
              
              
              44.1
              %
              
              
              39.2
              %Net
      Income Margin
              
              
              7.0
              %
              
              
              15.2
              %





Revenues





Revenues
for the three months ended March 31, 2009 were $3,184,487, an increase of
$1,893,548 or 146.7% from $1,290,939 for the three months ended March 31, 2008.
The increase in revenues was primarily due to an increase in electricity on-grid
tariffs and an increase in output due to increased total installed capacity.
Since July 2008, the benchmark on-grid tariff of our two Hunan facilities was
increased from RMB0.28/kWh to RMB0.295/kWh. Our total installed capacity
increased from 62.5MW as of March 31, 2008to 149.3MW as of March
31, 2009 as a result of the commencement of operation of two new generating
units with an aggregate installed capacity of 50MW in April 2008, the
acquisition of Guizhou Yongfu Hydropower Station with total installed capacity
of 7.5MW in June 2008, the acquisition of Huohe Cascade II and Huohe Cascade III
hydropower stations with total installed capacity of 12.85MW in November 2008,
and the acquisition of Shunshuiping Hydropower Station, Qiujiabang Hydropower
Station, Huangjiawang Hydropower Station in January 2009. These seven newly
constructed or newly acquired hydropower stations contributed $1,487,209 toward
our total revenues for the three months ended March 31, 2009.





Cost
of Revenues





Cost of
revenues consisted of power purchase, depreciation expense of property, plant
and equipment, equipment maintenance cost, direct labor, overhead and state
taxes (not including value-added tax, price exclusive tax and corporate income
tax).





Cost of
revenues for the three months ended March 31, 2009 was $1,281,181 or 40.2% of
revenues, an increase of $816,804, or 175.9%, from $464,377 or 36.0% of revenues
for the three months ended March 31, 2008.





In
connection with the expansion of our existing facilities and the acquisition of
new facilities, our fixed asset depreciation increased to $807,344, or 25.4% of
revenues, for the three months ended March 31, 2009, from $270,343, or 20.9% of
revenues for the three months ended March 31, 2008; our maintenance cost
increased to $124,364, or 3.9% of revenues for the three months ended March 31,
2009, from $48,675, or 3.8% of revenues for the three months ended March 31,
2008; and our labor cost increased to $146,949, or 4.6% of revenues for the
three months ended March 31, 2009, from $77,766, or 6.0% of revenues for the
three months ended March 31, 2008.





Gross
Profit





As a
result of the foregoing, our gross profit increased from $826,562 for the three
months ended March 31, 2008 to $1,903,306 for the three months ended March 31,
2009, representing an increase of $1,076,744, or 130.3%. The increase in our
gross profit was mainly attributable to the increase in the benchmark on-grid
tariff of both Hunan Sanjiang Electric Power Co., Ltd. (“Hunan Sanjiang”) and
Hunan Zhaoheng from RMB0.28/kWh to RMB0.295/kWh since July 2008, and an increase
in total installed capacity from 62.5MW as of March 31, 2008 compared to 149.3MW
as of March 31, 2009. However, our gross margin decreased to 59.8% for the three
months ended March 31, 2009 from 64.0% for the three months ended March 31,
2008.





23


Operating
Expenses





Total
operating expenses, which include selling, general and administrative expenses,
increased by $178,996, or 55.9% to $499,224 for the three months ended March 31,
2009 from $320,228 for the three months ended March 31, 2008. The increase in
operating expenses for the three months period was mainly due to: (i) an
increase of $93,970 attributable to our three newly acquired operating entities
including Jingrong, Hubei Huohe and Hongping; (ii) an increase of $308,200
attributable to an increase in overhead at our headquarters, which largely
consists of $102,461 in wage expenditure and $134,463 in professional service
fees including legal fees and audit fees, partly offset by: (i) a decrease of
$63,806 attributable to the sale of Hunan Jiuli Hydropower Construction Co.,
Ltd. (“Hunan Jiuli”) to Shenzhen Zhaoheng Industrial Co., Ltd.(“Zhaoheng
Industrial”), a related party, in April 2008; and (ii) a decrease of $167,881 in
the operating expense of Hunan Sanjiang and Hunan Zhaoheng, our subsidiaries.
However, operating expenses as a percentage of revenues decreased to 15.7% for
the three months ended March 31, 2009 from 24.8% for the three months ended
March 31, 2008.





Operating
Income





Operating
income was $1,404,082 for the three months ended March 31, 2009, an increase of
$897,748, or 177.3%, from $506,334 for the three months ended March 31,
2008.  However, our operating income margin was 44.1% for the three
months ended March 31, 2009 as compared to 39.2% for the three months ended
March 31, 2008. The increase in operating income margin was due to the decrease
in our operating expenses as a percentage of revenues as discussed
above.





Interest
Income





For the
three months ended March 31, 2009, we realized interest income of $29,221,
compared with interest income of $1,167 for the three months ended March 31,
2008. Interest income was generated from loans to our related party Zhaoheng
Winner (Shimen) Tungsten Industry Company Limited (“Winner”). Interest rates
charged on loans to related parties were 12% in the three months ended March 31,
2009. As of March 31, 2009, the loans to Winner amounted to $1,155,072, compared
to $1,213,654 as of March 31, 2008.





Interest
Expense





Interest
expense was $1,265,276 for the three months ended March 31, 2009, as compared to
$309,665 for the three months ended March 31, 2008. This significant increase
was mainly due to the fact that: (i) the interest expenses of $794,212 for the
three months ended March 31, 2008 incurred by Hunan Zhaoheng were capitalized
and not included in our statement of operations because the project was under
construction, while for the three months ended March 31, 2009, interest expenses
of Hunan Zhaoheng amounted to $878,216 and were included in our statement of
operations; (ii) we paid interest of $42,226 on loans that we assumed when we
acquired Hubei Huohe and Hongping in November 2008 and January 2009
respectively; and (iii) we borrowed loans and paid interest on such loans in
Renminbi while the average foreign currency exchange rate between U.S. dollar
and Renminbi decreased between the three months ended March 31, 2008 and the
three months ended March 31, 2009.





Investment
Income





Total
investment income was $28,630 for the three months ended March 31, 2009 as
compared to $27,377 for the three months ended March 31, 2008. The investment
income was generated from the long-term investment in Winner. As of March 31,
2009 and December 31, 2008, our investment in Winner was $572,631 and $571,912,
respectively, for a 49% equity interest in Winner. The difference in investment
amount resulted from the change in the foreign currency exchange rate. The
investment amount was unchanged in Renminbi. According to the memorandum and
articles of association of Winner, Hunan Zhaoheng does not participate in the
management of Winner, but is to receive an annual dividend at a fixed rate of
20% of its investment in Winner starting from the date Winner commenced
production. In addition, the other shareholders of Winner have committed to buy
back the equity interests held by Hunan Zhaoheng progressively at historical
cost and the dividend income was adjusted in accordance with Hunan Zhaoheng’s
equity interest in Winner based on the above investment term. Winner commenced
its operation in October 2007.





24


Non
Operating Income





Non
operating income for the three months ended March 31, 2009 was $61,982. Non
operating income came from interest forfeited by original shareholders when we
assumed shareholder loans as part of our acquisition of Hongping.  We
did not generate non operating income for the three months ended March 31,
2008.





Income
Taxes





We did
not conduct any business or maintain any office in the United States for the
three months ended March 31, 2009 and 2008. Therefore, no provision for U.S.
federal income taxes has been made.





For the
three months ended March 31, 2009 and 2008, our operations were conducted solely
in China and governed by the PRC Enterprise Income Tax Law. PRC enterprise
income tax is calculated based on taxable income determined under PRC GAAP. In
accordance with the Income Tax Laws, a PRC domestic company is subject to
enterprise income tax (“EIT”) at the rate of 25% effective January 1, 2008.
However, the Income Tax Laws provide certain favorable tax treatment to a
foreign invested company in the energy industry. Additionally, the PRC
government at the provincial, municipal and local levels can provide many tax
incentives and abatements based on a number of programs at each
level.





For the
three months ended March 31, 2009, our income taxes were $75,556 and came
entirely from our subsidiary Hunan Sanjiang. Applicable income tax rate for
Hunan Sanjiang for the three months ended March 31, 2009 was 10% due to certain
preferential income tax policies including: (i) a “two-year exemption followed
by a three-year 50% reduction” income tax policy granted to energy and
infrastructure sectors; (ii) a 15% preferential income tax rate granted to
hydropower operators; and (iii) a mandatory tax rate increase from 15% to a
uniform 25% progressively in five years starting from 2008. Under the same
“two-year exemption followed by a three-year 50% reduction” income tax policy,
Hunan Zhaoheng was exempted from income tax for the three months ended March 31,
2009. Further, the income before tax of Shenzhen Zhaoheng, Jingrong and Hubei
Huohe was offset by net operating loss carryovers from previous years, so there
were no income tax expenses for these three subsidiaries for the three months
ended March 31, 2009.





For the
three months ended March 31, 2008, our income taxes were $11,533 and came
entirely from our subsidiary Hunan Sanjiang. Applicable income tax rate for
Hunan Sanjiang for the three months ended March 31, 2008 was 9% due to
preferential income tax policies including: (i) a “two-year exemption followed
by a three-year 50% reduction” income tax policy granted to energy and
infrastructure sectors; and (ii) a 15% preferential income tax rate granted to
hydropower operators.





Net
Income





Net
income increased to $209,933 for the three months ended March 31, 2009 from
$196,053 for the three months ended March 31, 2008. As a percentage of revenue,
net income was 6.6% for the three months ended March 31, 2009, as compared to
15.2% for the three months ended March 31, 2008.





The
decrease in net income as a percentage of revenue was mainly due to an increase
in both cost of revenues and interest expense as a percentage of
revenues.





Changes
in Financial Condition





Cash
and Cash Equivalent





Our cash
and cash equivalent decreased by $4,171,834 to $1,632,963 as of March 31, 2009
from $5,804,797 as of December 31, 2008, primarily due to  $4,595,409
used in investing activities and $4,188,032 used in financing activities, partly
offset by $4,059,358 generated from operating activities..





25


Accounts
Receivable





Our
accounts receivable, net of allowance for doubtful accounts, decreased by
$1,611,138 to $2,603,781 as of March 31, 2009 from $4,214,919 as of December 31,
2008. The decrease in accounts receivable was mainly due to the receipt of
payment by Hunan Sanjiang and Hunan Zhaoheng, our two subsidiaries, from the
State Grid Corporation of China.





Other
Receivables





Other
receivables increased by $686,809 to $737,560 as of March 31, 2009 from $50,751
as of December 31, 2008, primarily due to advances of $262,942 and $401,718 to a
hydropower development company for the preparation work in connection with the
construction of Baishadu Hydropower Station and Huanghugang Hydropower
Station.





Property,
Plant and Equipment





Property,
plant and equipment increased by $11,456,272 to $86,608,957 as of March 31, 2009
from $75,152,685 as of December 31, 2008, primarily as a result of new
acquisitions and the transfer of construction in progress of Hunan Zhaoheng
Hydropower Station to property, plant and equipments..





Due
from/to Related Parties





Amounts
due from related parties decreased by $4,031,827 to $1,213,654 as of March 31,
2009 from $5,245,481 as of December 31, 2008. Amounts due to related parties
increased by $2,002,534 to $2,262,037 as of March 31, 2009 from $259,503 as of
December 31, 2008. See Note 15 to our financial statements.





Construction
in Progress





Construction
in progress increased by $586,500 to $1,759,915 as of March 31, 2009 from
$1,173,415 as of December 31, 2008, primarily due to the ongoing auxiliary
project of Hunan Zhaoheng Hydropower Station, such as landscaping and slope and
the consolidation of construction in progress of Huangjiawang Hydropower Station
(“Huangjiawang”) in our balance sheet when we acquired Huangjiawang in January
2009.





Other
payables





Other
payables increased by $2,386,757 to $4,814,102 as of March 31, 2009 from
$2,427,345 as of December 31, 2008, mainly as a result of the payment of
$3,703,576 to the original shareholders for the acquisition of Hubei Huohe and
Hongping.





Liquidity
and Capital Resources





Historically,
we financed our operations and capital expenditures with equity financing from
our stockholders, cash flows from operations and bank loans. Over the years, we
developed good working relationships with the Bank of China, Industrial and
Commercial Bank of China, China Construction Bank and China Agriculture Bank. To
keep pace with the rapid growth and expansion of our business, we may need to
raise additional capital, primarily to acquire developed hydropower stations or
to construct new stations. As a result, we will seek to raise additional funds
to finance our future growth.





Cash
Flow





Cash is
primarily used to fund the acquisition of new facilities and working capital.
The following table sets forth changes in cash flows for each of the periods
ended March 31, 2009 and 2008:





Three
      Months Ended March 31,2009
                
                
                2008$
                
                
                $Cash
      and cash equivalents at beginning of period
                
                
                5,804,797
                
                
                
                994,719Cash
      flows from operating activities
                
                
                4,059,358
                
                
                
                379,127Cash
      flows from investing activities
                
                
                (4,595,409
                )
                
                
                144,178Cash
      flows from financing activities
                
                
                (3,651,981
                )
                
                
                —Net
      increase/(decrease) in cash and cash equivalents
                
                
                (4,188,032
                )
                
                
                523,305Cash
      and cash equivalents at end of period
                
                
                1,632,963
                
                
                
                2,077,063





26


Operating
Activities





Cash flow
from operating activities reflects profits for the quarter adjusted for non-cash
items such as depreciation and amortization expenses and the effects of changes
in working capital, such as trade and other receivables and trade and other
payables.





For the
three months ended March 31, 2009, we had net cash inflow from operating
activities of $4,059,358, primarily as a result of net income of $209,933,
adjusted for changes in depreciation and amortization expenses due to operation
of new facilities, accounts receivable, other payables, other receivables and
taxes payable.





For the
three months ended March 31, 2008, we had net cash inflow from operating
activities of $379,127, primarily as a result of net income of $177,108,
adjusted for changes in depreciation and amortization expenses due to operation
of new facilities, accounts receivable, and prepaid expense and other current
assets.





Investing
Activities





Cash flow
used in investing activities reflects amounts due to related parties, cash used
in acquisitions, construction in progress, cash used to purchase intangible
assets as well as property, plant and equipment.





For the
three months ended March 31, 2009, our net cash outflow used in investing
activities was $4,595,409. Our net cash outflow used in investing activities
mainly consisted of: (i) decrease in amounts due to related parties, including
Zhaoheng Industrial and the original shareholders of Hubei Huohe and Hongping,
which amounted to $5,427,895; (ii) cash used in the acquisition of Hubei Huohe
which amounted to $3,355,753; and (iii) cash used in construction in progress in
the amount of $586,500, partly offset by (i) decrease in amounts due from
related parties, including Hunan Jiuli and Zhaoheng Industrial in the amount of
$4,031,827; and (ii) cash assumed from acquired subsidiaries in the amount of
$897,072.





For the
three months ended March 31, 2008, our net cash inflow from investing activities
was $144,178. Our net cash inflow from investing activities mainly consisted of
an increase in amounts due from related parties of $1,454,955, partly offset by
cash used in construction in progress in the amount of $1,389,099.





Financing
Activities





Cash flow
used in financing activities reflects cash used to repay long-term bank
loans.





For the
three months ended March 31, 2009, our net cash outflow used in financing
activities was $3,651,981. This entire amount was used in the repayment of
long-term loans from the Bank of China.





We did
not have cash flow from financing activities for the three months ended March
31, 2008.





Critical
Accounting Policies





Management's
discussion and analysis of its financial condition and results of operations is
based upon our unaudited consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles. Our financial statements reflect the selection and application of
accounting policies which require management to make significant estimates and
judgments. See Note 2 to the unaudited consolidated financial statements, “Summary of Significant Accounting
Policies”. Management makes its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. Management believes that the following reflects the
most critical accounting policies that currently affect our financial condition
and results of operations:





27


Consolidation





The
unaudited consolidated financial statements include the accounts of our Company
and our subsidiaries. Significant intercompany transactions have been eliminated
in consolidation. Investments in which we have a 20 percent to 50 percent voting
interest and where we exercise significant influence over the investee are
accounted for using the equity method.





The
following table sets forth details of our subsidiaries as of March 31,
2009:





Name
      of Company
            
            Place
      of
                Incorporation
            
            Date
      of
                Incorporation
            
            Attributable
      Equity Interest
            
            Registered
      Capital(%)
            
            (RMB)Shenzhen
      Zhaoheng Hydropower Co., Ltd.
            
            China
            
            August
      3, 1999
            
            100
            
            11,000,000Hunan
      Sanjiang Electric Power Co., Ltd.
            
            China
            
            November
      8, 2001
            
            100
            
            199,400,000Hunan
      Zhaoheng Hydropower Co., Ltd.
            
            China
            
            June
      25, 2003
            
            100
            
            150,000,000Jingrong
      Industrial Development Co., Ltd.
            
            China
            
            January
      24, 2002
            
            100
            
            1,000,000Hubei
      Minyuan Huohe Hydropower Development Co., Ltd.
            
            China
            
            December
      12, 2004
            
            88
            
            10,000,000Hubei
      Hongping Power Generation Co., Ltd.
            
            China
            
            April
      6, 1998
            
            85
            
            22,000,000





Economic
and Political Risks





Our
operations are conducted in China. Accordingly, our business, financial
condition, and results of operations may be influenced by the political,
economic and legal environment in China.





Our
operations in China are subject to special considerations and significant risks
not typically associated with companies in North America and Western Europe.
These include risks associated with, among others, the political, economic and
legal environment and foreign currency exchange. The operating results may be
adversely affected by changes in the political and social conditions in China,
and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation, among other things.





Use
of Estimates





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, our management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting year. These accounts and estimates
include, but are not limited to, the valuation of accounts receivable,
inventories, deferred income taxes and the estimation on useful lives of plant
and machinery. Actual results could differ from those estimates.





Cash
and Cash Equivalents





For
purposes of the consolidated cash flow statements, we consider all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents.





Investment
in Subsidiaries





We use
the cost method to account for investments in common stock of entities in which
we have a minority voting interest or in which we otherwise have the ability to
exercise significant influence or the right to share any net earnings or losses
of the entity. Under the cost method, the investment is originally recorded at
cost. We are recording the investment in Winner as an investment under the cost
method of accounting.





28


Winner is
49% owned by us and is engaged in downstream processing and sales of
tungsten.





Accounts
and Other Receivable





Accounts
and other receivable are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. We
extend unsecured credit to customers in the normal course of business and does
not accrue interest on trade accounts receivable. Allowance for uncollectible
accounts as of March 31, 2009 was not significant.





Bad
Debt Recognition Standard and Calculation Method





(a)
            Bad
      Debt Recognition Standard





(i)
            Uncollectible
      debt due to debtor's bankruptcy or
death.





(ii)
            Uncollectible
      debt due to debtor’s inability to keep account current for over half year,
      which is also approved by the board as bad
debt.





(b)
            Allowance
      Method of Accounting for Bad Debt





Our
accounting method for bad debt allowance is based on the aging of receivables
(including receivables and other receivables), with consideration of debtor’s
financial situation.  The allowance for bad debt is calculated as
following:





Aging
      of Receivables
                
                Rate
      for Bad Debt AllowanceWithin
      30 days
                
                
                1
                %30-60
      days
                
                
                3
                %60-90
      days
                
                
                6
                %90-180
      days
                
                
                30
                %180-360
      days
                
                
                50
                %Over
      360 days
                
                
                100
                %





Revenue
recognition





Our
revenue recognition policies are structured to comply with Staff Accounting
Bulletin No. 104 (“SAB104”). SAB 104 requires that revenue can only be
recognized when it is realized or realizable and earned. Revenue generally is
realized or realizable and earned when all four of the following criteria have
been met: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the price is fixed and determinable; and (4)
collectability is reasonably assured.





Determination
of criterion (4) is based on our judgment regarding the collectability of those
amounts. Historically, we have not encountered any significant problems with
collectability and thus have determined that it is not necessary to defer
revenue recognition on that basis. Should changes in conditions cause us to
determine this criterion is not met for certain future transactions, revenues
for any reporting period could be adversely affected by delaying recognition of
such revenues.





Property,
Plant and Equipment





Property,
plant and equipment, other than construction in progress, are stated at cost
less accumulated depreciation. Depreciation is recorded by the straight-line
method over the estimated original useful lives of the assets. Major renewals
and betterments are capitalized and depreciated; maintenance and repairs that do
not extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
Depreciation related to property, plant and equipment used in production is
reported in cost of sales.





Long-term
assets are reviewed annually as to whether their carrying value has become
impaired. We did not record any impairment charges during the three months ended
March 31, 2009 or 2008.





29


Intangible
Asset





Intangible
assets are stated at cost less amortization and accumulated impairment loss.
Amortization is provided over their estimated useful lives, using the
straight-line method.





Construction
in Progress





Construction
in progress represents the cost of constructing new hydropower station. The
major cost of construction includes construction materials, direct labor and
overhead.





Completed
items are transferred from construction in progress to property, plant and
equipment, when they are ready for their intended use.





Foreign
Currency Translation





Transactions
and balances originally denominated in Chinese dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52, “Foreign Currency
Translation”, and are included in determining net income or
loss.





Our
reporting currency is the U.S. dollar. The functional currency of our PRC
subsidiaries is the Renminbi. For foreign operations with the local currency as
the functional currency, assets and liabilities are translated from the local
currencies into Chinese dollars at the exchange rate prevailing at the balance
sheet date and weighted average rates of exchange for the period for revenues,
costs, and expenses. Net gains and losses resulting from foreign exchange
transactions are included in the consolidated statements of
operations.





The
Renminbi is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions. No
representation is made that the Renminbi amounts could have been, or could be,
converted into U.S. dollar at the rates used in translation.





Income
Tax





Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.





Pursuant
to the tax laws of the PRC, general enterprises are subject to income tax at a
new effective rate of 25% since January 1, 2008.





We are
engaged in the energy industry whose development is encouraged by the PRC
government. According to the income tax regulation, any company engaged in the
hydropower industry enjoys a favorable tax rate. We are exempt from corporate
income tax for the first two years and entitled to a 50% tax reduction for the
following three years. Refer to the table below for general description of tax
treatments for each of the entities as mentioned.





Entity
            
            Tax
      treatmentsHunan
      Zhaoheng
            
            -Preferential
      rate of 15% (income tax), and will increase to 25% progressively within
      the next five years from January 1, 2008 onwards.
              -40%
      reduction of income tax for the purchase of locally manufactured
      equipments.
              -Based
      on related regulation of PRC, this company fulfills the condition of
      applying 2 years tax exemption and subsequently 3 years 50% reduction in
      income tax from January 1, 2008 onwards, related application is now
      processing.Jingrong
            
            -Preferential
      rate of 15% (income tax) and will be increased to 25% progressively within
      the next five years from January 1, 2008 onwardsHunan
      Sanjiang
            
            -Preferential
      rate of 15% (income tax), and will increase to 25% progressively within
      the next five years from January 1, 2008 onwards.
              -Two
      years tax exemption from the first profit year (2005) and subsequently 50%
      reduction in income tax for the next 3 years including years ended
      December 31, 2007, 2008 and 2009.Shenzhen
      Zhaoheng
            
            -15%
      of income tax rate for the years ended December 31, 2007 and 2006 and will
      increase to - 25% progressively within the next five years from January 1,
      2008 onwards.





30





ITEM
3.                      QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




This item
is not required for a smaller reporting company.




ITEM
4T.                      CONTROLS
AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





During
the fiscal period covered by this report, our management, with the participation
of our Chief Executive Officer and Vice President of Finance, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such
evaluation, our Chief Executive Officer and Vice President of Finance have
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the required
time periods and are designed to ensure that information required to be
disclosed in our reports is accumulated and communicated to our management,
including our Chief Executive Officer and Vice President of Finance, as
appropriate, to allow timely decisions regarding required
disclosure.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of a company’s annual or interim financial
statements will not be prevented or detected on a timely basis. In its
assessment of the effectiveness of internal control over financial reporting as
of March 31, 2009, our management identified the following material
weaknesses:





1.
            Insufficient
      number of independent non-executive directors on our board of directors.
      In addition, we have yet to establish an audit committee, compensation
      committee, nominating committee and corporate governance committee. In the
      absence of an audit committee and an internal audit function, the board of
      directors is not able to exercise oversight responsibility related to
      financial reporting and related internal
  controls.





The
control environment sets the tone of an organization, influences the control
consciousness of its employees, and is the foundation of all other components of
internal control over financial reporting. The material weaknesses in the
control environment listed above, together with the limitation of the board of
directors to exercise oversight responsibility over the internal controls over
financial reporting, contributed to the material weakness listed
below.





2.
            Insufficient
      number of finance personnel with an appropriate level of knowledge,
      expertise and training in the application of U.S. GAAP and in internal
      controls over financial reporting commensurate with our reporting
      requirements, which resulted in a significant number and magnitude of
      out-of-period adjustments to our consolidated financial statements and in
      previously reported restatements, including the accounts of
      construction-in-progress, revenues, interest income, cost of revenues,
      general and administrative expenses, interest expenses, income tax and
      accrued expenses.





31


Our
annual report on Form 10-K did not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Our management’s report was not subject to attestation by
our independent registered public accounting firm pursuant to temporary rules of
the SEC that permit us to provide only management’s report in our annual report
on Form 10-K.








Changes
in Internal Control Over Financial Reporting




In
January 2009, we acquired 85% equity interest in Hongping, as more fully
described in Note 1 to the Condensed Consolidated Financial Statements.
Commencing in April 2009, we have initiated a transition period in which we are
attempting to review, evaluate, improve and integrate Hongping’s existing
internal control structure into our internal control system. The implementation
process is expected to be completed during the fiscal year ending December 31,
2009. Because we are in the process of evaluating the internal controls over
financial reporting associated with this acquisition, any material changes that
may result from this acquisition have not been disclosed in this report. We
intend to disclose all material changes resulting from this acquisition within,
or prior to the time of, our annual assessment of internal control over
financial reporting for the fiscal year ending December 31, 2009.




Other
than as set forth above, there were no changes in our internal controls over
financial reporting during the three months ended March 31, 2009 that have
materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.





32




PART
II - OTHER INFORMATION







ITEM
1.                      LEGAL
PROCEEDINGS




We are
not a party to any legal proceedings.




ITEM
1A.                       RISK
FACTORS





There are
no material changes to the risk factors previously disclosed in our annual
report on Form 10-K filed with the SEC on April 15,
2009.








ITEM
2.                      UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





None.





ITEM
3.                      DEFAULTS
UPON SENIOR SECURITIES





None.





ITEM
4.                       SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM
5.                      OTHER
INFORMATION





None.





33


ITEM
6.                        EXHIBITS





Exhibit
      No.
            Description31.1
            Certification
      of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a),
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*31.2
            Certification
      of the Vice President of Finance pursuant to Rules 13a-14(a) and
      15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*32.1
            Certification
      of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes- Oxley Act of
      2002*32.2
            Certification
      of the Vice President of Finance pursuant to 18 U.S.C Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes- Oxley Act of
      2002*


_________________________





* filed
herewith




34


SIGNATURES





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











ZHAOHENG
      HYDROPOWER COMPANYDated:
      May 14, 2009
            By:
            /s/ Guosheng
  XuName:
      Guosheng XuTitle:  Chairman
      and Chief Executive Officer(principal
      executive officer and duly authorized officer)Dated:
      May 14, 2009
            By:
            /s/ Changbing
      HuangName:
      Changbing HuangTitle:  Vice
      President of Finance