UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





(Mark
One)





x
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended September 30,
2008





OR





r
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      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
            
            (I.R.S.
      EmployerIncorporation
      or Organization)
            
            Identification
      No.)





F/19,
      Unit A, JingFengCheng Building
              5015
      Shennan Road, Shenzhen PRC
            
            518025(Address
      of Principal Executive Offices)
            
            (Zip
      Code)





(011-86)
755-8207-0966


(Registrant’s
Telephone Number, Including Area Code)





(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such

















shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days.    Yes x     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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the last practicable date: As of August 11, 2008, there were
71,692,999 shares of the issuer’s common stock, $0.001 par value per share,
outstanding.
















INDEX





PagePART
      I           
      FINANCIAL INFORMATIONItem
      1.
                            Financial
      Statements
                            1Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            19Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            29Item
      4.
                            Controls
      and Procedures
                            29PART
      II OTHER
      INFORMATIONItem
      1.
                            Legal
      Proceedings
                            29Item
      1A.
                            Risk
      Factors
                            29Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            37Item
      3.
                            Defaults
      Upon Senior Securities
                            37Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            37Item
      5.
                            Other
      Information
                            37Item
      6.
                            Exhibits
                            37SIGNATURES









PART
I — FINANCIAL INFORMATION





ITEM
1.     FINANCIAL STATEMENTS








ZHAOHENG
      HYDROPOWER COMPANY AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSSeptember
      30,
                                          
                                          
                                          December
      31,2008
                                          
                                          
                                          2007ASSETS
                                          
                                          (Unaudited)Current
      Assets:Cash
                                          
                                          $
                                          3,114,904
                                          
                                          
                                          $
                                          994,719Notes receivable
                                          
                                          
                                          -
                                          
                                          
                                          
                                          202,349Accounts receivable, net of allowance for doubtful accounts
      $327,652and $307,090 respectively
                                          
                                          
                                          2,430,558
                                          
                                          
                                          
                                          1,915,471Dividend receivable
                                          
                                          
                                          -
                                          
                                          
                                          
                                          71,460Other receivables
                                          
                                          
                                          117,498
                                          
                                          
                                          
                                          145,075Prepaid expenses and other current assets
                                          
                                          
                                          67,541
                                          
                                          
                                          
                                          85,971Total
      current assets
                                          
                                          
                                          5,730,501
                                          
                                          
                                          
                                          3,415,045Investment in subsidiary
                                          
                                          
                                          571,837
                                          
                                          
                                          
                                          535,951Property, plant and equipment, net of accumulated depreciation
      of$40,254,091 and $34,380,646 respectively
                                          
                                          
                                          73,504,610
                                          
                                          
                                          
                                          30,634,626Due from related parties
                                          
                                          
                                          16,369,507
                                          
                                          
                                          
                                          17,529,838Other assets
                                          
                                          
                                          174,429
                                          
                                          
                                          
                                          175,886Construction in progress
                                          
                                          
                                          2,553,107
                                          
                                          
                                          
                                          32,455,855Property use rights, net
                                          
                                          
                                          1,227,057
                                          
                                          
                                          
                                          1,169,905Goodwill
                                          
                                          
                                          401,122
                                          
                                          
                                          
                                          -Total
      assets
                                          
                                          $
                                          100,532,170
                                          
                                          
                                          $
                                          85,917,106LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts payable and accrued expenses
                                          
                                          $
                                          12,606
                                          
                                          
                                          $
                                          133,163Other payables
                                          
                                          
                                          962,224
                                          
                                          
                                          
                                          1,739,867Salary payable and judgements payable
                                          
                                          
                                          31,032
                                          
                                          
                                          
                                          7,600Taxes payable
                                          
                                          
                                          643,586
                                          
                                          
                                          
                                          157,525Due to related parties
                                          
                                          
                                          3,581,833
                                          
                                          
                                          
                                          31,444Advances from customers
                                          
                                          
                                          35,793
                                          
                                          
                                          
                                          34,021Total
      current liabilities
                                          
                                          
                                          5,267,074
                                          
                                          
                                          
                                          2,103,620Loans
      payable-long term
                                          
                                          
                                          64,623,419
                                          
                                          
                                          
                                          60,567,944Stockholders'
      Equity:Preferred Stock: $.001 par value; 20,000,000 authorized, no shares issued
      and outstandingat September 30, 2008 and December 31, 2007, respectively
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Common Stock: $.001 par value, 780,000,000 authorized, 71,692,943 and
      2,005,973 issuedand outstanding at September 30, 2008 and December 31, 2007,
      respectively
                                          
                                          
                                          71,693
                                          
                                          
                                          
                                          2,006Additional paid-in capital
                                          
                                          
                                          19,336,244
                                          
                                          
                                          
                                          19,405,931Statutory surplus reserve
                                          
                                          
                                          666,952
                                          
                                          
                                          
                                          666,952Retained earnings
                                          
                                          
                                          6,357,052
                                          
                                          
                                          
                                          628,704Accumulated other comprehensive income
                                          
                                          
                                          4,209,736
                                          
                                          
                                          
                                          2,541,949Total
      stockholders' equity
                                          
                                          
                                          30,641,677
                                          
                                          
                                          
                                          23,245,542Total
      liabilities and stockholders' equity
                                          
                                          $
                                          100,532,170
                                          
                                          
                                          $
                                          85,917,106See
      notes to unaudited consolidated financial statements
  
  
 1
  
 ZHAOHENG
      HYDROPOWER COMPANY AND SUBSIDIARIESUNAUDITED
      CONSOLIDATED STATEMENTS OF OPERATIONSFor
      the Three Months Ended September 30,
                                                
                                                
                                                For
      the Nine Months Ended September 30,2008
                                                
                                                
                                                2007
                                                
                                                
                                                2008
                                                
                                                
                                                2007Revenues
                                                
                                                $
                                                5,156,207
                                                
                                                
                                                $
                                                3,191,260
                                                
                                                
                                                $
                                                9,789,788
                                                
                                                
                                                $
                                                7,722,300Cost
      of revenues
                                                
                                                
                                                722,820
                                                
                                                
                                                
                                                424,892
                                                
                                                
                                                
                                                1,942,789
                                                
                                                
                                                
                                                1,303,246Gross
      profit
                                                
                                                
                                                4,433,387
                                                
                                                
                                                
                                                2,766,368
                                                
                                                
                                                
                                                7,846,999
                                                
                                                
                                                
                                                6,419,054Operating
      expenses:Selling expense, General and administrative expenses
                                                
                                                
                                                400,003
                                                
                                                
                                                
                                                317,658
                                                
                                                
                                                
                                                934,438
                                                
                                                
                                                
                                                1,039,914Operating
      income
                                                
                                                
                                                4,033,384
                                                
                                                
                                                
                                                2,448,710
                                                
                                                
                                                
                                                6,912,561
                                                
                                                
                                                
                                                5,379,140Other
      income (expenses):Interest
      income
                                                
                                                
                                                677,264
                                                
                                                
                                                
                                                2,845
                                                
                                                
                                                
                                                1,642,276
                                                
                                                
                                                
                                                34,084Interest
      expense
                                                
                                                
                                                (1,223,717
                                                )
                                                
                                                
                                                (257,405
                                                )
                                                
                                                
                                                (2,686,779
                                                )
                                                
                                                
                                                (695,817
                                                )Nonoperating
      income
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (6,766
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                66,833Nonoperating
      expense
                                                
                                                
                                                (926
                                                )
                                                
                                                
                                                (13,789
                                                )
                                                
                                                
                                                (21,932
                                                )
                                                
                                                
                                                (37,333
                                                )Other
      income
                                                
                                                
                                                311
                                                
                                                
                                                
                                                109,800
                                                
                                                
                                                
                                                26,540
                                                
                                                
                                                
                                                109,800Other
      expense
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (16,285
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (16,285
                                                )Investment
      income
                                                
                                                
                                                29,893
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                189,043
                                                
                                                
                                                
                                                -Total
      other income (expenses)
                                                
                                                
                                                (517,175
                                                )
                                                
                                                
                                                (181,600
                                                )
                                                
                                                
                                                (850,852
                                                )
                                                
                                                
                                                (538,718
                                                )Income
      before income taxes
                                                
                                                
                                                3,516,209
                                                
                                                
                                                
                                                2,267,110
                                                
                                                
                                                
                                                6,061,709
                                                
                                                
                                                
                                                4,840,422Income
      taxes
                                                
                                                
                                                178,936
                                                
                                                
                                                
                                                196,289
                                                
                                                
                                                
                                                333,228
                                                
                                                
                                                
                                                366,742Income
      before minority interest
                                                
                                                
                                                3,337,273
                                                
                                                
                                                
                                                2,070,821
                                                
                                                
                                                
                                                5,728,481
                                                
                                                
                                                
                                                4,473,680Minority
      interest
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (278,937
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                976,781Net
      income
                                                
                                                $
                                                3,337,273
                                                
                                                
                                                $
                                                1,791,884
                                                
                                                
                                                $
                                                5,728,481
                                                
                                                
                                                $
                                                3,496,899Unrealized
      foreign currency translation gain
                                                
                                                
                                                42,977
                                                
                                                
                                                
                                                1,075,250
                                                
                                                
                                                
                                                1,667,787
                                                
                                                
                                                
                                                983,831Comprehensive  income
                                                
                                                $
                                                3,380,250
                                                
                                                
                                                $
                                                2,867,134
                                                
                                                
                                                $
                                                7,396,268
                                                
                                                
                                                $
                                                4,480,730Net
      income per common share- basic and diluted
                                                
                                                $
                                                0.05
                                                
                                                
                                                $
                                                0.89
                                                
                                                
                                                $
                                                0.15
                                                
                                                
                                                $
                                                1.74Weighted
      average number of sharesoutstanding-basic
      and diluted
                                                
                                                
                                                71,692,943
                                                
                                                
                                                
                                                2,005,973
                                                
                                                
                                                
                                                37,742,881
                                                
                                                
                                                
                                                2,005,973See
      notes to unaudited consolidated financial statements.
   2
  ZHAOHENG
      HYDROPOWER COMPANY AND SUBSIDIARIESUNAUDITED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFor
      the Nine Months Ended September 30,2008
                            
                            
                            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                            
                            $
                            5,728,481
                            
                            
                            $
                            3,496,899Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization expenses
                            
                            
                            1,215,494
                            
                            
                            
                            799,182Minority
      interest
                            
                            
                            -
                            
                            
                            
                            997,331Changes
      in operating assets and liabilities:Notes
      receivable
                            
                            
                            211,463
                            
                            
                            
                            9,311Accounts
      receivable
                            
                            
                            (378,887
                            )
                            
                            
                            1,299,999Dividend
      receivable
                            
                            
                            74,679
                            
                            
                            
                            -Other
      receivables
                            
                            
                            36,526
                            
                            
                            
                            (839,843
                            )Prepaid
      expense
                            
                            
                            (34,631
                            )
                            
                            
                            (124,431
                            )Other
      assets
                            
                            
                            (321,600
                            )
                            
                            
                            (90,861
                            )Accounts
      payable and accrued expenses
                            
                            
                            102
                            
                            
                            
                            (949,940
                            )Other
      payables
                            
                            
                            (976,945
                            )
                            
                            
                            (1,030,490
                            )Advances
      from customers
                            
                            
                            (35,554
                            )
                            
                            
                            88,390Taxes
      payable
                            
                            
                            465,943
                            
                            
                            
                            329,730Net
      cash provided by operating activities
                            
                            
                            5,985,071
                            
                            
                            
                            3,985,277CASH
      FLOWS FROM INVESTING ACTIVITIESDue
      from related parties
                            
                            
                            5,868,204
                            
                            
                            
                            (12,894,046
                            )Purchase
      of equity investment
                            
                            
                            (2,626,077
                            )
                            
                            
                            -Purchase
      of property, plant and equipment
                            
                            
                            (7,131,947
                            )
                            
                            
                            (107,213
                            )Investment
      in construction of hydropower station
                            
                            
                            -
                            
                            
                            
                            (11,486,794
                            )Net
      cash used in investing activities
                            
                            
                            (3,889,820
                            )
                            
                            
                            (24,488,053
                            )CASH
      FLOWS FROM FINANCING ACTIVITIESDividend
      paid
                            
                            
                            -
                            
                            
                            
                            (3,158,772
                            )Proceeds
      from long-term loans
                            
                            
                            -
                            
                            
                            
                            21,682,452Net
      cash provided by financing activities
                            
                            
                            -
                            
                            
                            
                            18,523,680NET
      INCREASE (DECREASE) IN CASH
                            
                            
                            2,095,251
                            
                            
                            
                            (1,979,096
                            )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                            
                            
                            24,934
                            
                            
                            
                            265,845CASH,
      BEGINNING OF YEAR
                            
                            
                            994,719
                            
                            
                            
                            4,819,766CASH,
      ENDING OF PERIOD
                            
                            $
                            3,114,904
                            
                            
                            $
                            3,106,514SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the period for:Interest
      paid
                            
                            $
                            2,686,779
                            
                            
                            $
                            2,551,175Income
      tax paid
                            
                            $
                            239,804
                            
                            
                            $
                            173,430See
      notes to unaudited consolidated financial statements
   
 3




ZHAOHENG
      HYDROPOWER COMPANY AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY(Unaudited)Preferred
      Stock
                                        
                                        
                                        Common
      StockShares
                                        
                                        
                                        Amount
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Additional
                                          Paid-in
      Capital
                                        
                                        
                                        Statutory
                                          Surplus
      Reserve
                                        
                                        
                                        Retained
                                          Earnings
                                        
                                        
                                        Accumulated
      Other
                                          Comprehensive
      Income
                                        
                                        
                                        TotalBalance,
      January 1, 2008
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        2,005,973
                                        
                                        
                                        $
                                        2,006
                                        
                                        
                                        $
                                        5,470,767
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (5,514,655
                                        )
                                        
                                        $
                                        2,541,949
                                        
                                        
                                        $
                                        2,500,067Recapitalization
      of reverse acquisition
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        69,686,970
                                        
                                        
                                        
                                        69,687
                                        
                                        
                                        
                                        13,865,477
                                        
                                        
                                        
                                        666,952
                                        
                                        
                                        
                                        6,143,226
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        20,745,342Commprehensive
      income:Net
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,728,481
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,728,481Unrealized
      foreign currency translation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,667,787
                                        
                                        
                                        
                                        1,667,787Subtotal
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        7,396,268Balance,
      September 30, 2008
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        71,692,943
                                        
                                        
                                        $
                                        71,693
                                        
                                        
                                        $
                                        19,336,244
                                        
                                        
                                        $
                                        666,952
                                        
                                        
                                        $
                                        6,357,052
                                        
                                        
                                        $
                                        4,209,736
                                        
                                        
                                        $
                                        30,641,677See
      notes to unaudited consolidated financial statements
      4







ZHAOHENG
HYDROPOWER COMPANY AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED


FINANCIAL
STATEMENTS





Note
1 – ORGANIZATION AND BUSINESS OPERATIONS





Certified
Technologies Corporation ("Certified") was incorporated under the laws of the
State of Minnesota in January, 1984. Certified was formed to market a fire
retardant chemical formulation to the commercial aviation and business furniture
industries. Certified filed for a Chapter 11 bankruptcy on July 11, 2000, which
was converted to a Chapter 7 on October 23, 2000. The bankruptcy closed on
November 4, 2004.





On May
13, 2008, Zhaoheng Investment Limited, a British Virgin Island Corporation
("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, in exchange for all of the shares of common stock of Zhaoheng BVI (the
“Share Exchange”). Contemporaneously with the closing of the Share Exchange,
certain holders of our Common Stock completed a sale of approximately 572,170
shares of Common Stock owned by them to Embedded Internet pursuant to a stock
purchase agreement (the “Stock Purchase”). As a result of the completion of the
Share Exchange and the Stock Purchase, Embedded Internet now owns shares of our
Common Stock constituting approximately 98% of our outstanding capital
stock.





Upon the
consummation of the Share Exchange, Certified ceased being a shell company and
is now engaged in the investment and operation of small and medium sized
hydropower stations in the People’s Republic of China (“PRC”).





In
November 2007, Zhaoheng BVI’s wholly-owned subsidiary, Zhaoheng Hydropower (Hong
Kong) Limited (“Zhaoheng HK”), was established in Hong Kong. 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 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”.





On
February 27, 2008, Certified reincorporated in the State of Nevada and on July
17, 2008, Certified changed its corporate name from “Certified Technologies
Corporation” to “Zhaoheng Hydropower Company”.





Hereafter,
Zhaoheng BVI, Zhaoheng HK, the Operating Entities that consolidated their equity
interest into Zhaoheng BVI, 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 a
letter of intent to transfer its 100% interest in Hunan Juili to its related
party, Shenzhen Zhaoheng Industrial Co., Ltd., for a consideration of RMB
13,038,000. All relevant procedures were completed in April 2008. As a result,
Hunan Jiuli is not a subsidiary of the Company as of June 30, 2008.





On June
15, 2008, Hunan Zhaoheng succeeded in the buyout of Guizhou Jingrong Industrial
Development Co., Ltd (“Guizhou Jingrong”) in Rongjiang County of the Guizhou
Province. The acquisition was undertaken to allow the Company to diversify its
operations, to improve its financial condition and increase shareholder
value.





The
Company uses the purchase method of accounting for qualifying business
combinations. Under the purchase method of accounting, the assets and
liabilities of acquired companies 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 Guizhou Jingrong was
initially estimated at $2,332,668 and the








5






amount
was paid on June 30, 2008. After final adjustment pursuant to the acquisition
agreement, the final cost was set at $2,681,150. The Company had paid the
difference by September 30, 2008.





The
Company, by virtue of their ownership structure, owns three hydropower stations
(Hunan Sanjiang Hydropower Station, Hunan Sanjiang Left Bank Hydropower Station
and Guizhou Jingrong Industrial Development Station) and other relevant
operating assets located in the People’s Republic of China (“PRC”).





The
financial statements as presented hereby consolidated for the nine months ended
September 30, 2008 and 2007. The accompanying unaudited financial statements of
the Company as of September 30, 2008 and 2007 had been prepared in accordance
with generally accepted accounting principles (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X, as promulgated by the US Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. The financial statements for the nine months
ended September 30, 2008 and 2007 are unaudited and include all adjustments
considered necessary for a fair presentation of the results of operations for
the nine month periods ended September 30, 2008 and 2007. All such adjustments
are of a normal recurring nature. The results of the Company's operations for
any interim period are not necessarily indicative of the results of the
Company's operations for a full fiscal year.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
Preparation





The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the accounts of the Company’s four
Operating Entities.  Inter-company items and transactions have been
eliminated in combination.





Estimates





In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reported period. Actual results could differ from those
estimates. Significant estimates include the allowance for doubtful accounts of
accounts receivable, and the useful life of property, plant and
equipment.





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.





Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at September
30, 2008 and December 31, 2007 amounted to $3,111,092 and $994,693 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.





Accounts
Receivable





The
Company conducts its business operations in the PRC. Accounts receivables are
reported at net realizable value. Management reviews its accounts receivable on
a regular basis. Delinquent accounts are written off when it’s determined that
the amounts are uncollectible. Accounts receivable, net of the allowance
for doubtful accounts, as of September 30, 2008 and December 31, 2007
were $2,430,558 and $1,915,471 respectively.





Investments in
Subsidiary





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






6






recording
the investment in Zhaoheng Weile Tungsten (Shimen), Ltd. (“Weile”) as an
investment under the cost method of accounting.





Property, Plant and
Equipment





Property,
      plant and equipment are stated at the actual cost on acquisition less
      accumulated depreciation. Depreciation is provided for in amounts
      sufficient to relate the cost of depreciation assets to operations over
      their estimated service lives, principally on a straight-line basis.
      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





Maintenance
and repairs are charged to expense as incurred. Significant renewals and
improvements are capitalized.





Construction in
Progress





As of
September 30, 2008, "construction in progress" refers to the auxiliary project
of Hunan Sanjiang Left Bank Hydropower Station and Guizhou Jingrong’s expansion
project which amounted to $2,553,107. As of  December 31, 2007, it
refers to Hunan Sanjiang Left Bank Station, which amounted to $32,455,855.
We started to test operations in April 2008. The amounts allocated to
"construction in progress" was transferred to property, plant and equipment in
July 2008. The carryover amount is $34,909,173.





Intangible
Assets





Intangible
assets represent the excess of cost over fair value of non-contractual
relationships. In accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets”, intangible assets are amortized over their useful lives. The useful
life for the intangible assets is 20 years since July 2008.





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.





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.





Sales
revenue represents the invoiced value of goods or service, net of a value-added
tax (“VAT”). All of the Company’s products that are sold in the PRC are subject
to a Chinese value-added tax at a rate of 17% of the gross sales price. This VAT
may be offset by VAT paid by the Company on raw materials and other materials
included in the cost of production.





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.








7





Major
Customers





For the
nine months ended September 30, 2008 and 2007, the major five customers
accounted for approximately 100% and 90.71%, respectively, of the Company’s
total sales. As at September 30, 2008 and December 31, 2007, accounts
receivables from these customers were 100% and 94% of the Company’s total
outstanding balance.





Foreign Currency
Translation





The
functional currency of the Company is the Chinese Renminbi (“RMB”). The
financial statements of the Company are translated to United Stated dollars
using year-end exchange rates as to assets and liabilities and average exchange
rates as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transaction occurred.  Net
gains and losses resulting from foreign exchange translations are included in
the statements of operations and stockholders' equity as other comprehensive
income. The cumulative translation adjustment and effect of exchange rate
changes at September 30, 2008 and December 31, 2007 was $4,209,736 and
$2,541,949, respectively.





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





Capital
accounts of the consolidated financial statements are translated into United
States dollars from RMB at their historical exchange rates when the capital
transactions occurred. Assets and liabilities are translated at the exchange
rates as of the balance sheet date. Income and expenditures are translated at
the average exchange rates during the nine months ended September 30, 2008 and
2007.





For
      the Three Months Ended September 30,
              
              For
      the Nine Months Ended September 30,2008
              
              2007
              
              2008
              
              2007Period
      end RMB : U.S. Dollar exchange rate
              
              6.8551
              
              7.5176
              
              6.8551
              
              7.5176Average
      year-to-date RMB : U.S. Dollar exchange rate
              
              6.8529
              
              7.5691
              
              6.9989
              
              7.6758





The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through PRC authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into United States dollars at the rates applied in the
translation.





Comprehensive Income
(Loss)





The
Company uses Statement of Financial Accounting Standards No. 130 (“SFAS 130”)
"Reporting Comprehensive
Income".  Comprehensive income is comprised of net income and
all changes to the statements of stockholders' equity, except those due to
investments by stockholders', changes in paid-in capital and distributions to
stockholders. Comprehensive income for the nine months ended September 30, 2008
and the year ended December 31, 2007 included net income and foreign currency
translation adjustments.





Impairment of Long-lived
Assets





In
accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company periodically reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable.
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 estimated fair value and
the book value of the underlying asset. The Company did not incur any impairment
charges during the nine months ended September 30, 2008 and 2007.










8







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.





Income
Taxes





The
Company accounts for income taxes under the Statement of Financial Accounting
Standards No. 109, "Accounting
for Income Taxes" ("Statement 109").





Under
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.





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.





Basic and Diluted Earnings
per Share





Basic
income per common share is computed by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding for the periods presented.  Diluted income per share
reflects the potential dilution that could occur if securities were exercised or
converted into common stock or other contracts to issue common stock resulted in
the issuance of common stock that would then share in the income of the Company,
subject to anti-dilution limitations.





Fair Value of Financial
Instruments





The
carrying amounts of the Company's financial instruments (including accounts
receivable, due from/to related parties, account payable, bank loans and notes
receivable) approximate fair value due to either the relatively short period to
maturity or float market interest rate of those instruments.





Concentrations and Credit
Risks





For the
nine months ended September 30, 2008 and 2007, all of the Company’s sales came
from companies located in the PRC.  As of September 30, 2008 and
December 31, 2007, all of the Company’s assets were located in the
PRC.





Recent Accounting
Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS No. 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.








9





In
September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (“SFAS 158”),
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 Statement 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. 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. 141 (revised 2007), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) will change the accounting for business combination. Under
SFAS No. 141(R), an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS 141(R) will change the accounting
treatment and disclosure for certain specific items in a business combination.
SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.





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”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company does not believe that
SFAS 160 will have a material impact on its consolidated financial
statements.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements
for derivative instruments and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The guidance in SFAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company is currently
assessing the impact of SFAS 161.





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
3 – NOTES RECEIVABLE





The
Company, on occasion, allows their customers to satisfy the payment of their
trade debt to the Company, through the issuance of notes receivable with the
Company as the beneficiary. These notes receivable are usually of a short term
nature, approximately three to six months in length. These notes do not bear
interest and are paid by the customer’s bank to the Company’s bank upon
presentation to the customer’s bank on the date of maturity. In the event of
insufficient funds to repay these notes, the company's bank can proceed with
bankruptcy proceedings








10






against
the customer in China. Total notes receivable as of September 30, 2008 and
December 31, 2007 were $0 and $202,349 respectively.





Note
4 – DIVIDEND RECEIVABLE





Dividend
receivable at September 30, 2008 and December 31, 2007 amounted to $0 and
$71,460, respectively. Dividend receivable is investment income receivable on
the investment in Zhaoheng Weile Tungsten (Shimen), Ltd. (see Note
7).





Note
5 – OTHER RECEIVABLES





Other
receivables at September 30, 2008 and December 31, 2007 amounted to $117,498 and
$145,075 respectively. Other receivables are primarily advance travel expenses
to employees.





Note
6 – 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 September 30, 2008 and
December 31, 2007 amounted to $67,541 and $85,971 respectively.





Note
7 – INVESTMENT IN SUBSIDIARY





As of
September 30, 2008 and December 31, 2007, Hunan Zhaoheng invested $571,837 and
$535,951, respectively, for a 49% equity interests in Zhaoheng Weile Tungsten
(Shimen), Ltd. (“Weile”). For this investment, Hunan Zhaoheng will not
participate in the management of Weile, but receive annual dividend at a fixed
rate of 20% of its original capital contribution to Weile as long as the
production line is put into operation. Weile had started its production line
since October 2007. The investment was accounted for historical cost. The
dividend generated from this investment was presented as investment income in
our unaudited consolidated financial statements. The investment income was then
calculated based on the above investment term. Total investment incomes for the
three months ended September 30, 2008 and 2007 were $29,893 and $0. For the nine
months ended September 30, 2008 and 2007, the investment incomes were $189,043
and $0, respectively.










11




Note
8 – PROPERTY, PLANT AND EQUIPMENT





Property,
plant and equipment as of September 30, 2008 and December 31, 2007 are
summarized as follows:


Items
                                                                        
                                                                        September
      30, 2008
                                                                        
                                                                        
                                                                        December
      31, 2007(Unaudited)Dams
                                                                        
                                                                        $
                                                                        72,105,460
                                                                        
                                                                        
                                                                        $
                                                                        42,467,137Buildings
                                                                        
                                                                        
                                                                        1,953,900
                                                                        
                                                                        
                                                                        
                                                                        8,278,953Machine
      equipment
                                                                        
                                                                        
                                                                        38,827,851
                                                                        
                                                                        
                                                                        
                                                                        13,434,886Electronic
      and other equipment
                                                                        
                                                                        
                                                                        871,490
                                                                        
                                                                        
                                                                        
                                                                        834,296Total
                                                                        
                                                                        
                                                                        113,758,701
                                                                        
                                                                        
                                                                        
                                                                        65,015,272Less:
      Accumulated Depreciation
                                                                        
                                                                        
                                                                        (40,254,091
                                                                        )
                                                                        
                                                                        
                                                                        (34,380,646
                                                                        )$
                                                                        73,504,610
                                                                        
                                                                        
                                                                        $
                                                                        30,634,626


Depreciation
expenses for the nine months ended September 30, 2008 and 2007 was $1,194,311
and $760,039, respectively.





Note
9 – OTHER ASSETS





Other
assets consisted of the following:





Items
                                    
                                    September
      30, 2008
                                    
                                    
                                    December
      31, 2007(Unaudited)Spare
      parts
                                    
                                    $
                                    167,607
                                    
                                    
                                    $
                                    175,886Deposit
                                    
                                    
                                    6,822
                                    
                                    
                                    
                                    -$
                                    174,429
                                    
                                    
                                    $
                                    175,886





Note
10 – CONSTRUCTION IN PROGRESS





As of
September 30, 2008, "construction in progress" refers to the Auxiliary project
of Hunan Sanjiang Left Bank Hydropower Station and Guizhou Jingrong’s expansion
project at which amounted to $2,553,107. As of December 31, 2007, it refers
to Hunan Sanjiang Left Bank Station, which amounted to $32,455,855, we
started to test operations in April 2008. The amount allocated to "construction
in progress" was transferred to property, plant and equipment in July 2008. The
carryover amount is $34,909,173.





Note
11 – PROPERTY USE RIGHT





Property
use right consists of the following as of September 30, 2008 and December 31,
2007


Items
                                      
                                      September
      30, 2008
                                      
                                      
                                      December
      31, 2007(Unaudited)Property
      use right
                                      
                                      $
                                      1,412,087
                                      
                                      
                                      $
                                      1,321,471Less:
      Accumulated amortization
                                      
                                      
                                      (185,030
                                      )
                                      
                                      
                                      (153,566
                                      )$
                                      1,227,057
                                      
                                      
                                      $
                                      1,169,905




12






Amortization
expenses for the nine months ended September 30, 2008 and 2007 amounted to
$21,183 and $39,143 respectively.





Note
12 – TAXES PAYABLE





Taxes
payable at September 30, 2008 and December 31, 2007 amounted to $643,586 and
$157,525 respectively. Taxes payable are summarized below:




Items
                                      
                                      September
      30, 2008
                                      
                                      
                                      December
      31, 2007(Unaudited)Business
      tax payable
                                      
                                      $
                                      129,208
                                      
                                      
                                      $
                                      33,680Value
      added tax payable
                                      
                                      
                                      252,097
                                      
                                      
                                      
                                      34,309Property
      tax payable
                                      
                                      
                                      22,087
                                      
                                      
                                      
                                      42,470Income
      tax payable
                                      
                                      
                                      211,434
                                      
                                      
                                      
                                      45,196Other
      taxes and government fees
                                      
                                      
                                      28,760
                                      
                                      
                                      
                                      1,870$
                                      643,586
                                      
                                      
                                      $
                                      157,525





Note
13 – OTHER PAYABLES





Other
payables at September 30, 2008 and December 31, 2007 amounted to $962,224 and
$1,739,867, respectively. Other payables were the final payment withheld from
the construction contractors until occupancy of the ongoing construction of
Sanjiang Left Bank Hydropower Station (details please refer to Note
10).










13


Note
14 – LONG-TERM LOANS





The
Company was obligated for the following long-term loans as of September 30, 2008
and December 31, 2007:





Lenders
                                  
                                  September
      30, 2008
                                  
                                  December
      31, 2007(Unaudited)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 year of 2007, the average interest rate was 7.2%. Pledged
      with property, plant and equipment.
                                  
                                  $
                                  6,272,701
                                  
                                  $
                                  5,879,055Due
      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 2007 and 2006, the average interest rate was 6.8%
      and 6.3%, respectively Pledged with property, plant and equipment and
      guaranteed by Shenzhen Zhaoheng Industrial Ltd.
                                  
                                  
                                  2,917,536
                                  
                                  
                                  2,734,444Due
      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 2007 and 2006, the average interest rate
      was 7.02% and 6.3%, respectively Pledged with property, plant and
      equipment and guaranteed by Shenzhen Zhaoheng Industry
Ltd.
                                  
                                  
                                  8,752,608
                                  
                                  
                                  8,203,333Due
      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 2007 and
      2006 the average interest rate are 6.84% and 6.72%, respectively. Pledged
      with 66.7% equity of Hunan Zhaoheng Hydropower Ltd.  and
      guaranteed by Shenzhen Zhaoheng Industry Ltd.
                                  
                                  
                                  23,340,287
                                  
                                  
                                  21,875,556Due
      to Industrial & Commerce Bank of China on March 23, 2022. Fixed
      interest rate of 7.11%. Guaranteed by Shenzhen Zhaoheng Industry
      Ltd.
                                  
                                  
                                  23,340,287
                                  
                                  
                                  21,875,556Total
                                  
                                  
                                  64,623,419
                                  
                                  
                                  60,567,944Less:
      short-term loans
                                  
                                  
                                  –
                                  
                                  
                                  –Long-term
      loans
                                  
                                  $
                                  64,623,419
                                  
                                  $
                                  60,567,944








The
future payments of loan principles for the next 5 years are as
below:





2008
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2011
                          
                          
                          2012
      and afterProjected
      payment of loan principle
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          6,272,701
                          
                          
                          $
                          11,670,143
                          
                          
                          $
                          46,680,575







Note
15 – STOCKHOLDERS’ EQUITY





Reverse
Merger




On May
13, 2008, the shareholder (Guoheng Xu) of the Company entered into a share
exchange agreement with those of Certified. Pursuant to the agreement, Certified
issued an aggregate of






14






69,686,970
shares of common stock, par value $0.001 (the “Common Stock”) to Embedded
Internet, in exchange for all of the shares of common stock of Embedded
Internet.  Contemporaneously with the closing of the Share Exchange,
certain holders of Certified's Common Stock completed a sale of approximately
572,170 shares of Common Stock owned by them to Embedded Internet pursuant to a
stock purchase agreement.  As a result of the completion of the Share
Exchange and the Stock Purchase, Embedded Internet former shareholders own
shares of Certified’s Common Stock constituting approximately 98% of Certified’s
total outstanding capital stock.





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 September 30, 2008 and December 31, 2007, 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 PRC (“PRC
GAAP”) until the reserve is equal to 50% of the entities’ registered capital or
members’ equity. Guizhou Jinrong, as a domestic company, did not provide any
reserves because of net loss incurred for the quarterly period ended September
30, 2008.





The
Company, is an entity registered in the British Virgin Islands and is, as a
result, not required to provide statutory reserves.





Retained
Earnings





As of
September 30, 2008 and December 31, 2007, the details of retained earnings are
listed as below:





Items
                    
                    September
      30, 2008
                    
                    
                    December
      31, 2007(Unaudited)Retained
      earnings
                    
                    $
                    6,357,052
                    
                    
                    $
                    628,704Statutory
      surplus reserve
                    
                    
                    666,952
                    
                    
                    
                    666,952$
                    7,024,004
                    
                    
                    $
                    1,295,656














15







Note
16 – INCOME TAXES





Refer to
the table below for general description of tax treatments for each of the four
major operating 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.Guizhou
      Jinrong
                                                                      
                                                                      -
                                                                      
                                                                      Preferential rate of
      15% (income tax), and will increase to 25% progressively within the next
      five years from January 1, 2008 onwards.-
                                                                      
                                                                      Based on related
      regulation of the 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.Hunan
      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.


Note
17 – RELATED PARTY TRANSACTIONS





For the
quarterly period ended September 30, 2008 and for the year ended December 31,
2007, the Company distributed power to its long-term invested company, Weile,
limited at market price. For the nine months ended September 30, 2008 and 2007,
the total sales amounted to $204,899 and $164,813, respectively.





The
Company leases its warehouse, plant and operating space to its related party,
Weile, for 5 years as of June 1, 2006 under an operating lease agreement.
The rent is $1,312 per month with an exemption period of 5 months.





As of
September 30, 2008 and December 31, 2007, the amounts due from related parties
were $16,369,507 and $17,529,838, respectively. All amounts are due on
demand, and all advances are without security. The details of payments
owed by related parties are listed as below:








16





Related
      party
                                Relationship
                                
                                
                                September
      30, 2008
                                
                                
                                
                                December
      31, 2007
                                
                                Interest
      rate(Unaudited)Weile
                                Long-term
      investment
                                
                                $
                                1,234,312
                                
                                
                                $
                                931,169
                                
                                12%
      annual; without securityHunan
      Jiuli Hydropower
                                  ConstructionCo.,
      Ltd.
                                The
      same major shareholder
                                
                                
                                1,493,637
                                
                                
                                
                                -
                                
                                Interest
      free; without securityZhaoheng
      Industrial
                                The
      same major shareholder
                                
                                
                                13,641,558
                                
                                
                                
                                16,598,669
                                
                                120%
      of the bench mark rate set the People’s Bank of China annual; without
      securityTotal
                                
                                
                                $
                                16,369,507
                                
                                
                                $
                                17,529,838





Starting
from January 1, 2008, we started charging interest on the loans to our related
party Shenzhen Zhaoheng Industrial Co., Ltd. (“Zhaoheng Industrial”) whose major
shareholders are also the majority shareholders fo the Company. For the
nine months ended September 30, 2008 and 2007, the interest incomes were
$2,505,385 and $0, respectively. Interest rates charged on these loans are 120%
of the bench mark rate as set by the People’s Bank of China. The bench mark rate
as of September 30, 2008 was 7.47%. Accordingly, the Company charged 8.96%
interest on this related party loan receivable as of September 30, 2008. As of
September 30, 2008 and December 31, 2007, the loans to Zhaoheng Industrial
amounted to $13,641,558 and $16,598,669.




As of
September 30, 2008 and December 31, 2007, the amounts due to related parties
were $3,581,833 and $31,444, respectively and due on demand. The details of due
to related parties are listed as below:





Related
      party
                      Relationship
                      
                      September
      30, 2008
                      
                      
                      December
      31, 2007
                      
                      Interest
      rate(Unaudited)Original
      shareholders of
                        Certified
      Technologies Corp.
                      Original
      shareholders of the Company
                      
                      $
                      -
                      
                      
                      $
                      31,444
                      
                      Interest
      free without securityZhaoheng
      holdings limited.
                      The
      same major shareholder
                      
                      
                      3,581,833
                      
                      
                      
                      -
                      
                      Interest
      free without securityTotal
                      
                      
                      $
                      3581,833
                      
                      
                      $
                      31,444











17





Note
18 – OPERATING RISKS





(a)
            Country
      risk





Currently,
the Company's revenues are derived fully from distribution of power in the 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.





Note
19 – SUBSEQUENT EVENTS




In China,
electricity tariff is regulated by Provincial Price Bureau and reevaluated on a
periodic basis as market conditions dictate. Such conditions can be consumer
demand and inflation, among others. On September 24, 2008, Price Bureau of
Hunan Province promulgated a document to increase the benchmark electricity rate
of Hunan Sanjiang and Hunan Zhaoheng from RMB 0.28/KWH to RMB 0.295/KWH. As
such, the Company will record additional revenue of approximately $240,000 in
October 2008 based on the new electricity rate for the electricity sold to
Changde Branch of State Grid Corporation of China (“SGCC”) based on revenue
generated from July 1 to September 30, 2008.









18


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





Cautionary
Statement Regarding Forward-Looking Statements





The
information contained in this report include statements that are not purely
historical facts and that are “forward-looking statements” as defined by the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include, but are not limited to, statements regarding our
management’s expectations, hopes, beliefs, intentions or strategies regarding
the future, including our financial condition, results of operations, growth of
our blower business and establishment of our turbine business. The words
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“projects,” “should,” and similar expressions, or the negatives of such terms,
identify forward-looking statements.





The
forward-looking statements contained in this report are based on our current
expectations and beliefs concerning future developments. There can be no
assurance that future developments actually affecting us will be those
anticipated.  These forward-looking statements involve a number of
risks, uncertainties (some of which are beyond our control) or other assumptions
that may cause actual results to be materially different from those expressed or
implied by these forward-looking statements, including the
following:





• 
vulnerability of our business to general economic downturn;


• 
operating in the PRC generally and the potential for changes in the laws of the
PRC that affect our operations;


• 
failure to meet or timely meet contractual performance standards and
schedules;


• 
dependence on the steel and iron markets;


• 
exposure to product liability and defect claims;


• 
ability to obtain all necessary government certifications and/or licenses to
conduct our business;


• 
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and


• 
other factors referenced in this report.





These
risks and uncertainties, along with others, are also described in the Risk
Factors section in Part I, Item 1A of this Form 10-Q. We undertake no obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.




Company
Overview





As a
result of the share exchange or “reverse acquisition” transaction consummated on
May 13, 2008, Zhaoheng Hydropower Company became a holding company conducting
operations through an indirect operating subsidiary: Zhaoheng Hydropower (Hong
Kong) Limited (“Zhaoheng HK”), a company operating in China. As a wholly owned
subsidiary of the Company, Zhaoheng Investment Limited (BVI), a British Virgin
Islands corporation, owns 100% of the capital stock of Zhaoheng HK.







19









Zhaoheng
Hydropower Company and its subsidiaries (collectively, “Zhaoheng”, “we”, “us”,
“our” and “the Company”) are engaged in generating and supplying hydropower in
Midwest China. We focus on small to medium sized hydropower stations and aim to
become a leader in our industry.





The
Company entered the hydropower industry in 2002. After 2 years of exploring the
available opportunities in the industry, the Company acquired Hunan Sanjiang
Hydropower Station with an installed capacity of 62.5MW, from a state-owned
company in 2003.





In April
2008, the Company completed the construction of the Hunan Zhaoheng Hydropower
Station (also called “Hunan Sanjiang Left Bank Hydropower Station”), which
provides an additional 50MW capacity. Hunan Zhaoheng Hydropower Station is the
expansion project of Hunan Sanjiang Hydropower Station. They share the same dam
and are located on the left and right bank of the river respectively. In June
2008, the Company acquired the Guizhou Yongfu Hydropower station. Currently,
Zhaoheng’s portfolio consists of three hydropower stations with an aggregate
installed capacity of 120MW:





·
            Hunan
      Sanjiang Hydropower Station :
62.5MW


·
            Hunan
      Zhaoheng Hydropower Station: 50MW


·
            Guizhou
      Yongfu Hydropower Station: 7.5MW





Zhaoheng’s
business consists primarily of the following three activities:





1.
            Development
      –


(i)
            identify
      and invest in small and medium hydropower stations in China;
      and


(ii)
            secure
      sales contracts with the State Grid Corporation of China and the China
      Southern Power Grid Corporation
annually.








20





2.
            Operation
      –


(i)
            operate
      hydropower stations; and


(ii)
            generate
      hydropower and supply electricity to power grid
  companies.





3.
            Construction
      –


(i)
            construct
      quality power stations with high economic value and substantial return on
      investment.





Zhaoheng’s
current operations are in the Hunan and Guizhou Provinces. The Hunan Sanjiang
Hydropower Station, Hunan Zhaoheng Hydropower Station and Guizhou Yongfu
Hydropower Station primarily service the Changde Branch of State Grid
Corporation of China and China Southern Power Grid Corporation, two state-owned
power grid companies.




Hydropower
Industry





Hydropower
is the cheapest form of large-scaled clean energy and can be highly utilized in
China with its vast amount of water resources. The generation of hydropower does
not consume or pollute water nor does it produce greenhouse gases. The per
capita installed capacity in China only amounts to 0.5 KW, one-sixth of the
level in the United States. At the same time, China is rich in hydropower
resources. With a technically
exploitable capacity of 542 GW and annual potential output capacity of 2.47
trillion KWH, China ranks number one in the world
in  potential  hydraulic resources. However, by the end of
2007, the installed capacity of hydropower only amounted to 145.26 GW and the
utilization level in China is only 26.8%,  much lower than the 65-85%
range in developed countries such as U.S., Japan, and European countries. The
central government of China has rated the development of hydropower as a top
priority and plans to increase the utilization of hydropower to 55% by 2020,
which will require a substantial amount of capital investment.





The
various policies issued by the central government in the past 2 years are
testament to the government’s intention to encourage and support the small –
medium hydropower stations in the country. For example, the government offers
tax incentives for hydropower companies and guarantees 100% purchase of the
electricity generated by hydropower stations. The government is also gradually
implementing the “Same Price for Same Power” policy, giving hydropower producers
substantial room for revenue increase.





On
January 28, 2008, the State Development and Reform Commission (“SDRC”)
promulgated the “Opinions on
Regulating the Investment into the Power Generation Enterprises by the Employees
in Power System”, stipulating that leaders of grid enterprises at the
level of prefecture city or the power dispatching personnel, financial
personnel, and managers cannot invest in power generation companies within the
coverage of their power grid. Those who already invested in power generation
companies are required to sell their shares within one year. This will reduce
competition in our industry and create many acquisition opportunities for
us.





For the
nine months ended September 30, 2008, total power output in China amounted to
2.61 trillion KWH, an increase of 9.9% from the same period in the prior year.
Output of hydropower and thermal power increased 17.0% and 8.2%, respectively,
from the same period in the prior year. With the rapid growth of China’s
economy, power generation cannot meet power demand and the power industry in
China is now growing at a fast space.





One of
the biggest uncertainties in our business is the unpredictability of rainfall.
In a particular year, the amount of rainfall may be significantly less than the
average for prior years. In the event this decrease in rainfall levels takes
place in the regions where our hydropower stations are located, the ability of
our stations to generate power will be hampered. Therefore, our revenue will
also be impacted. In order to mitigate this risk, the Company has been adopting
certain strategies such as diversifying the locations of our future stations,
both acquired and self-constructed.  We believe that this is a sound
and effective strategy to stabilize the impact of uneven and unpredictable
rainfall levels.





Results
of Operations





The
following table sets forth runoff and output of our Hunan facilities from
January to September in 2008 and 2007, respectively.






21





Jan
                    Feb
                    Mar
                    Apr
                    May
                    Jun
                    Jul
                    Aug
                    SepRunoff
      (million m3),
      2008
                    397
                    360
                    527
                    1,036
                    1,415
                    878
                    1656
                    3655
                    1243Output
      (million KWH), 2008
                    8.29
                    11.93
                    13.7
                    32.13
                    29.83
                    29.2
                    22.57
                    55.9
                    41.33Runoff
      (million m3),
      2007
                    500
                    656
                    919
                    907
                    627
                    1,286
                    4361
                    1300
                    802Output
      (million KWH), 2007
                    16.72
                    19.14
                    28.51
                    28.93
                    21
                    30.94
                    36.69
                    39.01
                    26.84




*In the
event the runoff exceeds the maximum diversion discharge of turbines, the
excessive amount of water is wasted.





With the
usage of two new generating units at our subsidiary, Hunan Zhaoheng Hydropower
Co., Ltd., in April and the acquisition of Guizhou Jingrong Industrial
Development Co., Ltd. in June 2008, the Company now owns 9 generating units with
total installed capacity of 120 MW and annual potential output capacity of 430
million KWH. The potential output capacity has increased by 60% from September
30, 2007. Currently, all generating units are in good working
condition.





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





For
      Three Months Ended September 30,
                    
                    
                    For
      Nine Months Ended September 30,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Revenues
                    
                    $
                    5,156,207
                    
                    
                    $
                    3,191,260
                    
                    
                    $
                    9,789,788
                    
                    
                    $
                    7,722,300Cost
      of revenues
                    
                    
                    722,820
                    
                    
                    
                    424,892
                    
                    
                    
                    1,942,789
                    
                    
                    
                    1,303,246Gross
      profit
                    
                    
                    4,433,387
                    
                    
                    
                    2,766,368
                    
                    
                    
                    7,846,999
                    
                    
                    
                    6,419,054Operating
      Expenses
                    
                    
                    400,003
                    
                    
                    
                    317,658
                    
                    
                    
                    934,438
                    
                    
                    
                    1,039,914Operating
      income
                    
                    
                    4,033,384
                    
                    
                    
                    2,448,710
                    
                    
                    
                    6,912,561
                    
                    
                    
                    5,379,140Interest
      Income
                    
                    
                    677,264
                    
                    
                    
                    2,845
                    
                    
                    
                    1,642,276
                    
                    
                    
                    34,084Interest
      Expense
                    
                    
                    (1,223,717
                    )
                    
                    
                    (257,405
                    )
                    
                    
                    (2,686,779
                    )
                    
                    
                    (695,817
                    )Net
      Income
                    
                    $
                    3,337,273
                    
                    
                    $
                    1,791,884
                    
                    
                    $
                    5,728,481
                    
                    
                    $
                    3,496,899Gross
      Margin
                    
                    
                    86.0
                    %
                    
                    
                    86.7
                    %
                    
                    
                    81.2
                    %
                    
                    
                    83.1
                    %Operating
      Margin
                    
                    
                    78.2
                    %
                    
                    
                    76.7
                    %
                    
                    
                    70.6
                    %
                    
                    
                    69.7
                    %Net
      Income Margin
                    
                    $
                    64.7
                    %
                    
                    $
                    56.1
                    %
                    
                    $
                    58.5
                    %
                    
                    $
                    45.3
                    %








22






Revenues




Revenues
for the three months ended September 30, 2008 were $5,156,207, an increase of
$1,964,947 or 61.6% from $3,191,260 during the three months ended September 30,
2007. For the nine months period ended September 30, 2008, revenues were
$9,789,788, an increase of $2,067,488 or 26.8% from total revenues of $7,722,300
reported during the nine months ended September 30, 2007. This growth was due
primarily to an increase in installed capacity and power output. Two new
generating units with total installed capacity of 50MW were put into use in
April 2008 and another hydropower station was acquired in June 2008, bringing
the total installed capacity of the Company to 120MW by September 30, 2008.
Electricity tariff varies in different seasons and different hours. The
following table sets fort electricity tariff in the nine months ended September
30, 2008 for Hunan Sanjiang and Hunan Zhaoheng (Except for Hunan Zhaoheng during
its trial run in April 2008). In the dry season of January and February of 2008,
when electricity tariff was highest, rainfall in Lishui Basin where our Sanjiang
Hydropower Plants are located was much less compared to the same period of 2007.
Also, the electricity tariff for Hunan Zhaoheng Hydropower Co. Ltd during its
trial run in April 2008 was only RMB 0.08/K WH. As a result,  average
electricity tariff for our Hunan facilities was RMB 0.2773/KWH for the three
months ended September 30, 2008, higher than the RMB 0.2744/KWH for the three
months ended September 30, 2007.  Average electricity tariff for our
Hunan facilities was RMB 0.2698/KWH for the nine months ended September 30,
2008, lower than the RMB 0.2774/KWH for the nine months ended September 30,
2007.





Season
              Month
              Tariff(RMB/KWH)Peak
              High
              Low
              ValleyDry
              1,
      2
              0.3744
              0.3744
              0.32
              0.2208Ordinary
              3,
      7, 8, 9
              0.3276
              0.3276
              0.28
              0.1932Rainy
              4,
      5, 6,
              0.2925
              0.2925
              0.25
              0.1725




Cost
of Revenues




Cost of
revenues consists of 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 September 30, 2008 was $722,820 or 14.0% of
revenues.  For the same period one year ago, cost of revenues was
$424,892 or 13.3% of revenues. Cost of revenues for the nine months ended
September 30, 2008 was $1,942,789, or 19.8% of our revenues.  This
represents an increase from  $1,303,246 or 16.9% of our revenues from
the nine months ended September 30, 2007. Our Hunan Zhaoheng Hydropower Station
is an expansion project of the existing Hunan Sanjiang Hydropower Station and
the annual average utilization hour of expansion project usually can not match
the existing facility. As a result, cost of revenues, which largely consists of
depreciation expense, increased slightly as a percentage of revenues for the
nine months ended September 30, 2008 compared with the same period in
2007.




Operating
Expenses




Total
operating expenses, which include selling, general and administrative expenses
increased to $400,003 for the three months ended September 30, 2008, as compared
to $317,658 for the three months ended September 30, 2007. Comparing the nine
months periods ended September 30, 2008 and September 30, 2007, operating
expenses were $934,438, or 9.54% of revenues in 2008 and $1,039,914, or 13.46%
of revenues in 2007. The decrease in operating expenses for the nine months
period was mainly due to savings from 1) a discontinued leather trading business
operated by one of our subsidiaries, Shenzhen Zhaoheng Hydropower Co., Ltd.
(“Shenzhen Zhaoheng”) in December 2007; and 2) sales of  Hunan Jiuli
Hydropower Construction Co. Ltd to our related company Shenzhen Zhaoheng
Industrial Co., Ltd in April 2008.




Interest
Income




For the
nine months ended September 30, 2008, we realized interest income of $1,642,276,
compared with interest income of $34,084 for the nine months ended September 30,
2007. Starting from January 1, 2008, two of our








23




subsidiaries,
Hunan Sanjiang Power Co., Ltd. (“Hunan Sanjiang”) and Hunan Zhaoheng Hydropower
Co., Ltd. (“Hunan Zhaoheng”), started charging interest on the loans to Shenzhen
Zhaoheng Industrial Co., Ltd. (“Shenzhen Zhaoheng Industrial”), a related party
with a common controlling shareholder. Interest rates charged
on  loans to related parties are 120% of the bench mark rate set by
the People’s Bank of China. As of September 30, 2008, the loans to Shenzhen
Zhaoheng Industrial amounted to $13,641,558, compared to $16,598,669 as of
December 31, 2007.




Interest
Expense




Interest
expense was $1,223,717 for the nine months ended September 30, 2008, compared
with $257,405 for the same period in 2007. This increase was due to 1) the
capitalization of interest expense incurred during the construction period of
the new hydropower plant established by one of our subsidiaries, Hunan Zhaoheng;
and 2)  incurring a new loan in the amount of RMB 43 millions from
China Construction Bank in July 2007.




Investment
Income




Total
investment income for the three months ended September. 30, 2008 and September
30, 2007 was $29,893 and $0 respectively. For the nine months ended September
30, 2008 and September 30, 2007, the investment income was $189,043 and $0,
respectively. The investment income was generated from the long-term investment
at Zhaoheng Weile Tungsten (Shimen), Ltd. (“Weile”). As of September 30, 2008
and December 31, 2007, we invested $571,837 and $535,951 respectively for
a  49% equity interests in Weile. For this investment, we will not
participate in the management of Weile, but will receive an annual dividend at a
fixed rate of 20% of the original capital contribution to Weile as long as the
production line is put into operation. Weile  started its production
line in October 2007. The investment was accounted for at cost basis. Dividends
generated from this investment are presented as investment income in our
unaudited consolidated financial statements and the investment income
was  calculated based on the above investment term.




Net
Income




Net
income increased to $3,337,273 for the three months ended September 30, 2008
from $1,791,884 for the period ended September 30, 2007. As a percentage of
revenue, net income was approximately 64.7% for the three months ended September
30, 2008, as compared to approximately 56.1% for the same period ended September
30, 2007.




For the
nine months ended September 30, 2008 and September 30, 2007, net income
increased to $5,728,481 in 2008 from $3,496,899 in 2007. As a percentage of net
sales, net income was approximately 58.5% for the nine months ended September
30, 2008, compared to approximately 45.3% for the nine months ended September
30, 2007.




The
increase in net income as a percentage of revenue was mainly due to reduced
operating expenses and increased interest income. In addition, we realized
investment income of $189,043 in Zhaoheng (Shimen) Weile Tungsten Co., Ltd. for
the nine months ended September 30, 2008.




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
Flows




For
the nine months ended September 30, 2008, we had a net increase in cash and cash
equivalents of $2,095,251. Cash flow from operating activities was $5,985,071,
cash outflow from investing activities was $43,889,820 and we did not have any
financing activities this quarter. The primary components of cash generated by
operating activities were: (a) net income of $5,728,481; (b) a $1,215,494
increase in depreciation and amortization; (c) a decrease of $211,463 in notes
receivable and (d) an increase of $465,943 in taxes payable offset by: a) an
increase in accounts receivable of $378,887; b) an increase of $321,600 in other
assets; and c) a decrease of $976,945 in other payables.






24






The
primary components of cash used in investing activities were: (i) $7,131,947 in
connection with the construction of hydropower plant in Hunan offset by (i)
$2,626,077 in connection with the adjustment of the acquisition of Jingrong
Industrial Development Co., Ltd. in Rongjiang County of Guizhou Province; and
(ii) a decrease in due from related parties of $5,916,147.




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. In 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:





1.
            Consolidation





The
unaudited consolidated financial statements include the accounts of the Company
and its subsidiaries (“the Group”). Significant intercompany transactions have
been eliminated in consolidation. Investments in which the company has a 20
percent to 50 percent voting interest and where the company exercises
significant influence over the investee are accounted for using the equity
method.





As of
September 30, 2008, the particulars of the subsidiaries are as
follows:





Name of Company
                    Place of
                      Incorporation
                    Date of
                      Incorporation
                    Attributable
                      Equity Interest
                    Registered
                      CapitalShenzhen
      Zhaoheng Hydropower Co., Ltd.
                    PRC
                    8/3/1999
                    100
                    RMB
      11,000,000Hunan
      Sanjiang Power Co., Ltd
                    PRC
                    11/8/2001
                    100
                    RMB
      199,400,000Hunan
      Zhaoheng Hydropower Co., Ltd
                    PRC
                    6/25/2003
                    100
                    RMB
      150,000,000Jingrong
      Industrial Development Co., Ltd
                    PRC
                    1/24/2002
                    100
                    RMB
      1,000,000





2.
            Economic
      and Political Risks





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





The
operations in the PRC 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 the PRC, 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.




3.
            Use
      of Estimates




In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the
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.








25






4.
            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.




5.
            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 Zhaoheng Weile Tungsten (Shimen), Ltd.
(“Weile”) as an investment under the cost method of accounting.





Zhaoheng
Weile Shimen Co., Ltd. is 49% owned by the Company and is engaged in downstream
processing and sales of tungsten.





6.
            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. The
Company extends 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 September 30, 2008 was not
significant.




7.
            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




The
Company’s 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
                        %




8.
            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






26




criterion
is not met for certain future transactions, revenues for any reporting period
could be adversely affected by delaying recognition of such
revenues.




9.
            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. The Company did not record any impairment charges during the nine
months ended September 30, 2008 or 2007.




10.
            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.




11.
            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.




12.
            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.




The
Company’s reporting currency is the U.S. dollar. The functional currency of the
Company's Chinese subsidiaries is the Chinese dollar or Renminbi (“RMB”). 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 RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollar at the rates used in translation.




13.
            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.





The Group
is engaged in the energy industry whose development is encouraged by the
government. According to the income tax regulation, any company engaged in the
hydropower industry enjoys a favorable tax rate. We are






27






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.Guizhou
      Jinrong
              -
                -Preferential
      rate of 15% (income tax) based on the policies of the grand development of
      China’s Western regionHunan
      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.







28
   ITEM 3.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  This item
is not required for a smaller reporting company.
  ITEM
4.  CONTROLS AND PROCEDURES
  We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer (CEO) , as
appropriate, to allow timely decisions regarding required
disclosure.
  As of
June 30, 2008, an evaluation was performed under the supervision and with the
participation of our management, including the CEO, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on that
evaluation, our management, including the CEO, concluded that our disclosure
controls and procedures were effective as of June 30, 2008.
  PART
II-OTHER INFORMATION
  ITEM
1.  LEGAL PROCEEDINGS
  None.
  ITEM
1A.  RISK FACTORS
 
 An
investment in our common stock or other securities involves a number of
risks.  You should carefully consider each of the risks described
below before deciding to invest in our common stock.  If any of the
following risks develops into actual events, our business, financial condition
or results of operations could be negatively affected, the market price of our
common stock or other securities could decline and you may lose all or part of
your investment.
 
 The
risk factors presented below are all of the ones that we currently consider
material.  However, they are not the only ones facing our
company.  Additional risks not presently known to us, or which we
currently consider immaterial, may also adversely affect us.  There
may be risks that a particular investor views differently from us, and our
analysis might be wrong.  If any of the risks that we face actually
occur, our business, financial condition and operating results could be
materially adversely affected and could differ materially from any possible
results suggested by any forward-looking statements that we have made or might
make.  In such case, the trading price of our common stock could
decline, and you could lose part or all of your investment.
 
 Risks
Related to Our Business
 
 Our limited operating history may
not serve as an adequate basis to judge our future prospects and results of
operations.
 
 We
commenced our current line of business operations in 2002. Our limited operating
history may not provide a meaningful basis on which to evaluate our business.
Although our revenues have grown rapidly since inception, we cannot assure you
that we will maintain our profitability or that we will not incur net losses in
the future. We expect that our operating expenses will increase as we expand.
Any significant failure to realize anticipated revenue growth could result in
significant operating losses. We will continue to encounter risks and
difficulties frequently experienced by companies at a similar stage of
development, including our potential failure to:
    29
   -
              raise
      adequate capital for expansion and operations;-
              implement
      our business model and strategy and adapt and modify them as
      needed;
 
 -
              increase
      awareness of our brands, protect our reputation and develop customer
      loyalty;
 
 -
              manage
      our expanding operations and service offerings, including the integration
      of any future acquisitions;
 
 -
              maintain
      adequate control of our
expenses;
 
 -
              anticipate
      and adapt to changing conditions in the hydropower utility market in which
      we operate as well as the impact of any changes in government regulations,
      mergers and acquisitions involving our competitors, technological
      developments and other significant competitive and market
      dynamics.
 
 If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.
 
 Our
failure to compete effectively may adversely affect our ability to generate
revenue.
 
 We
compete primarily on the basis of our ability to secure sales contracts with
local government entities in small- and medium-sized cities that allow us the
exclusive rights to develop hydropower distribution networks and supply
hydropower in these cities. There can be no assurance that such contracts will
be available to us in new areas as we attempt to expand or that our competitors
will negotiate more favorable arrangements. We expect that we will be required
to continue to invest in building hydropower distribution infrastructure. Our
business requires large amounts of working capital to fund our operations. Our
competitors may have better resources and better strategies to raise capital
which could have a material adverse effect on our business, results of
operations or financial condition.
 
 Our
inability to fund our capital expenditure requirements may adversely affect our
growth and profitability.
 
 Our
continued growth is dependent upon our ability to generate more revenue from our
existing distribution systems and raise capital from outside sources. We believe
that in order to continue to capture additional market share, we will have to
raise more capital to fund the construction and installation of the hydropower
distribution network for our customers under existing contracts and for
additional customers. In the future we may be unable to obtain the necessary
financing on a timely basis and on acceptable terms, and our failure to do so
may adversely affect our financial position, competitive position, growth and
profitability. Our ability to obtain acceptable financing at any time may depend
on a number of factors, including:
 
 -
              our
      financial condition and results of
operations,
 
 -
              the
      condition of the PRC economy and the hydropower industry in the PRC,
      and
 
 -
              conditions
      in relevant financial markets in the United States, the PRC and elsewhere
      in the world.
 
 We
may not be able to effectively control and manage our growth.
 
 If our
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. In addition, we may face challenges
in managing and expanding hydropower stations and service offerings and in
integrating acquired businesses with our own. Such eventualities will increase
demands on our existing management, workforce and facilities. Failure to satisfy
such increased demands could interrupt or adversely affect our operations and
cause delay in construction and/or acquisition of hydropower stations, longer
operation location completion cycle, and administrative
inefficiencies.
    30
   If
we are unable to successfully complete and integrate new operational locations
in a timely manner, our growth strategy could be adversely
impacted.
 
 An
important element of our growth strategy has been and is expected to continue to
develop additional hydropower stations in small- and medium-sized cities.
However, integrating businesses involves a number of special risks, including
the possibility that management may be distracted from regular business concerns
by the need to integrate operations, unforeseen difficulties in integrating
operations and systems, problems relating to assimilating and retaining the
employees of the acquired business, accounting issues that arise in connection
with the acquisition, challenges in retaining customers, and potential adverse
short-term effects on operating results. In addition, we may incur debt to
finance future operation locations, and we may issue securities in connection
with future operation locations that may dilute the holdings of our current or
future stockholders. If we are unable to successfully complete and integrate new
operations in a timely manner, our growth strategy could be adversely
impacted.
 
 Our
success depends on our ability to identify and develop additional hydropower
stations and negotiate and enter into favorable franchise agreements with local
governments of the operation locations.
 
 Our
success depends on our ability to identify new hydropower stations and negotiate
and enter into favorable franchise agreements with local governments of the
operational locations that grant us long-term exclusive right to develop the
hydropower stations and supply hydropower in the operational location. Our
failure to identify and develop additional hydropower stations and obtain the
exclusive rights to be the developer of hydropower stations and distribute
hydropower in such operational locations would curb our revenue growth and may
have adverse impact on our financial conditions and operating
results.
 
 Our
success depends on our ability to obtain large industrial supply contracts and
master residential supply contracts with large quantity of end
users.
 
 Our
success depends on our ability to obtain large industrial supply contracts and
master residential supply contracts with large quantity of end users. Our
failure to obtain large industrial supply contracts and master residential
supply contracts with large quantity of end users will adversely affect our
ability to generate revenue and our growth potential and may have adverse impact
on our financial conditions and operating results.
 
 Our
hydropower business can be affected by adverse weather conditions.
 
 Our
hydropower projects depend on the near-continuous operation of their equipment.
Should the productivity of some or all of this equipment be compromised or
should the equipment fail altogether, our business would be adversely affected.
We may also experience difficulty in hiring qualified operating
personnel.
 
 The
primary equipment of our hydropower stations include reciprocating engine
generator sets and hydropower generating equipment.  This equipment is
subject to mechanical failure that we may not be able to predict and that can
render specific stations inoperable for considerable periods of time. This risk
also extends to failures of the electricity grid near our projects that
could prevent the affected project or projects from delivering its electricity.
In addition, we may experience price increases for, or difficulty in obtaining,
spare parts for its projects and in identifying and hiring personnel qualified
to operate, maintain and repair the specialized equipment that makes up parts of
its projects.
 
 Our
hydropower generation stations rely on rainfall and snowfall to provide water
flow for hydropower production. Rainfall vary from year-to-year and an extended
period of below-normal rainfall would significantly reduce our revenue. Each
hydropower station is entirely dependent on the water flow through where it is
located.
 
 New
construction of hydropower stations may be delayed by governmental review and
approval as well as environmental concerns.
   31
  
 Construction
of each hydropower project is subject to special sessions of governmental review
and approval.  These reviews include an analysis of the impact on the
environment and environmental protection, water use, feasibility studies, soil
and water conservation programs. These reviews could delay the completion of
each hydropower project which would hinder our expansion plans and could have a
material adverse effect on our financial condition and results of
operation.
 
 Since
a majority of small hydropower stations are located in rural and mountainous
areas, the cost of construction may be high and operation of the stations may be
difficult.
 
 The
majority of hydropower stations are built in remote mountain villages and
townships. The construction of hydropower projects in such remote and
mountainous locations will increase cost of each project and require us to raise
additional capital.  In addition, the remote locations of the
hydropower stations will result increased costs of managing and operating such
projects.
 
 We
are responsible for the indemnification of our officers and
directors.
 
 Our
Bylaws provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against costs and expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on behalf of us. This indemnification policy
could result in substantial expenditures, which we may be unable to
recoup.
 
 We may not be
able to hire and retain qualified personnel to support our growth and if we are
unable to retain or hire such personnel in the future, our ability to improve
our products and implement our business objectives could be adversely
affected.
 
 Our
future success depends heavily upon the continuing services of the members of
our senior management team, in particular our Chief Executive Officer, Mr.
Guosheng Xu. If one or more of our senior executives or other key personnel are
unable or unwilling to continue in their present positions, we may not be able
to replace them easily or at all, and our business may be disrupted and our
financial condition and results of operations may be materially and adversely
affected. Competition for senior management and senior technology personnel is
intense, the pool of qualified candidates is very limited, and we may not be
able to retain the services of our senior executives or senior technology
personnel, or attract and retain high-quality senior executives or senior
technology personnel in the future. Such failure could materially and adversely
affect our future growth and financial condition.
 
 Risks
Related to Doing Business in the PRC.
 
 We
face the risk that changes in the policies of the PRC government could have a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.
 
 The PRC’s
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe that
this trend will continue, we cannot assure you that this will be the case. A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports or
sources of supplies, or the expropriation or nationalization of private
enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, we cannot assure you that the government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership, social
or political disruption, or other circumstances affecting the PRC's political,
economic and social life.
   32
  
 The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may have a
material and adverse effect on our business.
 
 There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing our business, or the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We and any future subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are sometimes vague and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our businesses.
  A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect our customers, demand for our services and our
business.
 
 We are a
holding company. All of our operations are conducted in the PRC and all of our
revenues are generated from sales in the PRC. Although the PRC economy has grown
significantly in recent years, we cannot assure you that such growth will
continue. The solar hot water and renewable energy industry in the PRC is
relatively new and growing, but we do not know how sensitive we are to a
slowdown in economic growth or other adverse changes in the PRC economy which
may affect demand for solar hot water heaters and boilers. A slowdown in overall
economic growth, an economic downturn or recession or other adverse economic
developments in the PRC may materially reduce the demand for our products and
materially and adversely affect our business.
 
 Inflation
in the PRC could negatively affect our profitability and growth.
 
 While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and
restrictions on state bank lending. Such an austerity policy can lead to a
slowing of economic growth. In October 2004, the People’s Bank of China, the
PRC’s central bank, raised interest rates for the first time in nearly a decade
and indicated in a statement that the measure was prompted by inflationary
concerns in the Chinese economy. Repeated rises in interest rates by the central
bank would likely slow economic activity in China which could, in turn,
materially increase our costs and also reduce demand for our
products.
 
 Zhaoheng
HK  is subject to restrictions on paying dividends and making other
payments to us.
 
 We are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investments in our
subsidiaries. As a result of our holding company structure, we rely primarily on
dividends payments from our subsidiary in China. However, PRC regulations
currently permit payment of dividends only out of accumulated profits, as
determined in accordance with PRC accounting standards and regulations. Our
subsidiary and affiliated entity in China are also required to set aside a
portion of their after-tax profits according to PRC accounting standards and
regulations to fund certain reserve funds. The PRC government also imposes
controls on the conversion of RMB into foreign currencies and the remittance of
currencies out of China. We may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency. See
“Government control of
currency conversion may affect the value of your investment.”
Furthermore, if our subsidiary or affiliated entity in China incurs debt on
their own in the future, the
 instruments
governing the debt may restrict their ability to pay dividends or make other
payments. If we or our subsidiary is unable to receive all of the revenues from
our operations through these contractual or dividend arrangements, we may be
unable to pay dividends on our common stock.
 
 Governmental
control of currency conversion may affect the value of your
investment.
    33
 
 The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenues in Renminbi, which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and
 expenditures
from the transaction, can be made in foreign currencies without prior approval
from the PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate governmental
authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies.
 
 The PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they come
due.
 
 The
fluctuation of the Renminbi may materially and adversely affect your
investment.
 
 The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC's political and economic
conditions. As we rely entirely on revenues earned in the PRC, any significant
revaluation of the Renminbi may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar could
have a material adverse effect on our business, financial condition and results
of operations. Conversely, if we decide to convert our Renminbi into U.S.
dollars for the purpose of making payments for dividends on our common
shares or for other business purposes and the U.S. dollar appreciates against
the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be
reduced. In addition, the depreciation of significant U.S. dollar denominated
assets could result in a charge to our income statement and a reduction in the
value of these assets.
 
 On July
21, 2005, the PRC government changed its decade-old policy pegging the value of
the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in an approximately 2.0%
appreciation of the RMB against the U.S. dollar. While the international
reaction to the RMB revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in a further and more significant
appreciation of the RMB against the U.S. dollar.
 
 Recent
PRC State Administration of Foreign Exchange (“SAFE”) Regulations regarding
offshore financing activities by PRC residents, have undertaken continuous
changes which may increase the administrative burden we face and create
regulatory uncertainties that could adversely affect the implementation of our
acquisition strategy, and a failure by our stockholders who are PRC residents to
make any required applications and filings pursuant to such regulations may
prevent us from being able to distribute profits and could expose us and our PRC
resident stockholders to liability under PRC law.
 
 The PRC
State Administration of Foreign Exchange, or SAFE, issued a series of public
notices in 2005 (the “SAFE Regulations”), which require registrations with, and
approval from, SAFE on direct or indirect offshore investment activities by PRC
resident individuals. The SAFE Regulations require that if an offshore company
directly or indirectly formed by or controlled by PRC resident individuals
(“SPC”) intends to acquire a PRC company, such acquisition will be subject to
strict examination by the SAFE. Without registration, the PRC entity cannot
remit any of its profits out of the PRC as dividends or otherwise. Certain
stockholders of the Company who are PRC residents are subject to the SAFE
Regulations by virtue of being stockholders of Zhaoheng (BVI) prior to the
consummation of the Share Exchange.
  The PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 (“January Notice”) requiring registrations with, and approval from,
SAFE on direct or indirect
   34
   offshore
investment activities by PRC resident individuals. The January Notice states
that if an offshore company directly or indirectly formed by or controlled by
PRC resident individuals (“SPC” - as referred to in the October Notice, see the
following) intends to acquire a PRC company, such acquisition will be subject to
strict examination by the central SAFE, the SAFE bureau at the highest level,
which requires the disclosure by PRC resident individuals regarding their
ownership status with an SPC or any other asset link between or among the
parties to the acquisition transaction.
 
 In April
2005, SAFE issued another public notice clarifying the January Notice (“April
Notice”). In accordance with the April Notice, if a PRC company is acquired by
an SPC, the PRC resident stockholders of an SPC are required to submit a
registration form to the local SAFE branch to register his or her respective
ownership interests in the SPC, even such transaction occurred prior to the
January Notice. The April Notice does not specify the timeframe during which
such retrospective registration must be completed. The PRC resident must also
file amendments if there is a material event affecting the SPC, such as, among
other things, a change to share capital, a transfer of shares, or if the SPC is
involved in a merger and an acquisition or a spin-off transaction or uses its
assets in the PRC to guarantee offshore obligations. Furthermore, the April
Notice expanded the definition of the term “foreign acquisition”, which makes
the registration obligation applicable to any transaction that results in PRC
residents directly or indirectly holding shares in an SPC.
 
 On
October 21, 2005, SAFE issued the third public notice (“October Notice”)
effective from November 1, 2005 (“Effective Date”), which shall supersede the
January Notice and April Notice by clarifying the documentation requirement and
procedure of any registration process occurring after the Effective Date. It
defines the term “SPC” as to be an offshore company directly or indirectly
formed by or controlled by PRC resident entities or resident individuals for the
purpose of equity financing (including financing by convertible bonds) by the
assets or interests in a PRC entity. It also clarifies that the registration
approval authority is the local SAFE, instead of the central SAFE, as set forth
in the January Notice.
 
 As such,
our stockholders who are PRC residents, must comply with the registration and
disclosure requirements provided thereunder. As of the date hereof, Mr. Xu, our
Chief Executive Officer and Chairman of the Board, has completed the
registration with the SAFE. Our other PRC stockholders who are subject to the
SAFE regulations are in the process of registering with the SAFE.
 
 Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.
 
 A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of the Company’s revenue is derived, could have an adverse effect on our
operations. Our operations may be impacted by a number of health-related
factors, including quarantines or closures of some of our offices that would
adversely disrupt our operations.
 
 Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
  Because
our principal assets are located outside of the United States and all of our
directors and all our officers reside outside of the United States, it may be
difficult for you to enforce your rights based on U.S. Federal Securities Laws
against us and our officers and some directors in the U.S. or to enforce U.S.
Court Judgment against us or them in the PRC.
 
 All of
our directors and all of our officers reside outside of the United States. In
addition, our operating subsidiary, is located in the PRC and substantially all
of its assets are located outside of the United States. It may therefore be
difficult for investors in the United States to enforce their legal rights based
on the civil liability provisions of the U.S. Federal securities laws against us
in the courts of either the U.S. or the PRC and, even if civil
    35
   judgments
are obtained in U.S. courts, to enforce such judgments in PRC courts.
Further, it is unclear if extradition treaties now in effect between the United
States and the PRC would permit effective enforcement against us or our officers
and directors of criminal penalties, under the U.S. Federal securities laws or
otherwise.
 
 We
may face obstacles from the communist system in the PRC.
 
 Foreign
companies conducting operations in PRC face significant political, economic and
legal risks. The Communist regime in the PRC, including a cumbersome
bureaucracy, may hinder Western investment.
 
 We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
 
 The PRC
historically has not adopted a Western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management,
legal and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
 
 Risks
Related to Our Common Stock.
 
 Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other stockholders.
 
 Our
officers, directors and affiliates beneficially own approximately 98.0% of our
Common Stock. Mr. Guosheng Xu, our Chairman and Chief Executive Officer,
beneficially owns approximately 98% of our Common Stock through his wholly-owned
subsidiary Embedded Internet. As a result, Mr. Xu is able to influence the
outcome of stockholder votes on various matters, including the election of
directors and extraordinary corporation transactions including business
combinations. Yet Mr. Xu’s interests may differ from other stockholders.
Furthermore, the current ratios of ownership of our common stock reduce the
public float and liquidity of our common stock which can in turn affect the
market price of our common stock. See “Security Ownership of Certain Beneficial
Owners and Management” under Item 2.01 of this Current Report for more
information regarding beneficial ownership of securities of our
management.
 
 We
are not likely to pay cash dividends in the foreseeable future.
 
 We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary. In addition, our operating
subsidiary, from time to time, may be subject to restrictions on its ability to
make distributions to us, including as a result of restrictions on the
conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions.
 
 There
is currently a limited trading market for our common stock.
  Our
common stock is quoted on the over-the-counter Bulletin Board. However, our bid
and asked quotations have not regularly appeared on the OTC Bulletin Board for
any consistent period of time. There is no established trading market for our
common stock and our common stock may never be included for trading on any stock
exchange or through any other quotation system (including, without limitation,
the NASDQ Stock Market). You may not be able to sell your shares due to the
absence of a trading market.
 
 Our
common stock may be also subject to the "penny stock" rules to the extent that
the price drops below $5.00, which require delivery of a schedule explaining the
penny stock market and the associated risks before any sale. See "MARKET PRICE
OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS." These requirements may further limit your ability to sell your
shares.
    36
 
 Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
 
 The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
 
 
 ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None.
 
 ITEM
3.  DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 ITEM
5.  OTHER INFORMATION
 
 None.
 
 ITEM
6.  EXHIBITS
 
 Exhibit
                      Number
                    
                    Description
      of Exhibit31.1*
                    
                    Certification
      of Principal Executive Officer pursuant to Rule
  13a-14(a).31.2*
                    
                    Certification
      of Acting Principal Financial Officer pursuant to Rule
      13a-14(a).32.1*
                    
                    Certification
      of Principal Executive Officer and Acting Principal Financial Officer
      pursuant to 18 U.S.C. Section 1350.







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:
      November 14, 2008
            By:
            /s/ Guosheng XuName:
      Guosheng XuTitle:  Chairman
      and Chief Executive Officer(principal
      executive officer and duly authorized officer)Dated:
      November 14, 2008
            By:
            /s/ Guosheng XuName:
      Guosheng XuTitle:  Acting
      Chief Financial Officer(principal
      financial officer)