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 June 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)
 
 Certified
Technologies Corporation
 5353
Manhattan Circle
 Suite
101
 Boulder,
CO 80303
 March
31
 
 (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

 
 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 
              
              Accelerated
      filer Non-accelerated
      filer 
                (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  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
      IFINANCIAL
      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
              19Item
      4.
              Controls
      and Procedures
              29PART
      II OTHER
      INFORMATIONItem
      1.
              Legal
      ProceedingsItem
      1A.
              Risk
      Factors
              29Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              29Item
      3.
              Defaults
      Upon Senior Securities
              37Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              37Item
      5.
              Other
      Information
              37Item
      6.
              Exhibits
              37SIGNATURES
              37
       
 
 PART
I — FINANCIAL INFORMATION
 
 ITEM
1.     FINANCIAL STATEMENTS
 
 ZHAOHENG
      HYDROPOWER COMPANY AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSJune
      30,
              
              
              December
      31,2008
              
              
              2007ASSETS
              
              (Unaudited)Current
      Assets:Cash
              
              $
              4,442,737
              
              
              $
              994,719Notes receivable
              
              
              -
              
              
              
              202,349Accounts receivable, net of allowance for doubtful accounts $327,461 and
      $307,090 respectively
              
              
              2,450,351
              
              
              
              1,915,471Dividend receivable
              
              
              -
              
              
              
              71,460Other receivables
              
              
              97,175
              
              
              
              145,075Prepaid expenses and other current assets
              
              
              64,586
              
              
              
              85,971Total
      current assets
              
              
              7,054,849
              
              
              
              3,415,045Long-term investment
              
              
              571,504
              
              
              
              535,951Property, plant and equipment,, net of accumulated depreciation of
      $39,497,071 and$34,380,646
      respectively
              
              
              39,248,193
              
              
              
              30,634,626Due from related parties
              
              
              13,521,567
              
              
              
              17,529,838Other assets
              
              
              173,960
              
              
              
              175,886Construction in progress
              
              
              36,228,311
              
              
              
              32,455,855Property use rights, net
              
              
              1,233,398
              
              
              
              1,169,905Intangible asset
              
              
              18,197
              
              
              
              -Total
      assets
              
              $
              98,049,979
              
              
              $
              85,917,106LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts payable and accrued expenses
              
              $
              35,337
              
              
              $
              133,163Other payables
              
              
              3,696,684
              
              
              
              1,739,867Taxes payable
              
              
              375,802
              
              
              
              157,525Due to related party
              
              
              2,087,263
              
              
              
              31,444Advances from customers
              
              
              -
              
              
              
              34,021Judgment payable
              
              
              7,600
              
              
              
              7,600Total
      current liabilities
              
              
              6,202,686
              
              
              
              2,103,620Loans
      payable-long term
              
              
              64,585,733
              
              
              
              60,567,944Minority
      interest
              
              
              -
              
              
              
              -Stockholders'
      Equity:Preferred Stock: $.001 par value; 20,000,000 authorized, no shares issued
      and outstandingat June 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 June 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
              
              
              3,019,912
              
              
              
              628,704Accumulated other comprehensive income
              
              
              4,166,759
              
              
              
              2,541,949Total
      shareholders' equity
              
              
              27,261,560
              
              
              
              23,245,542Total
      liabilities and stockholders' equity
              
              $
              98,049,979
              
              
              $
              85,917,106See
      notes to unaudited consolidated financial statements.




1
  
 ZHAOHENG
      HYDROPOWER COMPANY AND SUBSIDIARIESUNAUDITED
      CONSOLIDATED STATEMENTS OF OPERATIONSFor
      the Three Months Ended June 30,
              
              
              For
      the Six Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)
              
              
              (unaudited)Revenues
              
              $
              3,342,642
              
              
              $
              2,363,423
              
              
              $
              4,633,581
              
              
              $
              4,531,040Cost
      of revenues
              
              
              755,592
              
              
              
              450,783
              
              
              
              1,219,969
              
              
              
              878,354Gross
      profit
              
              
              2,587,050
              
              
              
              1,912,640
              
              
              
              3,413,612
              
              
              
              3,652,686Operating
      expenses:Selling, general and administrative expenses
              
              
              214,207
              
              
              
              316,580
              
              
              
              534,435
              
              
              
              722,256Operating
      income
              
              
              2,372,843
              
              
              
              1,596,060
              
              
              
              2,879,177
              
              
              
              2,930,430Other
      income (expenses):Interest income
              
              
              963,845
              
              
              
              1,567
              
              
              
              965,012
              
              
              
              31,239Interest expense
              
              
              (1,153,397
              )
              
              
              (180,632
              )
              
              
              (1,463,062
              )
              
              
              (438,412
              )Nonoperating income
              
              
              -
              
              
              
              31,435
              
              
              
              -
              
              
              
              73,599Nonoperating expense
              
              
              (2,841
              )
              
              
              (2,954
              )
              
              
              (21,006
              )
              
              
              (23,544
              )Other income
              
              
              25,691
              
              
              
              -
              
              
              
              26,229
              
              
              
              -Investment income
              
              
              131,773
              
              
              
              -
              
              
              
              159,150
              
              
              
              -Total
      other income (expenses)
              
              
              (34,929
              )
              
              
              (150,584
              )
              
              
              (333,677
              )
              
              
              (357,118
              )Income
      before income taxes
              
              
              2,337,914
              
              
              
              1,445,476
              
              
              
              2,545,500
              
              
              
              2,573,312Income
      taxes
              
              
              142,759
              
              
              
              81,647
              
              
              
              154,292
              
              
              
              170,453Income
      before minority interest
              
              
              2,195,155
              
              
              
              1,363,829
              
              
              
              2,391,208
              
              
              
              2,402,859Minority
      interest
              
              
              -
              
              
              
              (279,142
              )
              
              
              -
              
              
              
              (515,080
              )Net
      income
              
              
              2,195,155
              
              
              
              1,084,687
              
              
              
              2,391,208
              
              
              
              1,887,779Unrealized foreign currency translation gain
              
              
              641,817
              
              
              
              (326,142
              )
              
              
              1,624,810
              
              
              
              (91,418
              )Comprehensive
      income
              
              $
              2,836,972
              
              
              $
              758,545
              
              
              $
              4,016,018
              
              
              $
              1,796,361Net
      loss per common share - basic and diluted
              
              $
              0.07
              
              
              $
              0.38
              
              
              $
              0.20
              
              
              $
              0.90Weighted
      average number of sharesoutstanding
      - basic and diluted
              
              
              38,763,935
              
              
              
              2,005,973
              
              
              
              20,384,954
              
              
              
              2,005,973See
      notes to unaudited consolidated financial statements.
  
 2
  
 ZHAOHENG
      HYDROPOWER COMPANY AND SUBSIDIARIESUNAUDITED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFor
      the Six Months Ended June 30,2008
              
              
              2007(unaudited)
              
              
              (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
              
              $
              2,391,208
              
              
              $
              1,887,779Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization expenses
              
              
              732,047
              
              
              
              497,619Minority
      interest
              
              
              -
              
              
              
              515,080Changes
      in operating assets and liabilities:Notes
      receivable
              
              
              208,983
              
              
              
              51,867Accounts
      receivable
              
              
              (394,987
              )
              
              
              446,041Dividend
      receivable
              
              
              73,803
              
              
              
              -Other
      receivables
              
              
              55,715
              
              
              
              27,575Prepaid
      expense
              
              
              26,237
              
              
              
              (636,165
              )Other
      assets
              
              
              13,167
              
              
              
              886,580Accounts
      payable and accrued expenses
              
              
              (103,210
              )
              
              
              (837,389
              )Other
      payables
              
              
              1,783,471
              
              
              
              494,193Advances
      from customers
              
              
              (35,137
              )
              
              
              34,003Taxes
      payable
              
              
              201,289
              
              
              
              (31,419
              )Net
      cash provided by operating activities
              
              
              4,952,586
              
              
              
              3,335,764CASH
      FLOWS FROM INVESTING ACTIVITIESDue
      from related parties
              
              
              5,008,432
              
              
              
              (9,522,052
              )Purchase
      of equity investment
              
              
              (6,652,994
              )
              
              
              -Purchase
      of property, plant and equipment
              
              
              (168,450
              )
              
              
              (116,051
              )Investment
      in construction of hydropower station
              
              
              (1,857,456
              )
              
              
              (7,050,236
              )Net
      cash used in investing activities
              
              
              (3,670,468
              )
              
              
              (16,688,339
              )CASH
      FLOWS FROM FINANCING ACTIVITIESDividend
      paid
              
              
              -
              
              
              
              (2,825,649
              )Proceeds
      from long-term loans
              
              
              -
              
              
              
              15,559,964Due
      to related parties
              
              
              1,990,623
              
              
              
              -Net
      cash provided by financing activities
              
              
              1,990,623
              
              
              
              12,734,315EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
              
              
              175,277
              
              
              
              170,940NET
      INCREASE (DECREASE) IN CASH
              
              
              3,448,018
              
              
              
              (447,320
              )CASH,
      BEGINNING OF PERIOD
              
              
              994,719
              
              
              
              4,819,766CASH,
      ENDING OF PERIOD
              
              $
              4,442,737
              
              
              $
              4,372,446SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the year for:Interest
      paid
              
              $
              1,463,062
              
              
              $
              431,367Income
      tax paid
              
              $
              154,292
              
              
              $
              170,453See
      notes to unaudited consolidated financial statements.
      3
  
 ZHAOHENG
HYDROPOWER COMPANY AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED
 FINANCIAL
STATEMENTS
 
 
 Note
1 – ORGANIZATION AND PROPOSED 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 Power Co., Ltd.
entered into a letter of intent to transfer its 100% interest in Hunan Juili
Hydropower Construction Co., Ltd. (“Hunan Jiuli”) to its related party.
    4
    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 Hydropower Co., Ltd. (“Hunan Zhaoheng”) succeeded in
the buyout of Guizhou Jingrong Industrial Development Co., Ltd (“Guizhou
Jingrong”) in Rongjiang County of Guizhou Province. The acquisition was
undertaken to allow the Company to diversify its operations, to improve its
financial condition and increase shareholder value. The statements of operations
do not include Guizhou Jingrong due to the immaterial financial impact
associated with the brief period of ownership of Guizhou Jingrong.
 
 The
Company uses the purchase method of accounting for qualifying business
combinations. Under the purchase method of accounting, the assets and
liabilities of acquired company’s 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 purchase consideration for Guizhou Jingrong was $2,332,668
which had been paid at June 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 PRC.
 
 The
unaudited financial statements as presented hereby consolidated for the six
months ended June 30, 2008 and 2007. The accompanying unaudited financial
statements of the Company as of June 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
six months ended June 30, 2008 and 2007 are unaudited and include all
adjustments considered necessary for a fair presentation of the results of
operations for the six month periods ended on June 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
unaudited 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.
    5
   Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People’s Republic of China. Total cash in
state-owned banks at June 30, 2008 and December 31, 2007 amounted to $4,439,716
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 receivable 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. The allowance for doubtful accounts of June 30,
2008 and December 31, 2007 were $4,327,461 and $307,090,
respectively.
 
 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, plant 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
 
 Construction
in progress is booked as its historical cost. Construction in progress refers to
the Hunan Sanjiang Left Bank Hydropower Station that was being built since 2006
that have not been completed and become operational. As disclosed in the
subsequent event, this station started to test operation in April 2008. This
construction in progress was transferred to property, plant and equipment in
July 2008.
 
 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
     6
   
 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.
 
 Major
Customers
 
 For the
six months ended June 30, 2008 and 2007, the major five customers accounted for
approximately 89% and 91%, respectively, of the Company’s total sales. As at
June 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 June 30, 2008 and December 31, 2007 was $4,166,759 and $2,541,950,
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 rate during the six months ended June 30,
2008.
   7
   For
      the Three Months
                Ended
      June 30,
              
              For
      the Six Months
                Ended
      June 30,2008
              
              2007
              
              2008
              
              2007Period
      end RMB : U.S. Dollar exchange rate
              
              6.8718
              
              7.6248
              
              6.8718
              
              7.6248Average
      year-to-date RMB : U.S. Dollar exchange rate
              
              7.0819
              
              7.7121
              
              7.0726
              
              7.7299
  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 six months ended June 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 record any
impairment charges during the six months ended June 30, 2008 or
2007.
 
 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, the 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.
    8
   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
six months ended June 30, 2008 and the years ended December 31, 2007, all of the
Company’s sales came from companies located in the PRC.  As of June
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.
 
 In
September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (“SFAS 158”), an
amendment of FASB Statements No. 87, 88, 106 and 132(R).
SFAS No. 158 requires (a) recognition of the funded status
(measured as the difference between the fair value of the plan assets and the
benefit obligation) of a benefit plan as an asset or liability in the employer’s
statement of financial position, (b) measurement of the funded status as of
the employer’s fiscal year-end with limited exceptions, and (c) recognition
of changes in the funded status in the year in which the changes occur through
comprehensive income. The requirement to recognize the funded status of a
benefit plan and the disclosure requirements are effective as of the end of the
fiscal year ending after December 15, 2006. The requirement to measure the
plan assets and benefit obligations as of the date of the employer’s fiscal
year-end statement of financial position is effective for fiscal years ending
after December 15, 2008. This Statement has no current applicability to the
Company’s financial statements. Management adopted this Statement on January 1,
2007, and the adoption of SFAS 158 did not have a material impact to the
Company’s financial position, results of operations, or cash flows.
  
 9
   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. Therefore, the Company adopted this standard
on January 1, 2008, and the adoption of this statement did not have a
material impact on the Company’s financial condition or results of
operations.
 
 In
December 2007, the FASB issued SFAS No. 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 against the customer in China. Total notes receivable as
of June 30, 2008 and December 31, 2007 were $0 and $202,349
respectively.
 
 Note
4 – DIVIDEND RECEIVABLE
 
 Dividend
receivable at June 30, 2008 and December 31, 2007 amounted to $0 and $71,460,
respectively. Dividend receivable is an investment income receivable on the
investment in Zhaoheng Weile Tungsten (Shimen), Ltd. (see Note 7).
     10
   Note
5 – OTHER RECEIVABLES
 
 Other
receivables at June 30, 2008 and December 31, 2007 amounted to $97,175 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 June 30, 2008 and December
31, 2007 amounted to $64,586 and $85,971, respectively.
 
 Note
7 – LONG-TERM INVESTMENT
 
 As of
June 30, 2008 and December 31, 2007, Hunan Zhaoheng invested $571,504 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 at cost basis. 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 June 30, 2008 and 2007 were $131,773 and $0, respectively.
For the six months ended June 30, 2008 and 2007, the investment incomes were
$159,150 and $0, respectively.
 
 Note
8 – PROPERTY, PLANT AND EQUIPMENT
 
 Property,
plant and equipment as of June 30, 2008 and December 31, 2007 are summarized as
follows:
 
 Items
              
              June
      30,
                2008
              
              December
      31, 2007(Unaudited)Dams
              
              $ 
      56,629,416
              
              $  
      42,467,137Buildings
              
              1,889,204
              
              8,278,953Machine
      equipment
              
              19,357,443
              
              13,434,886Electronic
      and other equipment
              
              869,201
              
              834,296Total
              
              78,745,264
              
              65,015,272Less:
      Accumulated Depreciation
              
              (39,497,071)
              
              (34,380,646)$ 
      39,248,193
              
              $  
      30,634,626
 
 Depreciation
expense for the six months ended June 30, 2008 and 2007 was $718,880 and
$485,068, respectively.
 
 Note
9 – OTHER ASSETS
 
 Other
assets consisted of the following:
 
 Items
              
              June
      30,
                2008
              
              
              December
      31, 2007(Unaudited)Spare
      parts
              
              $
              168,594
              
              
              $
              175,886Deposit
              
              
              5,366
              
              
              
              -$
              173,960
              
              
              $
              175,886




11
 
 Note
10 – CONSTRUCTION IN PROGRESS
 
 Construction
in progress refers to the Hunan Sanjiang Left Bank Hydropower Station, the
project at June 30, 2008 and December 31, 2007 amounted to $36,228,311 and
$32,455,855, respectively. The project started to test operation in April 2008.
This construction in progress was transferred to property, plant and equipment
in July 2008.
 
 Note
11 – PROPERTY USE RIGHT
 
 Property
use right consists of the following as of June 30, 2008 and December 31,
2007
     
 12
 
 
 Items
              
              June
      30,
                2008
              
              December
      31, 2007(Unaudited)Property
      use right
              
              1,411,264
              
              1,323,471Less:
      Accumulated amortization
              
              (177,866
              )
              (153,566)1,233,398
              
              1,169,905
 
 Amortization
expense for the six months ended June 30, 2008 and 2007 amounted to $13,167 and
$12,551, respectively.
 
 Note
12 – TAXES PAYABLE
 
 Taxes
payable at June 30, 2008 and December 31, 2007 amounted to $375,802 and
$157,525, respectively. Taxes payable are summarized below:
  Items
              
              
              
              
              
              December
      31, 2007June
      30,
                  2008(Unaudited)Business
      tax payable
              
              $
              93,482
              
              
              
              $
              33,680Value
      added tax payable
              
              
              164,648
              
              
              
              
              34,309Property
      tax payable
              
              
              22,039
              
              
              
              
              42,470Income
      tax payable
              
              
              81,744
              
              
              
              
              45,196Other
      taxes and government fees
              
              
              13,889
              
              
              
              
              1,870$
              375,802
              
              
              
              $
              157,525




Note
13 – OTHER PAYABLES





Other
payables at June 30, 2008 and December 31, 2007 amounted to $3,696,684 and
$1,739,867, respectively. Other payables were the final payment withheld from
the vendor constructing the Sanjiang Left Bank Hydropower Station until
occupancy of the ongoing construction of Sanjiang Left Bank Hydropower Station
is completed (for details please refer to Note 10).









13





Note
14 – LONG-TERM LOANS





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





Lenders
            
            June
      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.
            $
            6,269,044
            $
            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%. Pledged with property, plant and equipment and guaranteed by
      Shenzhen Zhaoheng Industrial Ltd.
            
            2,915,834
            
            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%. Pledged with property, plant and equipment and
      guaranteed by Shenzhen Zhaoheng Industry Ltd.
            
            8,747,503
            
            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.
            
            23,326,676
            
            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.
            
            23,326,676
            
            21,875,556Total
            
            64,585,733
            
            60,567,944Less:
      short-term loans
            
            –
            
            –Long-term
      loans
            $
            64,585,733
            $
            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
            $-
            $-
            $6,269,044
            $11,663,337
            $46,653,352









14





Note
15 – STOCKHOLDERS’ EQUITY




Statutory
Reserve





Three of
our Operating Entities, Shenzhen Zhaoheng, Hunan Zhaoheng and Hunan Sanjiang,
are foreign-invested companies in PRC. According to relevant laws and
regulations in China, the companies reserve a portion of profit as reserve fund,
enterprise development fund and employee incentive and welfare fund with the
exact amount decided by the board of directors. As of June 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 People’s
Republic of China (“PRC GAAP”) until the reserve is equal to 50% of the
entities’ registered capital or members’ equity. Our operating entity Guizhou
Jinrong, as a domestic company, did not provide any reserves because of net loss
incurred for the quarterly period ended June 30, 2008 other operating entities
are required to provide reserve for their profit.





Retained
Earnings





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





Items
            
            June
      30, 2008
            
            
            December
      31, 2007(Unaudited)Retained
      earnings
            
            $
            3,019,912
            
            
            $
            628,704Statutory
      surplus reserve
            
            
            666,952
            
            
            
            666,952Total
            
            $
            3,686,864
            
            
            $
            1,295,656





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.




15


Entity
              Tax
      treatments
  Hunan
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.Hunan
      Jiuli
            -33%
      of income tax rate for years ended December 31, 2007 and 2006 and 25% flat
      afterwards.Guizhou
      Jinrong
            -Preferential
      rate of 15% (income tax) based on the policies for 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.





Deferred
income taxes arise from temporary timing differences in the recognition of
income and expenses for financial reporting and tax purposes. The Company's
deferred tax assets consist entirely of the benefit from net operating loss
(“NOL”) carry forwards all related to Shenzhen Zhaoheng, one of our
subsidiaries. As of June 30, 2008 and December 31, 2007, the NOL is $11,337 and
$7,114 respectively. According to the PRC regulations, the net operating loss
carry forward if not used, can be carry forward for time frame of five years.
The Company's deferred tax assets are offset by a valuation allowance due to the
uncertainty of the realization of the net operating loss carry forwards. Net
operating loss carry forwards may be further limited by other provisions of the
tax laws.





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





Items
            
            For
      the Six Months Ended June 30, 2008
            
            
            For
      the Six Months Ended June 30, 2007(Unaudited)
            
            
            
            (Unaudited)U.S.
      Operations
            
            $
            (1,511
            )
            
            $
            –Chinese
      Operations
            
            
            2,392,719
            
            
            
            2,401,927Total
            
            $
            2,391,208
            
            
            $
            2,401,927




The
Company has had minimal operating activity and operations with respect to its US
parent company, accordingly there is immaterial  NOL carry forwards
for United States income tax purposes at June 30, 2008 and 2007. Any resulting
deferred tax asset from the US NOL has been fully offset by a valuation
allowance due to the uncertainty of the realization of the net operating loss
carryfowards. The utilization of the Company's US NOL may be limited because of
possible change in ownership as defined under Section 382 of the Internal
Revenue Code.





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. There are no deferred tax assets or
liabilities as of June 30, 2008 and December 31, 2007.





Note
17 – RELATED PARTY TRANSACTIONS










16







For the
quarterly period ended June 30, 2008 and for the year ended December 31, 2007,
the Company distributed power to its long-term invested company, Zhaoheng Weile
Tungsten (Shimen) Company, limited at market price. For the six months ended
June 30, 2008 and 2007, the total sales amounted to $45,563 and $230,662
respectively.





The
Company leases its warehouse, plant and operating space to its related party
Zhaoheng Weile Tungsten (Shimen) Company limited for 5 years since June 1, 2006
under operating lease agreements. The rental is $1,312 each month with exemption
period of 5 months.





As of
June 30, 2008 and December 31, 2007, the amounts due from related parties were
$13,521,567 and $17,529,838, respectively and due on demand without security.
The details of due from related parties are listed as below:





Related
      party
            Relationship
            
            June
      30, 2008
            
            
            December
      31, 2007
            
            Interest
      rate(Unaudited)Zhaoheng
      Weile Tungsten (Shimen) Co., Ltd.
            Long-term
      investment
            
            $
            1,189,043
            
            
            $
            931,169
            
            12%
      annual; without securityHunan
      Jiuli Hydropower Construction Co., Ltd.
            The
      same major shareholder
            
            
            1,246,835
            
            
            
            -
            
            Interest
      free; without securityShenzhen
      Zhaoheng Industrial Co., Ltd.
            The
      same major shareholder
            
            
            11,085689
            
            
            
            16,598,669
            
            120%
      of bench mark rate set
              by
      People’s Bank of ChinaTotal
            
            
            $
            13,521,567
            
            
            $
            17,529,838





Starting
from January 1, 2008, we started charging interest on the loans to our related
party Shenzhen Zhaoheng Industrial Co., Ltd. (“Shenzhen Zhaoheng Industrial”)
whose major shareholders are the same as our major shareholder. For the six
months ended June 30, 2008 and 2007, the interest incomes were $965,012 and
$31,239 respectively.





As of
June 30, 2008 and December 31, 2007, the amounts due to related parties were
$2,087,263 and $31,444, respectively and due on demand. The details of due to
related parties are listed as below:





Related
      party
            Relationship
            
            June
      30,
              2008
            
            
            December
      31, 2007
            
            Interest
      rate(Unaudited)Original
      shareholders of Certified Technologies Corp.
            Original
      shareholders
              of
      the Company
            
            $
            35,793
            
            
            $
            31,444
            
            Interest
      free; without securityShenzhen
      Zhaoheng Industrial Co., Ltd.
            The
      same major shareholder
            
            
            2,051,470
            
            
            
            -
            
            Interest
      free; without securityTotal
            
            
            $
            2,087,263
            
            
            $
            31,444




Note
18 – OPERATING RISKS





(a)
            Country
      risk








17





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





(b)
            Products
      risk





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


(c)
            Exchange
      risk





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





(d)
            Political
      risk





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





(e)
            Key
      personnel risk





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





Note
19 – SUBSEQUENT EVENTS





In June
2008, the Shareholders of Zhaoheng Hydropower Limited (Hong Kong), a related
party, prepared to increase its investment in Shenzhen Zhaoheng Hydropower by
approximately $10,000,000.   Approximately $2,050,000 has been
contributed into Shenzhen Zhaoheng Hydropower. The remaining capital is being
processed in the third and fourth quarters of 2008.




The Hunan
Sanjiang Left Bank Hydropower Station refers to construction in progress being
built since 2006 that have started to test operation in April 2008. This
hydropower plant station will start to operate in July 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 includes some statements that are not
purely historical fact 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;


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


• our
dependence on the steel and iron markets;


•
exposure to product liability and defect claims;


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


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


• the
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.




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 is 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.





Hydropower
is a clean and renewable energy. Hydropower generation does not consume or
pollute water, nor does it produce green house gases. With a technically
exploitable capacity of 542 GW, China ranks number one in the world in the
potential of hydraulic resources. By the end of 2007, the installed capacity of
hydropower only amounted to 145.26 GW and the utilization level of hydropower
resources was about 26.8%, much lower than the 65%-85% in developed countries
such as U.S., Japan, and European countries. However, the Chinese government has
rated the development of hydropower as a top priority and plans to increase the
utilization level to 55% by 2020.





The
central government of China also issued several preferential policies to support
the hydropower industry. For example, grid operators are required to purchase
hydropower as a priority. Operators of new hydropower stations are exempt from
income tax for the first two years and pay only half the standard income tax
rate for the next three years. 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, 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
six months ended June 30, 2008, total power output in China amounted to 1.68
trillion KWH, an increase of 12.9% from the same period in the prior year.
Output of hydropower and thermal power increased 18.5% and 11.7%, 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.






20





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.





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





Jan
            Feb
            Mar
            Apr
            May
            JunRunoff
      (million m3),
      2008 *
            397
            360
            527
            1,036
            1,415
            878Output
      (million KWH), 2008
            8.29
            11.93
            13.70
            32.13
            29.83
            29.20Runoff
      (million m3),
      2007 *
            500
            656
            919
            907
            627
            1,286Output
      (million KWH), 2007
            16.72
            19.14
            28.51
            28.93
            21.00
            30.94




*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 output capacity of 430 million
KWH. The output capacity has increased by 60% from June 30, 2007. Currently, all
generating units are in good working conditions.





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





For
      the Three Months Ended June 30,
            
            
            For
      the Six Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues
            
            $
            3,342,642
            
            
            $
            2,363,423
            
            
            $
            4,633,581
            
            
            $
            4,531,040Cost
      of revenues
            
            
            755,592
            
            
            
            450,783
            
            
            
            1,219,969
            
            
            
            878,354Gross
      profit
            
            
            2,587,050
            
            
            
            1,912,640
            
            
            
            3,413,612
            
            
            
            3,652,686Operating
      income
            
            
            2,372,843
            
            
            
            1,595,128
            
            
            
            2,879,177
            
            
            
            2,929,498Net
      income
            
            $
            2,195,155
            
            
            $
            1,083,960
            
            
            $
            2,391,208
            
            
            $
            1,887,052




Results of
Operations





The
following table summarizes our operating results for the six-month periods ended
June 30, 2008 and 2007:






21





For
      the Six Months Ended June 30,
            
            Increase
      (Decrease)2008
            
            2007
            
            Amount
            
            
            Percent(unaudited)Total
      revenue
            
            $
            4,633,581
            
            
            $
            4,531,040
            
            
            $
            102,541
            
            
            
            2.3
            %Cost
      of Revenues
            
            
            1,219,969
            
            
            
            878,354
            
            
            
            341,615
            
            
            
            38.9
            %Operating
      expenses
            
            
            534,435
            
            
            
            723,188
            
            
            
            (188,753
            )
            
            
            (26.1
            %)Net
      income
            
            
            2,391,208
            
            
            
            1,887,052
            
            
            
            504,156
            
            
            
            26.7
            %




Revenues




Revenues
for the three months ended June 30, 2008 were $3,342,642, an increase of
$979,219, or 41.4%, from $2,363,423 of the three months ended June 30, 2007. For
six months periods ended June 30, 2008, revenues were $4.6 million, an increase
of $102,541, or 2.3%, from total revenues of $4.5 million reported for the six
months ended June 30, 2007. This growth was due primarily to an increase in both
electricity tariff and installed capacity. Average electricity tariff for our
Hunan facilities was RMB 0.2410/KWH for the three months ended June 30, 2008
compared with RMB 0.2406/KWH for the three months ended June 30, 2007. 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 June 30, 2008. However,
total rainfall during the six months ended June 30, 2008 in Lishui Basin where
our Sanjiang Hydropower Plants are located was much less compared to the six
months ended June 30, 2007. As a result, water runoff was 4,555 million cubic
meterfor
the six months ended June 30, 2008, only 57% of average runoff in the same
period of 2007. With less runoff, the output capability was constrained and
revenues did not increase in proportion to the increase in installed capacity.
In the remainder of the year we expect the rainfall will return to normal level,
as well as our revenues.




Cost
of Revenues




Cost of
revenues consists of depreciation expense at 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 June 30, 2008 was $755,592, or 22.6% of our
revenues; cost of revenues for the three months ended June 30, 2007 was
$450,783, or 19.1% of revenues. Cost of revenues for the six months ended June
30, 2008 was $1,219,969, or 26.3% of our revenues; cost of revenues for six
months ended June 30, 2007 was $878,354, or 19.4% of our revenues. There was
slight increase in the cost of revenues rates since our installed capacity was
increased from 65MW on June 30, 2007 to 120MW on June 30, 2008, however total
output for the six months ended June 30, 2008 did not increase in proportion to
the increase in installed capacity due to decreased rainfall in the same period.
In the remainder of the year we expect the rainfall will return to normal level,
as well as our revenues.




Operating
Expenses




Total
operating expenses, which include selling, general and administrative expenses,
decreased to $214,207 for the three months ended June 30, 2008, as compared to
$317,512 for the three months ended June 30, 2007. Comparing for the six months
periods ended June 30, 2008 and 2007, operating expenses reduced in 2008 to
$534,435, or 11.5%, as compared to $723,188, or 16.0% in 2007. The decrease in
operating expenses was mainly due to savings from discontinued leather trading
business operated by one of our subsidiaries, Shenzhen Zhaoheng Hydropower Co.,
Ltd. (“Shenzhen Zhaoheng”), in December 2007.








22






Interest
Income




Starting
from January 1, 2008, two of our 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. For the six months ended June 30, 2008, we realized interest income
of $965,012, compared with interest income of $31,239 for the six months ended
June 30, 2007. Interest rates charged on these loans are 12% of the bench mark
rate set by the People’s Bank of China. As of June 30, 2008, the loans to
Shenzhen Zhaoheng Industrial amounted to $11,085,689, compared to $16,598,669 as
of December 31, 2007.




Interest
Expense




Interest
expense was $1,463,062 for the six months ended June 30, 2008, compared with
$438,412 for the same period in 2007. This increase was due to capitalization of
interest expense incurred during the construction period of the new hydropower
plant established by one of our subsidiaries, Hunan Zhaoheng. The new hydropower
plant will start its operation in July 2008.




Investment
Income




For the
six months ended June 30, 2008, the investment income were $159,150, increase
from $0 for the same period in 2007. The investment income was generated from
the long-term investment at Zhaoheng Weile Tungsten (Shimen), Ltd. (“Weile”). As
of June 30, 2008 and December 31, 2007, we invested $571,504 and $535,951,
respectively, for 49% equity interests in Weile. For this investment, we will
not participate in the management of Weile, but receive 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 had started its production line
since October 2007. The investment was accounted for at cost basis. The dividend
generated from this investment was presented as investment income in our
unaudited consolidated financial statements. The investment income was then
calculated based on the above investment term.




Net
Income




Net
income increased to approximately $2.2 million for the three months ended June
30, 2008 from approximately $1.1 million for the three months ended June 30,
2007. As a percentage of revenue, net income was approximately 65.7% for the
three months ended June 30, 2008, as compared to approximately 45.9% for the
three months ended June 30, 2007.




For the
six months ended June 30, 2008 and 2007, net income increased to approximately
$2.4 million in 2008 from approximately $1.9 million in 2007. As a percentage of
net sales, net income was approximately 51.6% for the six months ended June 30,
2008, compared to approximately 41.7% for the six months ended June 30,
2007.




The
increase at net income as a percentage of revenue was mainly through reduced
operating expenses and increased interest income. In addition, we realized
investment income of $159,150 in Zhaoheng (Shimen) Weile Tungsten Co., Ltd. for
the six months ended June 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 relationship 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
additional capital, primarily to acquire developed hydropower stations or to
construct new stations. As a result, we will seek to raise addition funds to
finance our future growth.






23






Cash Flows




For
the six months ended June 30, 2008, we had a net increase in cash and cash
equivalents of $3,448,018 million. Operating activities generated cash of
$4,952,586; investing activities used cash of $3,670,468; and financing
activities generated cash of $1,990,623. The primary components of cash used by
operating activities were: (a) net income of $2,391,208; (b) an increased of
$1,783,471 in other payables in connection with the acquisition of Guizhou
Jingrong Industrial Development Co., Ltd. in Rongjiang County of Guizhou
Province; and (c) $732,041 depreciation and amortization offset by a decrease in
accounts receivable of $394,987. The primary components of cash used in
investing activities were: (i) $6,652,994 in connection with the acquisition of
Guizhou Jingrong Industrial Development Co., Ltd. in Rongjiang County of Guizhou
Province; (ii) $1,857,456 in connection with the construction of hydropower
plant in Hunan; and (iii) $168,450 purchase of equipment offset by a decrease in
due from in related parties of $5,008,432. The primary components of cash
generated by financing activities were a $1,990,623 increase in due
to related parties.




Off-balance Sheet
Arragement




1) On
December 13, 1993, the State Council of China promulgated "The Provisional
Regulation of the People's Republic of China on Value Added Tax" and put VAT
into effect on January 1, 1994. In general, VAT was set at 17%.




In order
to encourage the development of rural counties, the Ministry of Finance and
State Administration of Taxation promulgated another notice on March 29, 1994
(No. 4, 1994) and lowered the VAT of certain businesses including small
hydropower plants to 6%. Under the guidance of this notice, Hunan Sanjiang Power
Co., Ltd. (“Hunan Sanjiang") has been paying VAT at 6% but received 17% VAT
invoices from the tax authorities until 2004 because those are the only
available invoices. Although this practice was allowed by the Tax
Administration, it created a payable of 11% VAT on our books,with a total
amount of $3,294,280 (RMB 24,094,690) by the end of 2004. As a result, these are
not genuine payables. The balances remain in the books because the tax
authorities do not have the rights to issue a statement to clarify that are
these conflicting policies.




With the
implementation of Golden Tax Project and the establishment of online tax cross
referencing network in 2005, local Tax Authorities can no longer collect VAT at
an amount different from the VAT invoices. Consequently, the above mentioned
preferential tax policy could not be executed in practice. Since January 2005,
Hunan Sanjiang has been paying VAT at normal rate of 17%.




However,
the Tax Administration has never questioned the historical tax payable of
$3,294,280 arising from the 11% VAT discrepancy created under the different
policies promulgated by the Ministry of Finance and State Administration of
Taxation. Management believes that the existence of this payable was due to the
unavailability of 6% VAT invoice from Tax Administration and this tax liability
will never be collected by the related Tax Authorities as there is no record of
such liabilities within the Tax Authorities.




In March
2005, Hunan Sanjiang transferred these payable and all related liabilities to
its shareholder Shenzhen Zhaoheng Industrial Co., Ltd (“Zhaoheng Industrial”)
According to an agreement signed between Hunan Sanjiang and Zhaoheng Industrial
on March 31, 2005, Shenzhen Zhaoheng will assume all the liabilities if the
related Tax Authorities come to collection of such payables.




2)
Pursuant to an agreement between Zhaoheng Industrial and Jinjian Rice Co., Ltd.
(“Jinjian Rice”), in July 2003, Hunan Sanjiang assumed three government loans in
the aggregate amount of $4,451,595 (RMB 32,514,894.72).  In the same
year, Zhaoheng Industrial acquired 60% of equity interest in Hunan Sanjiang from
Jinjian Rice. These three loans were granted by the State Ministry of Hydropower
and Finance Bureau of Hunan Province to provide assistance in the construction
of power plants during the years between 1985-1990. With government agency
restructuring, the creditors are no longer in existence and have never claimed
interest in the loans since 2003.






24






According
to Chinese law, any creditor who does not demand interest or re-payment for a
loan for more than 2 years will cause the loan to be forfeited and cannot
reclaim any ownership of the loan.




In June
2005, Hunan Sanjiang signed an agreement with its shareholder Zhaoheng
Industrial and transferred liabilities of these threes loans to Zhaoheng
Industrial. According to the agreement, Zhaoheng Industrial will assume the
liabilities in the event any of the valid government agencies demand repayment
of the loans.




Management
believes that these two issues will not impact Hunan Sanjiang’s future operation
since Zhaoheng Industrial has entered into agreements with Hunan Sanjiang to
assume these liabilities. In the event that Tax Administration or creditors
require the company to pay off these debts and Zhaoheng Industrial is notable to
pay off the debts, Hunan Sanjiang will have to assume corresponding liabilities.
However, based on the financial position of Zhaoheng Industrial, management
believes that the possibility of Zhaoheng Industrial’s failure to pay off these
liabilities is remote.




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 June 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
      150,000,000Guizhou
      Jingrong 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.








25





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.




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.
            Long-term
      Investment





In the
unaudited consolidated balance sheets, long-term investment is stated at the
Group's share of the net assets of its associates plus the premium paid less any
discount on acquisition in so far as it has not already been amortized to the
statement of income, less any identified impairment loss.




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.




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:








26






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 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 six
months ended June 30, 2008 and 2007.




10.
            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.




11.
            Foreign
      Currency Translation






27






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.




12.
            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 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.




ITEM1A.  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 developsinto 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 berisks 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 believethat 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.
Inthe
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
acceptablefinancing 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 theUnited 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 weare 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, unforeseendifficulties
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
industrialsupply 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
conditionsand 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 orshould 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 gridnear 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 andapproval 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, wateruse, 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 ofoperation.





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 executivesor 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,
restrictionson 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
ourbusinesses.




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 productsrise 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
forfixed 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 inChinawhich could, in turn, materially increase our costs andalso
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 ofNevadaand 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 inChina. 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 inChinaare 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 ofChina. We may experience difficulties in completing the
administrative procedures necessary to obtain andremit foreign
currency. See “Government control of currency
conversion may affect the value of your investment.”Furthermore, if
our subsidiary or affiliated entity inChinaincurs debt
on their own in the future, the








33




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.





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 receivesubstantially 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 remittedout ofChinato 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 yourinvestment.





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 makingpayments 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 reactionto 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
againstthe 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 ableto 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 byPRC 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 requiresthe 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 inthe 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) bythe
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 publichealth 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.






35





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 usor them in the PRC.





All of our directors and all of our officers reside
outside of theUnited States. In addition, our operating subsidiary, is located in
the PRC and substantially all of its assets are located outside of theUnited 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
judgments are obtainedin 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 inestablishing 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 publicfloat 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 dividendsin 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
paymentsfrom 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. dollarsor other hard
currency and other regulatory restrictions.





There is currently a limited trading market for our
common stock.








36





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.





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 ourplanned 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 sameeffect 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.








37








SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.








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