UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549







FORM
10-Q




x  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended December 31, 2008





 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from ______ to ______.




Commission
file number: 001-33470




NEW
ORIENTAL ENERGY & CHEMICAL CORP.


(Exact
name of registrant as specified in its charter)




Delaware
              
              20-1917956(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.  Employer
      Identification No.)




Xicheng
      Industrial Zone of
                  Luoshan,
      Xinyang
                  Henan
      Province, The People’s
                  Republic
      of China
                
                464200(Address
      of principal executive offices)
                
                (Zip
      Code)




(86)
27 853 75701


(Registrant’s
telephone number, including area code)




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  þ                                No   ̈





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




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





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




Yes   ̈                                No  þ





Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.





Class
            
            Outstanding
      at February 23, 2009Common
      Stock, $.001 par value per share
            
            12,640,000
      shares





PART
I – FINANCIAL INFORMATION





Item
1.                  Financial
Statements.





New
Oriental Energy & Chemical Corp.


(Formerly
Sports Source, Inc.) And Subsidiaries


Condensed
Consolidated Financial Statements


For
the Three and Nine Months Ended December 31, 2008 And 2007





PageCondensed
      Consolidated Balance Sheets as of December 31, 2008 (Unaudited) and March
      31, 2008
                
                
                F-2Condensed
      Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
      for the Three and Nine Months Ended December 31, 2008 and 2007
      (Unaudited)
                
                
                F-3Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended December
      31, 2008 and 2007 (Unaudited)
                
                
                F-4-5Notes to Condensed Consolidated Financial Statements for the
      Three and Nine Months Ended December 31, 2008 and 2007
      (Unaudited)
                
                
                F-6-20


F-1




NEW
ORIENTAL ENERGY & CHEMICAL CORP.


(FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS





December 31, 2008
                            
                            
                            March 31, 2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            446,028
                            
                            
                            $
                            7,487,808Restricted
      cash
                            
                            
                            4,389,430
                            
                            
                            
                            5,438,809Notes
      receivable, net of reserve of $146,314 and $135,563 at December 31, 2008
      and March 31, 2008, respectively
                            
                            
                            596,963
                            
                            
                            
                            647,908Inventories,
      net
                            
                            
                            4,117,065
                            
                            
                            
                            2,171,040Prepayments
      for goods
                            
                            
                            257,658
                            
                            
                            
                            1,196,831Due
      from employees
                            
                            
                            27,784
                            
                            
                            
                            13,213Other
      assets
                            
                            
                            48,803
                            
                            
                            
                            134,993Due
      from related parties
                            
                            
                            254,317
                            
                            
                            
                            -Total
      current assets
                            
                            
                            10,138,048
                            
                            
                            
                            17,090,602Long-term
      investment
                            
                            
                            469,669
                            
                            
                            
                            -Plant
      and equipment, net
                            
                            
                            19,386,472
                            
                            
                            
                            20,102,938Land
      use rights, net
                            
                            
                            1,646,648
                            
                            
                            
                            1,629,633Construction
      in progress
                            
                            
                            24,333,197
                            
                            
                            
                            9,740,638Deposits
                            
                            
                            2,075,125
                            
                            
                            
                            1,978,389Deferred
      taxes
                            
                            
                            185,928
                            
                            
                            
                            179,541Other
      long-term assets
                            
                            
                            11,747
                            
                            
                            
                            32,574Total
      long-term assets
                            
                            
                            48,108,786
                            
                            
                            
                            33,663,713TOTAL
      ASSETS
                            
                            $
                            58,246,834
                            
                            
                            $
                            50,754,315LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                            
                            $
                            6,938,489
                            
                            
                            $
                            1,656,883Other
      payables and accrued liabilities
                            
                            
                            648,318
                            
                            
                            
                            545,090Short-term
      debt
                            
                            
                            15,746,349
                            
                            
                            
                            17,954,837Customer
      deposits
                            
                            
                            6,865,774
                            
                            
                            
                            4,220,527Payable
      to contractors
                            
                            
                            1,726,398
                            
                            
                            
                            506,364Due
      to related parties
                            
                            
                            8,259,884
                            
                            
                            
                            5,708,995Taxes
      payable
                            
                            
                            634,625
                            
                            
                            
                            1,424,992Total
      current liabilities
                            
                            
                            40,819,837
                            
                            
                            
                            32,017,688LONG-TERM
      LIABILITIESLong-term
      notes payable
                            
                            
                            531,121
                            
                            
                            
                            517,168Deferred
      taxes
                            
                            
                            826,016
                            
                            
                            
                            773,449Due
      to employees
                            
                            
                            160,301
                            
                            
                            
                            156,517Total
      long-term liabilities
                            
                            
                            1,517,438
                            
                            
                            
                            1,447,134TOTAL
      LIABILITIES
                            
                            $
                            42,337,275
                            
                            
                            $
                            33,464,822SHAREHOLDERS'
      EQUITYCommon
      stock, par value $0.001 per share; 30,000,000 shares authorized,
      12,640,000 shares issued and outstanding as of December 31, 2008 and March
      31, 2008, respectively
                            
                            
                            12,640
                            
                            
                            
                            12,640Additional
      paid-in capital
                            
                            
                            4,573,205
                            
                            
                            
                            4,573,205Retained
      earnings (restricted portion was $950,327 as of December 31, 2008 and
      March 31, 2008, respectively)
                            
                            
                            8,768,233
                            
                            
                            
                            10,626,499Accumulated
      other comprehensive income
                            
                            
                            2,555,481
                            
                            
                            
                            2,077,149TOTAL
      SHAREHOLDERS' EQUITY
                            
                            
                            15,909,559
                            
                            
                            
                            17,289,493TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                            
                            $
                            58,246,834
                            
                            
                            $
                            50,754,315





See
accompanying notes to the condensed consolidated financial
statements.


F-2


NEW ORIENTAL ENERGY & CHEMICAL
CORP.


(FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND


COMPREHNENSIVE (LOSS)
INCOME


(UNAUDITED)





Three Months Ended
                  December 31,
                
                
                Nine Months Ended
                  December 31,2008
                
                
                2007
                
                
                2008
                
                
                2007REVENUES
                
                $
                10,614,418
                
                
                $
                20,168,977
                
                
                $
                40,533,491
                
                
                $
                53,222,726COST
      OF GOODS SOLD
                
                
                (11,971,384
                )
                
                
                (15,760,191
                )
                
                
                (40,097,429
                )
                
                
                (44,366,458
                )GROSS
      (LOSS) PROFIT
                
                
                (1,356,966
                )
                
                
                4,408,786
                
                
                
                436,062
                
                
                
                8,856,268General
      and administrative
                
                
                546,822
                
                
                
                780,861
                
                
                
                1,996,928
                
                
                
                1,793,510Selling
      and distribution
                
                
                367,424
                
                
                
                277,661
                
                
                
                928,534
                
                
                
                927,376Research
      and development
                
                
                14,292
                
                
                
                -
                
                
                
                123,392
                
                
                
                -(LOSS)
      INCOME FROM OPERATIONS
                
                
                (2,285,504
                )
                
                
                3,350,264
                
                
                
                (2,612,792
                )
                
                
                6,135,382OTHER
      INCOME (EXPENSES)Interest
      expense, net
                
                
                (485,891
                )
                
                
                (92,231
                )
                
                
                (897,869
                )
                
                
                (355,489
                )Government
      grants
                
                
                501,622
                
                
                
                1,350
                
                
                
                1,490,489
                
                
                
                81,123Other
      (expenses) income, net
                
                
                -
                
                
                
                35,398
                
                
                
                (33,418
                )
                
                
                43,332(LOSS)
      INCOME FROM OPERATIONS BEFORE INCOME TAXES
                
                
                (2,269,773
                )
                
                
                3,294,781
                
                
                
                (2,053,590
                )
                
                
                5,904,348INCOME
      TAX BENEFIT (EXPENSE)
                
                
                138,946
                
                
                
                (1,111,771
                )
                
                
                195,324
                
                
                
                (1,853,053
                )(LOSS)
      INCOME FROM CONTINUING OPERATIONS
                
                
                (2,130,827
                )
                
                
                2,183,010
                
                
                
                (1,858,266
                )
                
                
                4,051,295DISCONTINUED
      OPERATIONGain
      from discontinued operation (net of income tax of $396)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,761Gain
      from disposition of discontinued operation
                
                -
                
                
                
                -
                
                
                -
                
                
                
                19,930NET
      (LOSS) INCOME
                
                
                (2,130,827
                )
                
                
                2,183,010
                
                
                
                (1,858,266
                )
                
                
                4,072,986OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
                
                
                73,288
                
                
                
                559,942
                
                
                
                478,332
                
                
                
                1,097,290OTHER
      COMPREHENSIVE INCOME BEFORE TAX
                
                
                73,288
                
                
                
                559,942
                
                
                
                478,332
                
                
                
                1,097,290INCOME
      TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME
                
                
                -
                
                
                
                184,781
                
                
                
                -
                
                
                
                362,105OTHER
      COMPREHENSIVE INCOME, NET
                
                
                73,288
                
                
                
                375,161
                
                
                
                478,332
                
                
                
                735,185COMPREHENSIVE
      (LOSS) INCOME
                
                $
                (2,057,539
                )
                
                $
                2,558,171
                
                
                $
                (1,379,934
                )
                
                $
                4,808,171WEIGHTED
      AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
                
                
                12,640,000
                
                
                
                12,640,000
                
                
                
                12,640,000
                
                
                
                12,640,000(LOSS)
      INCOME FROM CONTINUING OPERATIONS PER SHARE, BASIC AND
    DILUTED
                
                $
                (0.17
                )
                
                $
                0.17
                
                
                $
                (0.15
                )
                
                $
                0.32INCOME
      FROM DISCONTINUED OPERATION PER SHARE, BASIC AND DILUTED
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                0.00NET
      (LOSS) INCOME PER SHARE, BASIC AND DILUTED
                
                $
                (0.17
                )
                
                $
                0.17
                
                
                $
                (0.15
                )
                
                $
                0.32





See
accompanying notes to the condensed consolidated financial
statements.


F-3


NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)


Nine Months Ended
                                  December 31,2008
                                
                                
                                2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                                
                                $
                                (1,858,266
                                )
                                
                                $
                                4,072,986Adjustments
      to reconcile net (loss) income to net cash provided
      by  operating activities:Depreciation
      and amortization
                                
                                
                                2,044,546
                                
                                
                                
                                1,516,482Gain
      on disposal of plant
                                
                                
                                (2,844
                                )
                                
                                
                                -Deferred
      taxes
                                
                                
                                46,180
                                
                                
                                
                                (244,287
                                )Provision
      for notes receivable
                                
                                
                                -
                                
                                
                                
                                136,900Provision
      for inventory
                                
                                
                                158,980
                                
                                
                                
                                -Gain
      on disposal of discontinued operation
                                
                                
                                -
                                
                                
                                
                                (19,930
                                )Discontinued
      operation
                                
                                
                                -
                                
                                
                                
                                (1,761
                                )Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Inventories
                                
                                
                                (2,105,005
                                )
                                
                                
                                1,756,751Prepayment
      for goods
                                
                                
                                939,173
                                
                                
                                
                                (3,419,818
                                )Taxes
      receivable
                                
                                
                                -
                                
                                
                                
                                155,863Due
      from employees
                                
                                
                                (14,571
                                )
                                
                                
                                110,930Other
      assets
                                
                                
                                86,190
                                
                                
                                
                                (58,432
                                )Due
      from related parties
                                
                                
                                (254,317
                                )
                                
                                
                                -Discontinued
      operation
                                
                                
                                -
                                
                                
                                
                                21,691Increase
      (Decrease) In:Accounts
      payable
                                
                                
                                5,281,606
                                
                                
                                
                                (294,366
                                )Other
      payables and accrued liabilities
                                
                                
                                103,228
                                
                                
                                
                                136,983Customer
      deposits
                                
                                
                                2,645,247
                                
                                
                                
                                (1,270,703
                                )Due
      to related parties
                                
                                
                                28,873
                                
                                
                                
                                -Due
      to employees
                                
                                
                                12,421
                                
                                
                                
                                -Taxes
      payable
                                
                                
                                (790,367
                                )
                                
                                
                                1,861,228Net
      cash provided by operating activities
                                
                                
                                6,321,074
                                
                                
                                
                                4,460,517CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted
      cash
                                
                                
                                1,049,379
                                
                                
                                
                                (2,392,521
                                )Payment
      for long-term investment
                                
                                
                                (433,100
                                )
                                
                                
                                -Purchases
      of plant and equipment
                                
                                
                                (150,033
                                )
                                
                                
                                (1,584,775
                                )Purchases
      of construction in progress
                                
                                
                                (13,378,109
                                )
                                
                                
                                (5,988,410
                                )Deposit
      for land use rights
                                
                                
                                (42,781
                                )
                                
                                
                                (882,530
                                )Purchases
      of other long term assets
                                
                                
                                (9,961
                                )
                                
                                
                                -Proceeds
      from disposition of long-term investment
                                
                                
                                -
                                
                                
                                
                                143,414Proceeds
      on disposal of plant
                                
                                
                                96,197
                                
                                
                                
                                18,795Repayment
      of notes receivable
                                
                                
                                67,516
                                
                                
                                
                                19,032Net
      cash used in investing activities
                                
                                
                                (12,800,892
                                )
                                
                                
                                (10,666,995
                                )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from short-term debt
                                
                                
                                22,365,306
                                
                                
                                
                                24,880,692Repayments
      of short-term debt
                                
                                
                                (25,022,377
                                )
                                
                                
                                (12,909,673
                                )Due
      to related parties
                                
                                
                                1,950,848
                                
                                
                                
                                388,499Net
      cash (used in) provided by financing activities
                                
                                
                                (706,223
                                )
                                
                                
                                12,359,518NET
      (DECREASE) INCREASE IN CASH AND CASH QUIVALENTS
                                
                                
                                (7,186,041
                                )
                                
                                
                                6,153,040Effect
      of exchange rate changes on cash
                                
                                
                                144,261
                                
                                
                                
                                410,610Cash
      and cash equivalents at beginning of period
                                
                                
                                7,487,808
                                
                                
                                
                                2,616,149CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
                                
                                $
                                446,028
                                
                                
                                $
                                9,179,799SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
                                
                                $
                                591,904
                                
                                
                                $
                                -Interest
      paid
                                
                                $
                                366,391
                                
                                
                                $
                                157,094





See
accompanying notes to the condensed consolidated financial
statements.


F-4


NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)


SUPPLEMENTAL
NON-CASH DISCLOSURES:





During
the nine months ended December 31, 2008 and 2007, $761,243 and $7,435,991,
respectively, was transferred from construction in progress to plant and
equipment.





During
the nine months ended December 31, 2008 and 2007, $0 and $32,760, respectively,
was transferred from deposits to plant and equipment.





See
accompanying notes to the condensed consolidated financial
statements.


F-5


NEW
ORIENTAL ENERGY & CHEMICAL CORP.


(FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007


(UNAUDITED)





1.   ORGANIZATION
AND PRINCIPAL ACTIVITIES





New
Oriental Energy & Chemical Corp. (formerly Sports Source, Inc.) and
Subsidiaries (“NOEC” or the "Company") was incorporated under the laws of the
State of Delaware on November 15, 2004. On November 22, 2006 the Company changed
its name to New Oriental Energy & Chemical Corp.





On
October 11, 2006, a share exchange agreement was entered into by and among the
Company, Kinfair Holding Limited (“KHL”) and KHL’s shareholders, whereby the
Company issued 7,500,000 shares, representing 59.34% of total common stock in
exchange for 100% of the common stock of KHL. (the “Share Exchange”). Henan
Jinding Chemical Co., Ltd. (“Jinding”) is a wholly owned subsidiary of KHL.
Jinding is the principal operating subsidiary of KHL.





After the
Share Exchange, KHL and its wholly owned subsidiary, Jinding, became
wholly-owned subsidiaries of the Company and Jinding became the principal
operating subsidiary of the Company and is deemed to be the accounting acquirer
and the exchange transaction has been accounted for as a reverse acquisition in
accordance with Statement of Financial Accounting Standards (“SFAS”) No.141,
Business Combinations.
The Share Exchange has been accounted for as the recapitalization of
Jinding.





On
November 13, 2007, Luoshan Jinding Chemical Co., Ltd. (“Luoshan Jinding”) was
incorporated as a wholly owned subsidiary of Henan Jinding under the law of the
People’s Republic of China (the “PRC”).





The
principal activities of the Company are the manufacture and distribution of
fertilizer and chemical products. The products are distributed to China
markets.





2.   BASIS
OF PRESENTATION





The
unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods are not
necessarily indicative of the results to be obtained for a full year. The
condensed consolidated balance sheet information as of March 31, 2008 was
derived from the audited consolidated financial statements included in the
Company's Annual Report on Form 10-KSB. These interim financial statements
should be read in conjunction with that report.




Lquidity




The
Company has a working capital deficit of $30,681,789 as of December 31,
2008, and the Company incurred net loss of $2,130,827 and $1,858,266 for the
three and nine months ended December 31, 2008. The Company expects to
obtain new long term bank loans from a local bank. Its major
shareholder has committed to provide financing aid, if necessary. The
Company believes revenue and gross profits will increase in the near
term.








3.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





(a)  Principles
of Consolidation





The
consolidated financial statements include the accounts of New Oriental Energy
& Chemical Corp. and the following subsidiaries:





(i)  Kinfair
Holding Limited. (“KHL”) (An inactive holding company, 100% subsidiary of
NOEC).





(ii)  Henan
Jinding Chemicals Co., Ltd. (“Henan Jinding”) ( 100% subsidiary of
KHL).





(iii)  Luoshan
Jinding Chemicals Co., Ltd. (“Luoshan Jinding”) ( 100% subsidiary of Henan
Jinding).





Intercompany
accounts and transactions have been eliminated in
consolidation.


F-6


NEW
ORIENTAL ENERGY & CHEMICAL CORP.


(FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007


(UNAUDITED)





3.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(b)  Concentrations





The
Company has major customers who accounted for the following percentage of total
sales and total customer deposits:





Customer
                  
                  Sales
                  
                  
                  Customer DepositsNine Months Ended December 31,
                  
                  
                  As of December 31,
                    2008
                  
                  
                  As of March 31,
                    20082008
                  
                  
                  2007Company
      A
                  
                  
                  22.28
                  %
                  
                  
                  21.90
                  %
                  
                  
                  19.20
                  %
                  
                  
                  35.81
                  %Company
      B
                  
                  
                  11.32
                  %
                  
                  
                  5.38
                  %
                  
                  
                  13.67
                  %
                  
                  
                  18.72
                  %Company
      C
                  
                  
                  9.33
                  %
                  
                  
                  6.37
                  %
                  
                  
                  -
                  
                  
                  
                  1.42
                  %Company
      D
                  
                  
                  3.83
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





The
Company has major suppliers who accounted for the following percentage of total
purchases and total accounts payable/deposits:





Supplier
                  
                  Purchases
                  
                  
                  Accounts Payable
                    /DepositsNine Months Ended December 31,
                  
                  
                  As of December 31,
                    2008
                  
                  
                  As of March 31,
                    20082008
                  
                  
                  2007Company
      E
                  
                  
                  20.82
                  %
                  
                  
                  16.65
                  %
                  
                  
                  12.66
                  %
                  
                  
                  28.82
                  %Company
      F
                  
                  
                  17.09
                  %
                  
                  
                  6.46
                  %
                  
                  
                  15.44
                  %
                  
                  
                  66.80
                  %Company
      G
                  
                  
                  15.23
                  %
                  
                  
                  10.88
                  %
                  
                  
                  5.08
                  %
                  
                  
                  8.42
                  %Company
      H
                  
                  
                  8.44
                  %
                  
                  
                  -
                  
                  
                  
                  5.48
                  %
                  
                  
                  -Company
      I
                  
                  
                  6.03
                  %
                  
                  
                  1.94
                  %
                  
                  
                  6.60
                  %
                  
                  
                  17.79
                  %





The sole
market of the Company is the PRC for the nine months ended December 31, 2008 and
2007.





(c)  Economic
and Political Risks





The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general
stateof the PRC
economy. The Company's 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 Company's 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.





(d)  Use
of Estimates





The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.





Management
makes these estimates using the best information available at the time the
estimates are made. Actual results could differ materially from those
estimates.


F-7


NEW
ORIENTAL ENERGY & CHEMICAL CORP.


(FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007


(UNAUDITED)





3.   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(e)  Fair
Value of Financial Instruments





The
Company’s financial instruments include cash and cash equivalents, restricted
cash, notes receivable, due from/to employees, prepayments for goods, accounts
payable, other payables and accrued liabilities, short-term and related party
debt, payable to contractors, taxes payable and customer deposits. Management
has estimated that the carrying amount approximates fair value due to their
short-term nature. The fair value of the Company’s long-term debt is estimated
based on the current rates offered to the Company for debt of similar terms and
maturities. The Company’s fair value of long-term debt was not significantly
different from the carrying value at December 31, 2008 and March 31,
2008.





(f)  Cash
and Cash Equivalents





For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be cash
equivalents.





Restricted
cash represents time deposits on account to secure short-term debt. See Note 10.
These balances are subject to withdrawal restrictions and totaled $4,389,430 and
$5,438,809 as of December 31, 2008 and March 31, 2008,
respectively.





(g)  Inventories





Inventories
are stated at the lower of cost or net realizable value (market). The cost of
raw materials is determined on a weighted average basis. Finished goods costs
are determined on a weighted average basis and comprise direct materials, direct
labor and an appropriate proportion of overhead.





Net
realizable value is based on estimated selling prices less any further costs
expected to be incurred for completion and disposal.





(h)
            Capitalized
      Interest





The
interest cost associated with debt relating to construction projects is
capitalized and included in the cost of the project. When no debt is incurred
specifically for a project, interest is capitalized on amounts expended on the
project using weighted-average cost of the Company’s outstanding borrowings.
Capitalization of interest ceases when the project is substantially complete or
development activity is suspended for more than a brief period. Capitalized
interest for the three and nine months ended December 31, 2008 was $99,231 and
$288,709, and $0 and $0 for the three and nine months ended December 31, 2007,
respectively.





(i)
            Revenue
      Recognition





Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met:





-Persuasive
evidence of an arrangement exists,


-Delivery
has occurred or services have been rendered,


-The
sales price to the buyer is fixed or determinable, and


-Collectability
is reasonably assured.





(j)
            Foreign
      Currency Translation





The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB). The
consolidated financial statements are translated into United States dollars from
RMB at 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 transactions
occurred.


F-8


NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 3.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
  December 31, 2008
                
                
                March 31, 2008
                
                
                December 31, 2007Year
      end RMB:  $ exchange rate
                
                
                6.8346
                
                
                
                7.0190
                
                
                
                7.3046Average
      yearly RMB: $ exchange rate
                
                
                6.9268
                
                
                
                7.3766
                
                
                
                7.5194
 
 (k)
              Earnings
      (Loss) Per Share
 
 Basic
earnings (loss) per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings (loss) per share is computed similarly to basic
earnings (loss) per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. There were no potentially dilutive securities for the nine months
ended December 31, 2008 and 2007.
 
 (l)
              Segments
 
 Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance.
 
 The
Company has determined that there are two reportable segments:
 
 The
fertilizer segment is made up of four business units, which involve the
manufacture and sale of Urea, Carbonate Hydrogen Ammonia, Liquefied Ammonia and
Ammonia Water.
 
 The fuel
segment involves the manufacture and sale of Methanol, Dimethyl Ether. The
Company believes it is not feasible to separately identify the assets and
operating expenses of each segment because of the similarities shared by each in
the manufacturing process. Both segments share the same coal-to-gas primary
system, and also share the same manufacturing sub-systems and cycles. Therefore,
the following represents the revenue, cost of goods sold and gross profit by
each product within each segment:
 
 Fuel
Segment:
 
 For The Three Months Ended December 31, 2008 (Unaudited)DME
                      
                      
                      Methanol
                      
                      
                      Segment TotalRevenues
                      
                      $
                      2,254,460
                      
                      
                      $
                      199,899
                      
                      
                      $
                      2,454,359COGS
                      
                      
                      2,865,038
                      
                      
                      
                      299,189
                      
                      
                      
                      3,164,227Gross
      loss
                      
                      $
                      (610,578
                      )
                      
                      $
                      (99,290
                      )
                      
                      $
                      (709,868
                      )
  For The Three Months Ended December 31, 2007 (Unaudited)DME
                
                
                Methanol
                
                
                Segment TotalRevenues
                
                $
                10,719,893
                
                
                $
                354,538
                
                
                $
                11,074,431COGS
                
                
                8,343,681
                
                
                
                246,398
                
                
                
                8,590,079Gross
      profit
                
                $
                2,376,212
                
                
                $
                108,140
                
                
                $
                2,484,352
 F-9
 NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 3.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
 
 (l)
                Segments
      (Continued)
 
 For The Nine Months Ended December 31, 2008 (Unaudited)DME
                      
                      
                      Methanol
                      
                      
                      Segment TotalRevenues
                      
                      $
                      11,090,320
                      
                      
                      $
                      909,053
                      
                      
                      $
                      11,999,373COGS
                      
                      
                      11,310,064
                      
                      
                      
                      972,846
                      
                      
                      
                      12,282,910Gross
      loss
                      
                      $
                      (219,744
                      )
                      
                      $
                      (63,793
                      )
                      
                      $
                      (283,537
                      )
 
 For The Nine Months Ended December 31, 2007 (Unaudited)DME
                        
                        
                        Methanol
                        
                        
                        Segment TotalRevenues
                        
                        $
                        27,351,989
                        
                        
                        $
                        409,205
                        
                        
                        $
                        27,761,194COGS
                        
                        
                        22,784,064
                        
                        
                        
                        299,149
                        
                        
                        
                        23,083,213Gross
      profit
                        
                        $
                        4,567,925
                        
                        
                        $
                        110,056
                        
                        
                        $
                        4,677,981
 
 Fertilizer
Segment:
 
 For The Three Months Ended December 31, 2008 (Unaudited)Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  6,255,938
                  
                  
                  $
                  1,137,658
                  
                  
                  $
                  647,371
                  
                  
                  $
                  119,092
                  
                  
                  $
                  8,160,059COGS
                  
                  
                  6,788,555
                  
                  
                  
                  1,070,997
                  
                  
                  
                  822,863
                  
                  
                  
                  124,742
                  
                  
                  
                  8,807,157Gross
      profit (loss)
                  
                  $
                  (532,617
                  )
                  
                  $
                  66,661
                  
                  
                  $
                  (175,492
                  )
                  
                  $
                  (5,650
                  )
                  
                  $
                  (647,098
                  )
 
 For The Three Months Ended December 31, 2007 (Unaudited)Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  LiquefiedAmmonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  7,870,570
                  
                  
                  $
                  729,699
                  
                  
                  $
                  425,261
                  
                  
                  $
                  69,016
                  
                  
                  $
                  9,094,546COGS
                  
                  
                  5,976,187
                  
                  
                  
                  709,639
                  
                  
                  
                  422,964
                  
                  
                  
                  61,322
                  
                  
                  
                  7,170,112Gross
      profit
                  
                  $
                  1,894,383
                  
                  
                  $
                  20,060
                  
                  
                  $
                  2,297
                  
                  
                  $
                  7,694
                  
                  
                  $
                  1,924,434
 
 For The Nine Months Ended December 31, 2008 (Unaudited)Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  24,593,181
                  
                  
                  $
                  2,853,455
                  
                  
                  $
                  799,867
                  
                  
                  $
                  287,615
                  
                  
                  $
                  28,534,118COGS
                  
                  
                  23,407,650
                  
                  
                  
                  3,060,673
                  
                  
                  
                  1,009,359
                  
                  
                  
                  336,837
                  
                  
                  
                  27,814,519Gross
      profit (loss)
                  
                  $
                  1,185,531
                  
                  
                  $
                  (207,218
                  )
                  
                  $
                  (209,492
                  )
                  
                  $
                  (49,222
                  )
                  
                  $
                  719,599
 
 For The Nine Months Ended December 31, 2007 (Unaudited)Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  22,648,524
                  
                  
                  $
                  1,875,453
                  
                  
                  $
                  771,453
                  
                  
                  $
                  166,102
                  
                  
                  $
                  25,461,532COGS
                  
                  
                  18,521,656
                  
                  
                  
                  1,842,673
                  
                  
                  
                  768,908
                  
                  
                  
                  150,008
                  
                  
                  
                  21,283,245Gross
      profit
                  
                  $
                  4,126,868
                  
                  
                  $
                  32,780
                  
                  
                  $
                  2,545
                  
                  
                  $
                  16,094
                  
                  
                  $
                  4,178,287
  F-10
 
 NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 3.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
 
 (l)
              Segments
      (Continued)
 
 Combined
Segments:
 For The Three Months Ended December 31, 2008 (Unaudited)Fuel Segment
                          
                          
                          Fertilizer Segment
                          
                          
                          Consolidated TotalRevenues
                          
                          $
                          2,454,359
                          
                          
                          $
                          8,160,059
                          
                          
                          $
                          10,614,418COGS
                          
                          
                          3,164,227
                          
                          
                          
                          8,807,157
                          
                          
                          
                          11,971,384Gross
      loss
                          
                          $
                          (709,868
                          )
                          
                          $
                          (647,098
                          )
                          
                          $
                          (1,356,966
                          )
 
 For The Three Months Ended December 31, 2007 (Unaudited)Fuel Segment
                        
                        
                        Fertilizer Segment
                        
                        
                        Consolidated TotalRevenues
                        
                        $
                        11,074,431
                        
                        
                        $
                        9,094,546
                        
                        
                        $
                        20,168,977COGS
                        
                        
                        8,590,079
                        
                        
                        
                        7,170,112
                        
                        
                        
                        15,760,191Gross
      profit
                        
                        $
                        2,484,352
                        
                        
                        $
                        1,924,434
                        
                        
                        $
                        4,408,786
 
 For The Nine Months Ended December 31, 2008 (Unaudited)Fuel Segment
                    
                    
                    Fertilizer Segment
                    
                    
                    Consolidated TotalRevenues
                    
                    $
                    11,999,373
                    
                    
                    $
                    28,534,118
                    
                    
                    $
                    40,533,491COGS
                    
                    
                    12,282,910
                    
                    
                    
                    27,814,519
                    
                    
                    
                    40,097,429Gross
      profit (loss)
                    
                    $
                    (283,537
                    )
                    
                    $
                    719,599
                    
                    
                    $
                    436,062
 
 For The Nine Months Ended December 31, 2007 (Unaudited)Fuel Segment
                      
                      
                      Fertilizer Segment
                      
                      
                      Consolidated TotalRevenues
                      
                      $
                      27,761,194
                      
                      
                      $
                      25,461,532
                      
                      
                      $
                      53,222,726COGS
                      
                      
                      23,083,213
                      
                      
                      
                      21,283,245
                      
                      
                      
                      44,366,458Gross
      profit
                      
                      $
                      4,677,981
                      
                      
                      $
                      4,178,287
                      
                      
                      $
                      8,856,268
 (m)
                New
      Accounting Pronouncement
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, Noncontrolling Interests
in Consolidated Financial Statements. SFAS No. 160 amends ARB 51 to
establish accounting and reporting standards for the noncontrolling (minority)
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No.160 is effective for the Company’s
fiscal year beginning October 1, 2009. Management is currently evaluating the
effect of this pronouncement on the consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination.
 
 SFAS No.
141(R) also establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree ; b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and c) determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. SFAS No. 141(R) will apply
prospectively to business combinations for which the acquisition date is on or
after Company’s fiscal year beginning October 1, 2009. While the Company
has not yet evaluated this statement for the impact, if any, that SFAS No.
141(R) will have on its consolidated financial statements, the Company will be
required to expense costs related to any acquisitions after September 30,
2009.
  F-11
  NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 3.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
 
 In March
2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company is currently evaluating the impact of adopting SFAS No.161 on its
consolidated financial statements.
  4.
              INVENTORIES
 
 Inventories
consist of the following:
  December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)Finished
      goods
                    
                    $
                    1,858,204
                    
                    
                    $
                    281,851Raw
      materials
                    
                    
                    1,813,122
                    
                    
                    
                    1,185,758Packing
      materials
                    
                    
                    445,739
                    
                    
                    
                    703,431Total
      inventories, net
                    
                    $
                    4,117,065
                    
                    
                    $
                    2,171,040
 
 The net
book value of $1,858,204 and $281,851 of finished goods inventory is pledged as
collateral for short-term debt at December 31, 2008 and March 31, 2008,
respectively. See Note 10.
 
 As of
December 31, 2008 and 2007, the Company recorded a write-down of inventories to
net realizable value for $158,980 and $0, respectively.
 
 5.
              RELATED
      PARTY TRANSACTIONS
 
 (I)
                Due
      from Related Parties
 
 December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)Current:Huaiyang
      Desheng Chemical Co., Ltd
                    
                    $
                    254,007
                    
                    
                    $
                    -Auto
      Chance International Limited
                    
                    
                    310
                    
                    
                    
                    -Total
                    
                    $
                    254,317
                    
                    
                    $
                    -
 
 Huaiyang
Desheng Chemical Co., Ltd (“Huaiyang Desheng”) is a company controlled by a
director of the Company. For the nine months ended December 31, 2008, Huaiyang
Desheng purchased $29,944 of raw materials from Henan Jinding, and sold $68,051
of finished goods to Henan Jinding. The remaining balance of $254,007 is
interest free, and has no fixed repayment terms.
 
 Auto
Chance International Limited is a controlling shareholder of the Company. The
amount represents advances to Auto Chance International Limited for bank
charges. The amount is interest free, and has no fixed repayment
terms.
  F-12
  NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 5.
              RELATED
      PARTY TRANSACTIONS (CONTINUED)
  (II)
                Due
      to Related Parties
 
 December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)Principal:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                    (a)
                    
                    $
                    4,974,688
                    
                    
                    $
                    4,131,643Long
      Triumph Investments Limited
                    (b)
                    
                    
                    1,367,408
                    
                    
                    
                    862,035Chen
      Siqiang
                    (c)
                    
                    
                    1,024,200
                    
                    
                    
                    712,352Wang
      Guiquan
                    (d)
                    
                    
                    131,683
                    
                    
                    
                    -Zhou
      Dianchang
                    (e)
                    
                    
                    73,157
                    
                    
                    
                    -Mai
      Xiaofu
                    (f)
                    
                    
                    146,314
                    
                    
                    
                    -Yu
      Zhiyang
                    (g)
                    
                    
                    43,894
                    
                    
                    
                    -Yang
      Hongtao
                    (h)
                    
                    
                    43,894
                    
                    
                    
                    -Due
      to employees
                    (i)
                    
                    
                    11,796
                    
                    
                    
                    2,965Subtotal
                    
                    
                    $
                    7,817,034
                    
                    
                    $
                    5,708,995Interest:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                    (a)
                    
                    
                    331,119
                    
                    
                    
                    -Chen
      Siqiang
                    (c)
                    
                    
                    81,117
                    
                    
                    
                    -Wang
      Guiquan
                    (d)
                    
                    
                    8,884
                    
                    
                    
                    -Zhou
      Dianchang
                    (e)
                    
                    
                    4,936
                    
                    
                    
                    -Mai
      Xiaofu
                    (f)
                    
                    
                    10,496
                    
                    
                    
                    -Yu
      Zhiyang
                    (g)
                    
                    
                    3,149
                    
                    
                    
                    -Yang
      Hongtao
                    (h)
                    
                    
                    3,149
                    
                    
                    
                    -Subtotal
                    
                    
                    $
                    442,850
                    
                    
                    $
                    -Total
                    
                    
                    $
                    8,259,884
                    
                    
                    $
                    5,708,995
 
 (a)
                Xinyang
      Hong Chang Pipeline Gas Co., Ltd. is a company controlled by the Chairman
      of the board and chief executive officer of the Company. The amount
      represents advances from Xinyang Hong Chang Pipeline Gas Co., Ltd. The
      amount is unsecured. Included in the $4,974,688 is $2,926,288, which has
      an interest rate of 8.748% per annum and is due on June 30, 2009. Included
      in the $4,974,688 is $731,571, which has an interest rate of 15% per annum
      and is due on September 25, 2009. The interest expense for the nine months
      ended December 31, 2008 and 2007 is $220,867 and $0, respectively. Of the
      $220,867 of interest expense, $189,438 was capitalized interest in
      construction in progress, since the amount was used for construction. The
      remaining balance of $1,316,829 is interest free and has no fixed
      repayment terms. Also see Note
9.
 
 (b)
                Long
      Triumph Investments Limited is a former shareholder of the Company. The
      amount represents advances from Long Triumph Investments Limited. The
      amount is unsecured, interest free, and has no fixed repayment
      terms.
 
 (c)
                Chen
      Siqiang is the chairman of the board and chief executive officer of the
      Company. The amount is unsecured and has an interest rate of 9.6% per
      annum. Included in the $1,024,200 is $731,571, which is due on August 3,
      2009. The balance of $292,629 is due on May 21, 2009. The interest expense
      for the nine months ended December 31, 2008 and 2007 is $69,065 and $0,
      which was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
9.
 
 (d)
                Wang
      Guiquan is the president and a director of the Company. The amount is
      unsecured, has an interest rate of 9.6% per annum and is due on April 18,
      2009. The interest expense for the nine months ended December 31, 2008 and
      2007 of $8,766 and $0, was capitalized interest in construction in
      progress, since the amount was used for construction. Also see Note
      9.
 
 (e)
                Zhou
      Dianchang is a director of the Company. The amount is unsecured, has an
      interest rate of 9.6% per annum and is due on April 18, 2009. The interest
      expense for the nine months ended December 31, 2008 and 2007 of $4,870 and
      $0, was capitalized in construction in progress, since the amount was used
      for construction. Also see Note
9.
  F-13
  NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 5.
              RELATED
      PARTY TRANSACTIONS (CONTINUED)
  (f)
                Mai
      Xiaofu is a director of Henan Jinding. The amount is unsecured, has an
      interest rate of 9.6% per annum and is due on April 2, 2009. The interest
      expense for the nine months ended December 31, 2008 and 2007 of $10,356
      and $0, was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
9.
  (g)
                Yu
      Zhiyang is a significant shareholder of the Company. The amount is
      unsecured, has an interest rate of 9.6% per annum and is due on April 2,
      2009. The interest expense for the nine months ended December 31, 2008 and
      2007 of $3,107 and $0, was capitalized in construction in progress, since
      the amount was used for construction. Also see Note
  9.
 
 (h)
                YangHongtao is a
      significant shareholder of the Company. The amount is unsecured, has an
      interest rate of 9.6% per annum and is due on April 2, 2009. The interest
      expense for the nine months ended December 31, 2008 and 2007 of $3,107 and
      $0, was capitalized in construction in progress, since the amount was used
      for construction. Also see Note
9.
 
 (i)
              The
      amounts due to employees are unsecured, interest free, and have no fixed
      repayment terms.
 
 (III)
              Due
      from Employees
 
 December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)Current
                    
                    $
                    27,784
                    
                    
                    $
                    13,213Total
      amount due from employees
                    
                    $
                    27,784
                    
                    
                    $
                    13,213
  Amounts
due from employees are interest-free, unsecured and have no fixed repayment
terms. The amounts primarily represent advances to employees for business
related expenses.
  (IV)
              Due
      to Employees – Long Term
 
 December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)Long-term
                    
                    $
                    160,301
                    
                    
                    $
                    156,517Total
      amount due to employees
                    
                    $
                    160,301
                    
                    
                    $
                    156,517
 
 Amounts
due to employees are interest-free, unsecured and have no fixed repayment terms.
The amounts represent training deposits due to employees.
 
 6.
              LONG-TERM
      INVESTMENT
 
 December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)Luoshan
      Rural Credit Cooperatives
                    
                    $
                    469,669
                    
                    
                    $
                    -
 
 The
Company purchased 2.87% of Luoshan Rural Credit Cooperatives’s shares for cash.
The Company accounted for its investment in Luoshan Rural Credit Cooperative
using the cost method.
  F-14
  NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
  7.
              PLANT
      AND EQUIPMENT
 
 Plant and
equipment consist of the following:
  December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)At
      cost:Buildings
                    
                    $
                    2,477,022
                    
                    
                    $
                    2,133,765Machinery
                    
                    
                    25,107,556
                    
                    
                    
                    23,988,684Motor
      vehicles
                    
                    
                    328,940
                    
                    
                    
                    314,870Office
      equipment
                    
                    
                    269,795
                    
                    
                    
                    247,36728,183,313
                    
                    
                    
                    26,684,686Less:  Accumulated
      depreciationBuildings
                    
                    
                    389,504
                    
                    
                    
                    304,052Machinery
                    
                    
                    8,107,481
                    
                    
                    
                    6,063,257Motor
      vehicles
                    
                    
                    183,637
                    
                    
                    
                    136,381Office
      equipment
                    
                    
                    116,219
                    
                    
                    
                    78,0588,796,841
                    
                    
                    
                    6,581,748Plant
      and equipment, net
                    
                    $
                    19,386,472
                    
                    
                    $
                    20,102,938
 
 Depreciation
expense for the nine months ended December 31, 2008 and 2007 is $2,016,890 and
$1,486,507, respectively.
 
 8.
              LAND
      USE RIGHTS
 
 December 31, 2008
                    
                    
                    March 31, 2008(Unaudited)Cost
                    
                    $
                    1,796,884
                    
                    
                    $
                    1,749,677Less:
      Accumulated amortization
                    
                    
                    150,236
                    
                    
                    
                    120,044Land
      use rights, net
                    
                    $
                    1,646,648
                    
                    
                    $
                    1,629,633
 
 Amortization
expense for the nine months ended December 31, 2008 and 2007 is $26,595 and
$29,975, respectively.
 
 The net
book value of $0 and $1,629,633 of the land use rights are pledged as collateral
for the short-term bank loans at December 31, 2008 and March 31, 2008,
respectively. See Note 10.
 
 Amortization
expense for the next five years and thereafter is as follows:
 
 2009
                    
                    $
                    8,9842010
                    
                    
                    35,9382011
                    
                    
                    35,9382012
                    
                    
                    35,9382013
                    
                    
                    35,938Thereafter
                    
                    
                    1,493,912Total
                    
                    $
                    1,646,648
  F-15
  NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
  9.
              CONSTRUCTION
      IN PROGRESS
 
 Construction
in progress at December 31, 2008 and March 31, 2008 consist of the
following:
  December 31, 2008
                      
                      
                      March 31, 2008(Unaudited)Plant
                      
                      $
                      21,797,072
                      
                      
                      $
                      4,525,886Machinery
                      
                      
                      2,449,280
                      
                      
                      
                      5,213,755Other
                      
                      
                      86,845
                      
                      
                      
                      997$
                      24,333,197
                      
                      
                      $
                      9,740,638
  Capitalized
interest for the nine months ended December 31, 2008 and 2007 is $288,709 and
$0, respectively.
 
 The net
book value of $3,108,009 and $0 of plant construction in progress is pledged as
collateral for the short-term bank loans at December 31, 2008 and March 31,
2008, respectively. See Note 10.
 
 10.
              SHORT-TERM
      DEBT
 
 Short-term
debt consists of the following:
  December 31, 2008
                          
                          
                          March 31, 2008(Unaudited)Bank
      Loans:Xinyang
      Commercial Bank, Due April 25, 2009, interest rate at 11.56% per annum,
      collateralized by finished goods inventory.
                          
                          $
                          1,463,143
                          
                          
                          $
                          -Rural
      Credit Cooperatives, Due June 12, 2009, interest rate at 14.19% per annum,
      collateralized by construction in progress.
                          
                          
                          570,626
                          
                          
                          
                          -Rural
      Credit Cooperatives, Due October 16, 2009, interest rate at 14.19% per
      annum, collateralized by construction in progress.
                          
                          
                          570,626
                          
                          
                          
                          -Xinyang
      Commercial Bank, Due August 3, 2009, interest rate at 11.56% per annum,
      collateralized by finished goods inventory.
                          
                          
                          1,463,143
                          
                          
                          
                          1,424,704Xinyang
      Commercial Bank, Due December 29, 2009, interest rate at 11.56% per annum,
      collateralized by finished goods inventory.
                          
                          
                          2,341,029
                          
                          
                          
                          -Xinyang
      Commercial Bank, Due December 27, 2008, interest rate at 11.23% per annum,
      collateralized by finished goods inventory. (Subsequently repaid on its
      due date)
                          
                          
                          -
                          
                          
                          
                          2,279,527Bank
      of China Luoshan Branch, Due August 13, 2008, interest rate at 6.84% per
      annum, collateralized by land use rights. (Subsequently repaid on its due
      date)
                          
                          
                          -
                          
                          
                          
                          2,849,409China
      Construction Bank Luoshan Branch, Due June 30, 2008, interest rate at
      7.29% per annum, collateralized by land use rights. (Subsequently repaid
      on its due date)
                          
                          
                          -
                          
                          
                          
                          2,849,409Xinyang
      Commercial Bank, Due April 16, 2008, interest rate at 9.55% per annum,
      collateralized by finished goods inventory. (Subsequently repaid on its
      due date)
                          
                          
                          -
                          
                          
                          
                          1,424,704
  F-16
  NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 10.
              SHORT-TERM
      DEBT (CONTINUED)
 
 December 31, 2008
                          
                          
                          March 31, 2008(Unaudited)Notes Payable to Unrelated
      Companies:Due
      July 11, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          142,470Due
      July 18, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          569,882Due
      August 19, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          96,168Due
      August 25, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          854,823Due
      August 28, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          71,235Due
      September 11, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          427,411Due
      September 25, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          854,823Due
      January 10, 2009 (subsequently repaid on its due date)
                          
                          
                          1,463,144
                          
                          
                          
                          -Due
      January 18, 2009 (subsequently repaid on its due date)
                          
                          
                          877,886
                          
                          
                          
                          -Due
      January 31, 2009 (subsequently repaid on its due date)
                          
                          
                          585,257
                          
                          
                          
                          -Due
      April 28, 2009
                          
                          
                          731,572
                          
                          
                          
                          -Due
      April 30, 2009
                          
                          
                          1,463,144
                          
                          
                          
                          -Due
      May 24, 2009
                          
                          
                          877,886
                          
                          
                          
                          -Due
      May 25, 2009
                          
                          
                          877,886
                          
                          
                          
                          -Due
      May 26, 2009
                          
                          
                          1,024,200
                          
                          
                          
                          -Due
      May 27, 2009
                          
                          
                          877,886
                          
                          
                          
                          -Due
      April 11, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          185,212Due
      April 15, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          765,065Due
      April 17, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          176,663Due
      April 19, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          247,899Due
      April 30, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          569,882Due
      May 13, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          284,941Due
      May 23, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          284,941Due
      May 28, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          598,376Due
      May 30, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          142,470Due
      June 5, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          569,882Due
      June 26, 2008 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          284,941Notes Payable to an Unrelated
      Individual:Due
      June 3, 2009
                          
                          
                          558,921
                          
                          
                          
                          -$
                          15,746,349
                          
                          
                          $
                          17,954,837
 
 Interest
expense for the nine months ended December 31, 2008 and 2007 was $934,740 and
$161,714, respectively.
  Notes
payable to unrelated companies are interest-free and were paid on their due
dates. All the notes payable are subject to bank charges of 0.05% of the
principal as a commission on each loan transaction. Bank charges for notes
payable were $8,467 and $7,031 for the nine months ended December 31, 2008 and
2007, respectively.
 
 Notes
payable to an unrelated individual is unsecured, has an interest rate of 15% per
annum and is due on June 3, 2009.
 
 Restricted
cash of $4,389,430 and $5,438,809 is collateralized for the notes payable at
December 31, 2008 and March 31, 2008, respectively.
 
 Inventory
of $1,858,204 and $281,851 is collateralized for the notes payable at December
31, 2008 and March 31, 2008, respectively.
  The net
book value of $1,858,204 and $281,851 of finished goods inventory is pledged as
collateral for short-term bank loans at December 31, 2008 and March 31, 2008,
respectively. See Note 4.
  F-17
  NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007
 (UNAUDITED)
 
 11.
              LONG-TERM
      NOTES PAYABLE
 
 In
September 2003, the Company purchased a plant and machinery, a building and a
land use right from Luoshan Fertilizer Plant, a bankrupt company, for
$4,633,601. The remaining balance at December 31, 2008 and March 31, 2008 and
2007 is $531,121 and $517,168, respectively. The notes are due on December 31,
2010 and are interest free. See Note 13.
  12.
              INCOME
      TAXES
 
 Corporation
Income Tax (“CIT”)
 
 On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the People’s Republic of China (the “new CIT Law”), which is
effective from January 1, 2008. Since under the new CIT Law, the corporate
income tax rate applicable to the Company starting from January 1, 2008 is 25%,
replacing the currently applicable tax rate of 33%.
 
 Income
tax benefit (expense) for the nine months ended December 31, 2008 and 2007 is
summarized as follows:
  Nine Months Ended December 31,2008
                        
                        
                        2007(Unaudited)
                        
                        
                        (Unaudited)Current:CIT
                        
                        $
                        225,079
                        
                        
                        $
                        (2,826,607
                        )Deferred:CIT
                        
                        
                        (29,755
                        )
                        
                        
                        973,554Income
      tax benefit (expense)
                        
                        $
                        195,324
                        
                        
                        $
                        (1,853,053
                        )
 
 The
Company’s income tax benefit (expense) differs from the “expected” tax benefit
(expense) (computed by applying the CIT rate of varying from 25% to 33% percent
to income before income taxes) as follows:
 
 Nine Months Ended December 31,2008
                    
                    
                    2007(Unaudited)
                    
                    
                    (Unaudited)Computed
      “expected” benefit (expense)
                    
                    $
                    513,398
                    
                    
                    $
                    (2,054,923
                    )Permanent
      differences
                    
                    
                    (318,074
                    )
                    
                    
                    201,870Income
      tax benefit (expense)
                    
                    $
                    195,324
                    
                    
                    $
                    (1,853,053
                    )
  F-18


NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007 (UNAUDITED)
  12. INCOME
TAXES (CONTINUED)
  The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of December 31, 2008 and March 31, 2008 are as
follows:
  December 31, 2008
                  
                  
                  March 31, 2008(Unaudited)Deferred tax assets:Non-current
      portion:Cost
      of sales
                  
                  $
                  57,547
                  
                  
                  $
                  73,207Financial
      expense
                  
                  
                  11,063
                  
                  
                  
                  11,840Welfare
                  
                  
                  21,557
                  
                  
                  
                  11,893Provision
      for notes receivable
                  
                  
                  36,578
                  
                  
                  
                  35,618Other
      expense
                  
                  
                  59,183
                  
                  
                  
                  46,983Total
      deferred tax assets
                  
                  
                  185,928
                  
                  
                  
                  179,541Deferred
      tax liabilities:Non-current
      portion:Amortization
                  
                  
                  26,191
                  
                  
                  
                  21,330Depreciation
                  
                  
                  371,618
                  
                  
                  
                  353,039Cost
      of sales
                  
                  
                  342,222
                  
                  
                  
                  314,511Government
      grant
                  
                  
                  53,771
                  
                  
                  
                  57,344Investment
      income
                  
                  
                  17,237
                  
                  
                  
                  16,785Other
      expense
                  
                  
                  14,977
                  
                  
                  
                  10,440Total
      deferred tax liabilities
                  
                  
                  826,016
                  
                  
                  
                  773,449Net
      deferred tax liabilities
                  
                  $
                  (640,088
                  )
                  
                  $
                  (593,908
                  )


In June
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109, which seeks to reduce the diversity
in practice associated with the accounting and reporting for uncertainty in
income tax positions. This interpretation prescribes a comprehensive model for
the financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in an income tax return.
FIN 48 presents a two-step process for evaluating a tax position. The first step
is to determine whether it is more likely than not that a tax position will be
sustained upon examination, based on the technical merits of the position. The
second step is to measure the benefit to be recorded from tax positions that
meet the more likely than not recognition threshold, by determining the largest
amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement, and recognizing that amount in the financial
statements. At the date of adoption, and as of December 31, 2008, the Company
does not have a liability for unrecognized tax benefits. There was no effect on
financial condition or results of operations as a result of implementing
FIN48.





The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. Federal or State income tax examinations
by tax authorities for years after 2006. During the periods open to examination,
the Company has net operating loss (“NOL”) and tax credit carry forwards for
U.S. federal and state tax purposes that have attributes from closed periods.
Since these NOLs and tax credit carry forwards may be utilized in future
periods, they remain subject to examination. The Company also files certain tax
returns in the PRC. As of December 31, 2008 the Company was not aware of any
pending income tax examinations by tax authorities in the PRC.




The
Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of December 31, 2008, the Company has no accrued
interest or penalties related to uncertain tax positions.


F-19


NEW
ORIENTAL ENERGY & CHEMICAL CORP.


(FORMERLY
SPORTS SOURCE, INC.) AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2008 AND 2007 (UNAUDITED)





13.     CONTINGENCIES





Pending
litigation:





On
December 29, 2004, the Company entered into an agreement (the “Luoshan
Agreement”) for the acquisition of the bankrupted Luoshan Fertilizer Plant and
to pay back approximately $1.3 million in debt owed by Xixian Fertilizer Plant
(the principal shareholder of Luoshan Fertilizer Plant). Under the Luoshan
Agreement, the Company was to receive reimbursements of $650,000 from each of
the Luoshan county government and the Xi county government, which were to be
received before December 29, 2007. The amount owed by the Luoshan county
government was received before the due date.





In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City against the Xi county government for the refusal to repay the note
receivable on its due date as set forth under the Luoshan Agreement, and seeking
the enforcement of the terms of the note receivable and the Luoshan Agreement
for payment of the $650,000 by the Xi county government. Final judgment of the
lawsuit is still pending and expected to be announced within our fourth fiscal
quarter.


F-20





Item
    2.
            Management
      Discussion and Analysis of Financial Conditions and Results of
      Operations





The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations (“MD&A”)
should be read together with the condensed consolidated financial statements and
the accompanying notes of New Oriental Energy & Chemical Corp. (the
“Company”, “we” or “our”) for the quarter ended December 31, 2008. The condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles of the United States
(“GAAP”).





Forward
Looking Statements




We are including the following
discussion to inform our existing and potential security holders of some of the
risks and uncertainties that can affect us and to take advantage of the “safe
harbor” protection for forward-looking statements that applicable federal
securities laws afford. From time to time, our management or persons acting on
our behalf make forward-looking statements to inform existing and potential
security holders about our Company. These forward-looking statements include
information about possible or assumed future results of our operations. All
statements, other than statements of historical facts, included or incorporated
by reference in this report that address activities, events or developments that
we expect or anticipate may occur in the future, including such things as future
capital expenditures, business strategy, competitive strengths, goals, growth of
our business and operations, plans and references to future successes, may be
considered forward-looking statements. Also, when we use words such as
“anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” “forecast,”
“may,” “should,” “budget,” “goal,” “expect,” “probably” or similar expressions,
we are making forward-looking statements. Many risks and uncertainties may
impact the matters addressed in these forward-looking statements. Our
forward-looking statements speak only as of the date made and we will not update
such forward-looking statements unless the securities laws require us to do
so.




Some of
the key factors which could cause our future financial results and performance
to vary from those expected include:




Ÿ
            The
      loss of primary customers;




Ÿ
            Our
      ability to implement productivity improvements, cost reduction initiatives
      or facilities expansions;




Ÿ
            Market
      developments affecting, and other changes in, the demand for our products
      and the introduction of new competing
products;




Ÿ
            Availability
      or increases in the price of our primary raw materials or active
      ingredients;




Ÿ
            The
      timing of planned capital
expenditures;




Ÿ
            Our
      ability to identify, develop or acquire, and market additional product
      lines and businesses necessary to implement our business strategy and our
      ability to finance such acquisitions and
  development;




Ÿ
            The
      condition of the capital markets generally, which will be affected by
      interest rates, foreign currency fluctuations and general economic
      conditions;




Ÿ
            The
      ability to obtain registration and re-registration of our products under
      applicable law;




Ÿ
            The
      political and economic climate in the foreign or domestic jurisdictions in
      which we conduct business; and




21




Ÿ
            Other
      People’s Republic of China (the “PRC”) or foreign regulatory or
      legislative developments which affect the demand for our products
      generally or increase the environmental compliance cost for our products
      or impose liabilities on the manufacturers and distributors of such
      products.




The information contained in this
report identifies additional factors that could cause our results or performance
to differ materially from those we express in our forward-looking statements.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of these assumptions and, therefore, the
forward-looking statements based on these assumptions, could themselves prove to
be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements which are included in this report and the exhibits
and other documents incorporated herein by reference, our inclusion of this
information is not a representation by us or any other person that our
objectives and plans will be achieved.




Critical Accounting Policies and
Estimates





Use
of estimates





The preparation of financial statements
in conformity with GAAP requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.





Accounts
receivable





The Company reviews the composition of
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit worthiness, current economic trends and changes in customer
payment patterns to evaluate the turnover and adequacy of accounts receivable
and adjust its collection strategies.





Inventories





Inventories are valued at the lower of
cost (determined on a weighted average basis) or market. The Company compares
the cost of inventories with the market value and allowance is made for writing
down the inventories to their market value, if lower.





Property and equipment





Property and equipment are stated at
cost. Expenditures for maintenance and repairs are charged to earnings as
incurred; additions, renewals and betterments are capitalized. When property and
equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in operations. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with estimated lives of:
30 years for building, 10 years for machinery, 5 years for office equipment and
8 years for vehicles.





Revenue
recognition





Sales revenue is recognized at the date
of shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations by the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue.


22


Income
taxes





The Company utilizes Statement of
Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.





Foreign currency transactions and comprehensive income
(loss)





Accounting principles generally require
that recognized revenue, expenses, gains and losses be included in net income.
Certain statements, however, require entities to report specific changes in
assets and liabilities, such as gain or loss on foreign currency translation, as
a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. Transactions
occur in Chinese Renminbi (“RMB”). The unit of RMB is in Yuan.





Recent
Accounting Pronouncements





In December 2007, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements. This Statement amends ARB 51 to establish accounting and
reporting standards for the noncontrolling (minority) interest in a subsidiary
and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
No.160 is effective for the Company’s fiscal year beginning October 1, 2009.
Management is currently evaluating the effect of this pronouncement on the
consolidated financial statements.





In December 2007, the FASB issued SFAS
No. 141(R), Business
Combinations. SFAS No. 141(R) replaces SFAS No. 141 (“Statement 141”),
Business Combinations. SFAS No. 141(R) retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (which Statement 141
called the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination.





SFAS No. 141(R) also establishes
principles and requirements for how the acquirer: a) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree; b) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase and c) determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) will apply prospectively to business
combinations for which the acquisition date is on or after Company’s fiscal year
beginning October 1, 2009. While the Company has not yet evaluated this
statement for the impact, if any, that SFAS No. 141(R) will have on its
consolidated financial statements, the Company will be required to expense costs
related to any acquisitions after September 30, 2009.





In March 2008, FASB issued SFAS No.
161, Disclosures about
Derivative Instrumentsand Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged.The Company is currently
evaluating the impact of adopting SFAS No.161 on our consolidated financial
statements.


23


Overview





The Company was incorporated in the
State of Delaware on November 15, 2004, and its operating subsidiary, Henan
Jinding Chemical Industry Co. Ltd. (“Jinding”), is headquartered in Henan
Province, the PRC. The Company is a leading manufacturer and marketer of various
products, including Urea, liquefied ammonia, ammonia water, methanol, ammonium
bicarbonate and dimethyl ether (“DME”).





We aim to continue to improve our
products in order to maintain our market leadership and to support our
performance. We are focused on applying innovation and technology to make our
processes more productive and profitable and provide improved products to our
customers. Our capabilities in alternative fuel and traditional chemical
products are generating a rich product pipeline that is expected to drive
long-term growth.


24


RESULTS
OF OPERATIONS





Three
Months Ended December 31, 2008 as compared to


Three
Months Ended December 31, 2007





Three Months Ended
                                                    December 31, 2008
                                                  
                                                  
                                                  Three Months Ended
                                                    December 31, 2007
                                                  
                                                  
                                                  ComparisonsAmount
                                                  
                                                  
                                                  Percentage of
                                                    Revenues
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Percentage
                                                    of Revenues
                                                  
                                                  
                                                  Change in
                                                    Amount
                                                  
                                                  
                                                  Increase
                                                    (Decrease) in
                                                    Percentage(%)Item
                                                  
                                                  US
      $
                                                  
                                                  
                                                  (%)
                                                  
                                                  
                                                  US
      $
                                                  
                                                  
                                                  (%)
                                                  
                                                  
                                                  US
      $Revenues
                                                  
                                                  
                                                  10,614,418
                                                  
                                                  
                                                  
                                                  100.00
                                                  %
                                                  
                                                  
                                                  20,168,977
                                                  
                                                  
                                                  
                                                  100.00
                                                  %
                                                  
                                                  
                                                  (9,554,559
                                                  )
                                                  
                                                  
                                                  (47.37
                                                  )%Cost
      of Goods Sold
                                                  
                                                  
                                                  (11,971,384
                                                  )
                                                  
                                                  
                                                  (112.78
                                                  )%
                                                  
                                                  
                                                  (15,760,191
                                                  )
                                                  
                                                  
                                                  (78.14
                                                  )%
                                                  
                                                  
                                                  3,788,807
                                                  
                                                  
                                                  
                                                  (24.04
                                                  )%Gross
      (loss) profit
                                                  
                                                  
                                                  (1,356,966
                                                  )
                                                  
                                                  
                                                  (12.78
                                                  )%
                                                  
                                                  
                                                  4,408,786
                                                  
                                                  
                                                  
                                                  21.86
                                                  %
                                                  
                                                  
                                                  (5,765,752
                                                  )
                                                  
                                                  
                                                  (130.78
                                                  )%General
      & administrative
                                                  
                                                  
                                                  546,822
                                                  
                                                  
                                                  
                                                  5.15
                                                  %
                                                  
                                                  
                                                  780,861
                                                  
                                                  
                                                  
                                                  3.87
                                                  %
                                                  
                                                  
                                                  (234,039
                                                  )
                                                  
                                                  
                                                  (29.97
                                                  )%Selling
      and distribution
                                                  
                                                  
                                                  367,424
                                                  
                                                  
                                                  
                                                  3.46
                                                  %
                                                  
                                                  
                                                  277,661
                                                  
                                                  
                                                  
                                                  1.38
                                                  %
                                                  
                                                  
                                                  89,763
                                                  
                                                  
                                                  
                                                  32.33
                                                  %Research
      and development
                                                  
                                                  
                                                  14,292
                                                  
                                                  
                                                  
                                                  0.13
                                                  %
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %
                                                  
                                                  
                                                  14,292
                                                  
                                                  
                                                  
                                                  100.00
                                                  %(Loss)
      income from operations
                                                  
                                                  
                                                  (2,285,504
                                                  )
                                                  
                                                  
                                                  (21.53
                                                  )%
                                                  
                                                  
                                                  3,350,264
                                                  
                                                  
                                                  
                                                  16.61
                                                  %
                                                  
                                                  
                                                  (5,635,768
                                                  )
                                                  
                                                  
                                                  (168.22
                                                  )%Interest
      expense, net
                                                  
                                                  
                                                  (485,891
                                                  )
                                                  
                                                  
                                                  (4.58
                                                  )%
                                                  
                                                  
                                                  (92,231
                                                  )
                                                  
                                                  
                                                  (0.46
                                                  )%
                                                  
                                                  
                                                  (393,660
                                                  )
                                                  
                                                  
                                                  426.82
                                                  %Governments
      grants
                                                  
                                                  
                                                  501,622
                                                  
                                                  
                                                  
                                                  4.73
                                                  %
                                                  
                                                  
                                                  1,350
                                                  
                                                  
                                                  
                                                  0.01
                                                  %
                                                  
                                                  
                                                  500,272
                                                  
                                                  
                                                  
                                                  37057.19
                                                  %Other
      (expenses) income, net
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %
                                                  
                                                  
                                                  35,398
                                                  
                                                  
                                                  
                                                  0.18
                                                  %
                                                  
                                                  
                                                  (35,398
                                                  )
                                                  
                                                  
                                                  (100.00
                                                  )%(Loss)
      income before tax
                                                  
                                                  
                                                  (2,269,773
                                                  )
                                                  
                                                  
                                                  (21.38
                                                  )%
                                                  
                                                  
                                                  3,294,781
                                                  
                                                  
                                                  
                                                  16.34
                                                  %
                                                  
                                                  
                                                  (5,564,554
                                                  )
                                                  
                                                  
                                                  (168.89
                                                  )%Income
      tax benefit (expense)
                                                  
                                                  
                                                  138,946
                                                  
                                                  
                                                  
                                                  1.31
                                                  %
                                                  
                                                  
                                                  (1,111,771
                                                  )
                                                  
                                                  
                                                  (5.51
                                                  )%
                                                  
                                                  
                                                  1,250,717
                                                  
                                                  
                                                  
                                                  (112.50
                                                  )%(Loss)
      income from continuing operations
                                                  
                                                  
                                                  (2,130,827
                                                  )
                                                  
                                                  
                                                  (20.07
                                                  )%
                                                  
                                                  
                                                  2,183,010
                                                  
                                                  
                                                  
                                                  10.82
                                                  %
                                                  
                                                  
                                                  (4,313,837
                                                  )
                                                  
                                                  
                                                  (197.61
                                                  )%Income
      from discontinued operation
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Gain
      from disposition of discontinued operation
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Net
      (loss) income
                                                  
                                                  
                                                  (2,130,827
                                                  )
                                                  
                                                  
                                                  (20.07
                                                  )%
                                                  
                                                  
                                                  2,183,010
                                                  
                                                  
                                                  
                                                  10.82
                                                  %
                                                  
                                                  
                                                  (4,313,817
                                                  )
                                                  
                                                  
                                                  (197.61
                                                  )%Foreign
      currency translation gain
                                                  
                                                  
                                                  73,288
                                                  
                                                  
                                                  
                                                  0.69
                                                  %
                                                  
                                                  
                                                  559,942
                                                  
                                                  
                                                  
                                                  2.78
                                                  %
                                                  
                                                  
                                                  (486,654
                                                  )
                                                  
                                                  
                                                  (86.91
                                                  )%Other
      comprehensive income, net
                                                  
                                                  
                                                  73,288
                                                  
                                                  
                                                  
                                                  0.69
                                                  %
                                                  
                                                  
                                                  375,161
                                                  
                                                  
                                                  
                                                  1.86
                                                  %
                                                  
                                                  
                                                  (301,873
                                                  )
                                                  
                                                  
                                                  (80.46
                                                  )%Comprehensive
      (loss) income
                                                  
                                                  
                                                  (2,057,539
                                                  )
                                                  
                                                  
                                                  (19.38
                                                  )%
                                                  
                                                  
                                                  2,558,171
                                                  
                                                  
                                                  
                                                  12.68
                                                  %
                                                  
                                                  
                                                  (4,615,710
                                                  )
                                                  
                                                  
                                                  (180.43
                                                  )%Weighted
      average shares outstanding basic and diluted
                                                  
                                                  
                                                  12,640,000
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  12,640,000
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0.00
                                                  %Net
      (loss) income per share, basic and diluted
                                                  
                                                  
                                                  (0.17
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  0.17
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (0.34
                                                  )
                                                  
                                                  
                                                  -


25


Revenues,
Cost of Goods Sold and Gross Profit





Revenues for the three months ended
December 31, 2008 were $10,614,418, which represented a decrease of 47.37% from
the same period in the prior year. The decrease was mainly due to the decrease
in sales volume and the selling price of DME.





Three Months Ended
                                                December 31, 2008
                                              
                                              
                                              Three Months Ended
                                                December 31, 2007
                                              
                                              
                                              ComparisonsProducts
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                of Revenues
                                                (%)
                                              
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                of Revenues
                                                (%)
                                              
                                              
                                              Change in
                                                Amount
                                                US $
                                              
                                              
                                              Increase
                                                (Decrease) in
                                                Percentage
                                                (%)Urea
                                              
                                              
                                              6,255,938
                                              
                                              
                                              
                                              58.94
                                              %
                                              
                                              
                                              7,870,570
                                              
                                              
                                              
                                              39.02
                                              %
                                              
                                              
                                              (1,614,632
                                              )
                                              
                                              
                                              (20.51
                                              )%Ammonium
      bicarbonate
                                              
                                              
                                              1,137,658
                                              
                                              
                                              
                                              10.72
                                              %
                                              
                                              
                                              729,699
                                              
                                              
                                              
                                              3.62
                                              %
                                              
                                              
                                              407,959
                                              
                                              
                                              
                                              55.91
                                              %Methanol
                                              
                                              
                                              199,899
                                              
                                              
                                              
                                              1.88
                                              %
                                              
                                              
                                              354,538
                                              
                                              
                                              
                                              1.76
                                              %
                                              
                                              
                                              (154,639
                                              )
                                              
                                              
                                              (43.62
                                              )%Liquefied
      Ammonia
                                              
                                              
                                              647,371
                                              
                                              
                                              
                                              6.10
                                              %
                                              
                                              
                                              425,261
                                              
                                              
                                              
                                              2.11
                                              %
                                              
                                              
                                              222,110
                                              
                                              
                                              
                                              52.23
                                              %DME
                                              
                                              
                                              2,254,460
                                              
                                              
                                              
                                              21.24
                                              %
                                              
                                              
                                              10,719,893
                                              
                                              
                                              
                                              53.15
                                              %
                                              
                                              
                                              (8,465,433
                                              )
                                              
                                              
                                              (78.97
                                              )%Ammonia
      Water
                                              
                                              
                                              119,092
                                              
                                              
                                              
                                              1.12
                                              %
                                              
                                              
                                              69,016
                                              
                                              
                                              
                                              0.34
                                              %
                                              
                                              
                                              50,076
                                              
                                              
                                              
                                              72.56
                                              %Total
                                              
                                              
                                              10,614,418
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              20,168,977
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              (9,554,559
                                              )
                                              
                                              
                                              (47.37
                                              )%





Three Months Ended
                            December 31, 2008
                          
                          
                          Three Months Ended
                            December 31, 2007
                          
                          
                          ComparisonsProvinces
                          
                          Amount
                            US $
                          
                          
                          Percentage
                            ofRevenues
                            (%)
                          
                          
                          Amount
                            US $
                          
                          
                          Percentage
                            ofRevenues
                            (%)
                          
                          
                          Change in
                            Amount
                            US $
                          
                          
                          Increase
                            (Decrease)in
                            Percentage
                            (%)Henan
      Province
                          
                          
                          4,471,399
                          
                          
                          
                          42.13
                          %
                          
                          
                          7,310,579
                          
                          
                          
                          36.25
                          %
                          
                          
                          (2,839,180
                          )
                          
                          
                          (38.84
                          )%Guangdong
      Province
                          
                          
                          3,807,832
                          
                          
                          
                          35.87
                          %
                          
                          
                          4,492,459
                          
                          
                          
                          22.27
                          %
                          
                          
                          (684,627
                          )
                          
                          
                          (15.24
                          )%Hubei
      Province
                          
                          
                          1,058,549
                          
                          
                          
                          9.97
                          %
                          
                          
                          3,774,562
                          
                          
                          
                          18.72
                          %
                          
                          
                          (2,716,013
                          )
                          
                          
                          (71.96
                          )%Anhui
      Province
                          
                          
                          515,363
                          
                          
                          
                          4.86
                          %
                          
                          
                          1,079,847
                          
                          
                          
                          5.35
                          %
                          
                          
                          (564,484
                          )
                          
                          
                          (52.27
                          )%Hunan
      Province
                          
                          
                          107,734
                          
                          
                          
                          1.01
                          %
                          
                          
                          10,470
                          
                          
                          
                          0.05
                          %
                          
                          
                          97,264
                          
                          
                          
                          928.98
                          %Hebei
      Province
                          
                          
                          8,014
                          
                          
                          
                          0.08
                          %
                          
                          
                          2,825,976
                          
                          
                          
                          14.01
                          %
                          
                          
                          (2,817,962
                          )
                          
                          
                          (99.72
                          )%Jiangxi
      Province
                          
                          
                          473,597
                          
                          
                          
                          4.46
                          %
                          
                          
                          610,681
                          
                          
                          
                          3.03
                          %
                          
                          
                          (137,084
                          )
                          
                          
                          (22.45
                          )%Shandong
      Province
                          
                          
                          171,930
                          
                          
                          
                          1.62
                          %
                          
                          
                          0
                          
                          
                          
                          0.00
                          %
                          
                          
                          171,930
                          
                          
                          
                          100
                          %Zhejiang
      Province
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          64,403
                          
                          
                          
                          0.32
                          %
                          
                          
                          (64,403
                          )
                          
                          
                          (100.00
                          )%Total
                          
                          
                          10,614,418
                          
                          
                          
                          100.00
                          %
                          
                          
                          20,168,977
                          
                          
                          
                          100.00
                          %
                          
                          
                          (9,554,559
                          )
                          
                          
                          (47.37
                          )%


26


The sales for the three months ended
December 31, 2008 in the Hunan Province increased by 928.98%. This increase was
mainly attributable to the Company’s reinforcement of its marketing strategy and
expansion of the market share. As a result, the sales of Urea in Hunan Province
increased as compared to the same period last year.





The sales
for the three months ended December 31, 2008 in other provinces decreased as
compared to the same period last year. This decrease was mainly due to the
continued decrease in the selling price and sales volume of DME product. At the
meanwhile, the continued increase of the price of raw materials resulted in
higher production costs. As a result, the gross profit of DME decreased
accordingly. The Company adjusted its product structure and reduced the
production volume of DME.





Cost of Goods Sold (“COGS”) for the
three months ended December 31, 2008 was $11,971,384, which is 112.78% of
total revenues and represents a 24.04% decrease as compared to $15,760,191 and
78.14% of total revenues for the three months ended December 31, 2007. This
was mainly due to the decrease in sales volume of DME products offset by
increased production cost as compared to the same period last year.





COGS as a percentage of revenue may
fluctuate in the future. This fluctuation may primarily be due to changes in the
price of raw materials, which can result in high production cost.





For the Three months ended December 31,
2008, as compared to the Three months ended December 31, 2007:





Three Months Ended
                                                December 31, 2008
                                              
                                              
                                              Three Months Ended
                                                December 31, 2007
                                              
                                              
                                              ComparisonsItem
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                ofRevenues
                                                (%)
                                              
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                ofRevenues
                                                (%)
                                              
                                              
                                              Change in
                                                Amount
                                                US $
                                              
                                              
                                              Increase
                                                (Decrease)in
                                                Percentage
                                                (%)Revenues
                                              
                                              
                                              10,614,418
                                              
                                              
                                              
                                              100
                                              %
                                              
                                              
                                              20,168,977
                                              
                                              
                                              
                                              100
                                              %
                                              
                                              
                                              (9,554,559
                                              )
                                              
                                              
                                              (47.37
                                              )%Cost
      of Goods Sold
                                              
                                              
                                              11,971,384
                                              
                                              
                                              
                                              112.78
                                              %
                                              
                                              
                                              15,760,191
                                              
                                              
                                              
                                              78.14
                                              %
                                              
                                              
                                              (3,788,807
                                              )
                                              
                                              
                                              (24.04
                                              )%Gross
      (Loss) Profit
                                              
                                              
                                              (1,356,966
                                              )
                                              
                                              
                                              (12.78
                                              )%
                                              
                                              
                                              4,408,786
                                              
                                              
                                              
                                              21.86
                                              %
                                              
                                              
                                              (5,765,752
                                              )
                                              
                                              
                                              (130.78
                                              )%





Gross profit is calculated by deducting
from revenues the cost of raw materials used to produce the finished products as
well as charges for depreciation, employee welfare, repairs to machinery and
equipment, all inventory costs and all other costs incident to or necessary for
the production of our products. The Company’s COGS line item does not include
any of inbound freight charges, purchasing and receiving costs, inspection
costs, warehousing costs, internal transfer costs, and the other costs of our
distribution network.  The Company’s gross profit may not be
comparable to those of other entities, since some entities include all of the
costs related to their distribution network in COGS and others exclude a portion
of them from gross profit.





Gross profit decreased $5,765,752, or
130.78%, to a gross loss of $1,356,966 for the three months ended December 31,
2008, as compared to a gross profit of $4,408,786 for the three months ended
December 31, 2007.  This decrease was mainly due to the continued
decrease in the selling price of DME product, and the continued increase of the
price of raw materials, which resulted in higher production costs. As a result,
the Company adjusted its product structure, and the sales volume of DME
decreased substantially as compared to the same period last year.




27





DME
                                                  
                                                  
                                                  Methanol
                                                  
                                                  
                                                  Urea
                                                  
                                                  
                                                  Ammonium
      Bicarbonate
                                                  
                                                  
                                                  Liquefied
                                                    Ammonia
                                                  
                                                  
                                                  Ammonia
                                                    Water2009Q3
                                                  Revenues
                                                  
                                                  
                                                  2,254,460
                                                  
                                                  
                                                  
                                                  199,899
                                                  
                                                  
                                                  
                                                  6,255,938
                                                  
                                                  
                                                  
                                                  1,137,658
                                                  
                                                  
                                                  
                                                  647,371
                                                  
                                                  
                                                  
                                                  119,092COGS
                                                  
                                                  
                                                  2,865,038
                                                  
                                                  
                                                  
                                                  299,189
                                                  
                                                  
                                                  
                                                  6,788,555
                                                  
                                                  
                                                  
                                                  1,070,997
                                                  
                                                  
                                                  
                                                  822,863
                                                  
                                                  
                                                  
                                                  124,742Gross
      Profit
                                                  
                                                  
                                                  (610,578
                                                  )
                                                  
                                                  
                                                  (99,290
                                                  )
                                                  
                                                  
                                                  (532,617
                                                  )
                                                  
                                                  
                                                  66,661
                                                  
                                                  
                                                  
                                                  (175,492
                                                  )
                                                  
                                                  
                                                  (5,650
                                                  )Gross
      Margin
                                                  
                                                  
                                                  (27.08
                                                  )%
                                                  
                                                  
                                                  (49.67
                                                  )%
                                                  
                                                  
                                                  (8.51
                                                  )%
                                                  
                                                  
                                                  5.86
                                                  %
                                                  
                                                  
                                                  (27.11
                                                  )%
                                                  
                                                  
                                                  (4.74
                                                  )%2008Q3
                                                  Revenues
                                                  
                                                  
                                                  10,719,893
                                                  
                                                  
                                                  
                                                  354,538
                                                  
                                                  
                                                  
                                                  7,870,570
                                                  
                                                  
                                                  
                                                  729,699
                                                  
                                                  
                                                  
                                                  425,261
                                                  
                                                  
                                                  
                                                  69,016COGS
                                                  
                                                  
                                                  8,343,681
                                                  
                                                  
                                                  
                                                  246,398
                                                  
                                                  
                                                  
                                                  5,976,187
                                                  
                                                  
                                                  
                                                  709,639
                                                  
                                                  
                                                  
                                                  422,964
                                                  
                                                  
                                                  
                                                  61,322Gross
      Profit
                                                  
                                                  
                                                  2,376,212
                                                  
                                                  
                                                  
                                                  108,140
                                                  
                                                  
                                                  
                                                  1,894,383
                                                  
                                                  
                                                  
                                                  20,060
                                                  
                                                  
                                                  
                                                  2,297
                                                  
                                                  
                                                  
                                                  7,694Gross
      Margin
                                                  
                                                  
                                                  22.17
                                                  %
                                                  
                                                  
                                                  30.50
                                                  %
                                                  
                                                  
                                                  24.07
                                                  %
                                                  
                                                  
                                                  2.75
                                                  %
                                                  
                                                  
                                                  0.54
                                                  %
                                                  
                                                  
                                                  11.15
                                                  %Changes
                                                  Revenues
                                                  
                                                  
                                                  (8,465,433
                                                  )
                                                  
                                                  
                                                  (154,639
                                                  )
                                                  
                                                  
                                                  (1,614,632
                                                  )
                                                  
                                                  
                                                  407,959
                                                  
                                                  
                                                  
                                                  222,110
                                                  
                                                  
                                                  
                                                  50,076Revenue
      Growth
                                                  
                                                  
                                                  (78.97
                                                  )%
                                                  
                                                  
                                                  (43.62
                                                  )%
                                                  
                                                  
                                                  (20.51
                                                  )%
                                                  
                                                  
                                                  55.91
                                                  %
                                                  
                                                  
                                                  52.23
                                                  %
                                                  
                                                  
                                                  72.56
                                                  %Gross
      Margin Growth
                                                  
                                                  
                                                  (49.25
                                                  )%
                                                  
                                                  
                                                  (80.17
                                                  )%
                                                  
                                                  
                                                  (32.58
                                                  )%
                                                  
                                                  
                                                  3.11
                                                  %
                                                  
                                                  
                                                  (27.65
                                                  )%
                                                  
                                                  
                                                  (15.89
                                                  )%





Sales of Urea decreased $1,614,632, or
20.51%, to $6,255,938 for the three months ended December 31, 2008, as compared
to $7,870,570 for the three months ended December 31, 2007. This decrease was
mainly due to the decrease in sales volume and the selling price of Urea as
compared to the same period of last year.





The gross margin of Urea decreased
32.58% to (8.51)% for the three months ended December 31, 2008, as compared to
24.07% for the three months ended December 31, 2007. This was mainly due to the
decrease in the selling price and in the sales of the Urea, and the increase in
the cost of production as compared to the same period of last year.





Sales of ammonium bicarbonate for the
third quarter of fiscal year 2009 were $1,137,658, which represented an increase
of 55.91% from the same period in the prior year. This was mainly due to the
increase in the production and sales volume of ammonium bicarbonate as well as
the increasing selling price of ammonium bicarbonate as compared to the same
period last year.





The gross margins of ammonium
bicarbonate increased 3.11% to 5.86% for the three months ended December 31,
2008 as compared to 2.75% for the same period of the prior year. This was mainly
due to the selling price being higher than the growth rate of the product cost
per unit.





Sales of methanol for the three months
ended December 31, 2008 decreased 43.62% to $199,899, from $354,538 for the
three months ended December 31, 2007. This was mainly due to the decreasing
selling price of methanol, which led the Company to make adjustments to its
product structure to sell part of the self produced methanol, and the self
produced methanol was used entirely for the production of DME for the same
period in the prior year. Methanol incurred a negative gross margin of 49.67%
for the three months ended December 31, 2008, which was mainly due to the
increased cost of raw material.





Sales of liquefied
ammonia increased $222,110, or 52.23%, to $647,371 for the three months
ended December 31, 2008, as compared to $425,261 for the three months ended
December 31, 2007. This was mainly due to the increase in sales volume of
liquefied ammonia as compared to the same period last year.





The gross margin of liquefied ammonia
decreased 27.65% to a gross loss of 27.11% for the three months ended December
31, 2008, as compared to a gross profit of 0.54% for the three months ended
December 31, 2007. This was mainly due to the fact that the growth rate of the
product selling price was lower than the growth rate of the product cost per
unit.





28




Sales of DME decreased $8,465,433, or
78.97%, to $2,254,460 for the three months ended December 31, 2008, as compared
to $10,719,893 for the three months ended December 31, 2007. This decrease was
mainly due to the continued decrease in the selling price and sales volume of
DME product. At the meanwhile, the continued increase of the price of raw
materials resulted in higher production costs. As a result, the gross profit of
DME decreased accordingly.  The Company adjusted its product structure
and reduced the production volume of DME.





The gross margin of DME decreased
49.25% to (27.08)% for the three months ended December 31, 2008 as compared to
22.17% for the same period of the prior year. This was mainly due to the
decrease in selling price of DME, and the continual increase in theraw material price, which
resulted in higher production costs per unit, as compared to the same period
last year.





Sales of ammonia water increased
$50,076, or 72.56%, to $119,092 for the three months ended December 31, 2008 as
compared to $69,016 for the three months ended December 31, 2007. This was
mainly due to the increase in both sales volume and selling price of ammonia
water as compared to the same period last year.





The gross margin of ammonia water
decreased 15.89% to a gross loss of 4.74% for the three months ended December
31, 2008 as compared to a gross profit of 11.15% for the same period prior year.
This was mainly due to the fact that the growth rate of the product selling
price was lower than the growth rate of the product cost per unit.





Operating
Expenses





The Company incurred selling and
distribution expenses of $367,424 for the three months ended December 31, 2008,
an increase of $89,763, or 32.33%, as compared to $277,661 for the three months
ended December 31, 2007. This increase was mainly attributable to the increased
sales volume of Urea to other provinces, which resulted in increased selling and
distribution expenses as compared to the same period last year.





The Company incurred general and
administrative expenses of $546,822 for the three months ended December 31,
2008, representing a decrease of $234,039, or 29.97%, as compared to $780,861
for the three months ended December 31, 2007. This was mainly due to the
decrease in consulting fees and evaluation feesas
compared to the same period last year.





The Company incurred R&D expenses
of $14,292 for three months ended December 31, 2008, representing an increase of
$14,292, or 100%, compared to $0 for the three months ended December 31,
2007.





Income
(loss) from Operations





Consolidated operating income (loss)
for the three months ended December 31, 2008 decreased 168.22% to $(2,285,504)
from $3,350,264 for the three months ended December 31, 2007. This decrease was
mainly due to the decrease in the selling price of DME, and the continued
increase in the price of raw materials, which resulted in higher production
costs. The Company made adjustments to its product structure.




29




Income
Tax





For the three months ended December 31,
2008, the Company had an income tax benefit of $138,946 due to a net operating
loss which can be carried forward for five years under PRC tax law. The Company
believes that it will generate sufficient profit in future years to deduct such
net operating loss.





Net
Income (Loss)





The Company incurred a net loss of
$2,130,827 for the three months ended December 31, 2008 representing a decrease
of $4,313,837, or 197.61%, as compared to a net income of $2,183,010 for the
three months ended December 31, 2007. This decrease was mainly due to the
continued increase in the price of raw materials, which resulted in higher
production costs and the decrease in DME sales revenue. The Company made
adjustments to its product structure.





The Company incurred a comprehensive
loss of $2,057,539 for the three months ended December 31, 2008 represented a
decrease of $4,615,710 as compared to a comprehensive income of $2,558,171 for
the three months ended December 31, 2007. This decrease was mainly due to the
net loss.





Earnings (loss) per share decreased
from $0.17 to $(0.17), which was due to the change from net income to net loss
as compared to the same period last year.





Nine
Months Ended December 31, 2008 as compared to


Nine
Months Ended December 31, 2007





Nine Months Ended
                                              December 31, 2008
                                            
                                            
                                            Nine Months Ended
                                              December 31, 2007
                                            
                                            
                                            ComparisonsAmount
                                            
                                            
                                            Percentage
                                              of Revenues
                                            
                                            
                                            Amount
                                            
                                            
                                            Percentage
                                              of Revenues
                                            
                                            
                                            Change in
                                              Amount
                                            
                                            
                                            Increase
                                              (Decrease) in
                                              PercentageItem
                                            
                                            US $
                                            
                                            
                                            (%)
                                            
                                            
                                            US $
                                            
                                            
                                            (%)
                                            
                                            
                                            US $
                                            
                                            
                                            (%)Revenues
                                            
                                            
                                            40,533,491
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            53,222,726
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            (12,689,235
                                            )
                                            
                                            
                                            (23.84
                                            )%Cost
      of Goods Sold
                                            
                                            
                                            (40,097,429
                                            )
                                            
                                            
                                            (98.92
                                            )%
                                            
                                            
                                            (44,366,458
                                            )
                                            
                                            
                                            (83.36
                                            )%
                                            
                                            
                                            4,269,029
                                            
                                            
                                            
                                            (9.62
                                            )%Gross
      (loss) profit
                                            
                                            
                                            436,062
                                            
                                            
                                            
                                            1.08
                                            %
                                            
                                            
                                            8,856,268
                                            
                                            
                                            
                                            16.64
                                            %
                                            
                                            
                                            (8,420,206
                                            )
                                            
                                            
                                            (95.08
                                            )%General
      & administrative
                                            
                                            
                                            1,996,928
                                            
                                            
                                            
                                            4.93
                                            %
                                            
                                            
                                            1,793,510
                                            
                                            
                                            
                                            3.37
                                            %
                                            
                                            
                                            203,418
                                            
                                            
                                            
                                            11.34
                                            %Selling
      and distribution
                                            
                                            
                                            928,534
                                            
                                            
                                            
                                            2.29
                                            %
                                            
                                            
                                            927,376
                                            
                                            
                                            
                                            1.74
                                            %
                                            
                                            
                                            1,158
                                            
                                            
                                            
                                            0.12
                                            %Research
      and development
                                            
                                            
                                            123,392
                                            
                                            
                                            
                                            0.30
                                            %
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            123,392
                                            
                                            
                                            
                                            100.00
                                            %(Loss)
      income from operations
                                            
                                            
                                            (2,612,792
                                            )
                                            
                                            
                                            (6.45
                                            )%
                                            
                                            
                                            6,135,382
                                            
                                            
                                            
                                            11.53
                                            %
                                            
                                            
                                            (8,748,174
                                            )
                                            
                                            
                                            (142.59
                                            )%Interest
      expense, net
                                            
                                            
                                            (897,869
                                            )
                                            
                                            
                                            (2.22
                                            )%
                                            
                                            
                                            (355,489
                                            )
                                            
                                            
                                            (0.67
                                            )%
                                            
                                            
                                            (542,380
                                            )
                                            
                                            
                                            152.57
                                            %
  30




Nine Months Ended
                                    December 31, 2008
                                  
                                  
                                  Nine Months Ended
                                    December 31, 2007
                                  
                                  
                                  ComparisonsAmount
                                  
                                  
                                  Percentage
                                    of Revenues
                                  
                                  
                                  Amount
                                  
                                  
                                  Percentage
                                    of Revenues
                                  
                                  
                                  Change in
                                    Amount
                                  
                                  
                                  Increase
                                    (Decrease) in
                                    PercentageItem
                                  
                                  US $
                                  
                                  
                                  (%)
                                  
                                  
                                  US $
                                  
                                  
                                  (%)
                                  
                                  
                                  US $
                                  
                                  
                                  (%)Governments
      grants
                                  
                                  
                                  1,490,489
                                  
                                  
                                  
                                  3.68
                                  %
                                  
                                  
                                  81,123
                                  
                                  
                                  
                                  0.15
                                  %
                                  
                                  
                                  1,409,366
                                  
                                  
                                  
                                  1,737.32
                                  %Other
      (expenses) income, net
                                  
                                  
                                  (33,418
                                  )
                                  
                                  
                                  (0.08
                                  )%
                                  
                                  
                                  43,332
                                  
                                  
                                  
                                  0.08
                                  %
                                  
                                  
                                  (76,750
                                  )
                                  
                                  
                                  (177.12
                                  )%(Loss)
      income before tax
                                  
                                  
                                  (2,053,590
                                  )
                                  
                                  
                                  (5.07
                                  )%
                                  
                                  
                                  5,904,348
                                  
                                  
                                  
                                  11.09
                                  %
                                  
                                  
                                  (7,957,938
                                  )
                                  
                                  
                                  (134.78
                                  )%Income
      tax benefit (expense)
                                  
                                  
                                  195,324
                                  
                                  
                                  
                                  0.48
                                  %
                                  
                                  
                                  (1,853,053
                                  )
                                  
                                  
                                  (3.48
                                  )%
                                  
                                  
                                  2,048,377
                                  
                                  
                                  
                                  (110.54
                                  )%(Loss)
      income from continuing operations
                                  
                                  
                                  (1,858,266
                                  )
                                  
                                  
                                  (4.58
                                  )%
                                  
                                  
                                  4,051,295
                                  
                                  
                                  
                                  7.61
                                  %
                                  
                                  
                                  (5,909,561
                                  )
                                  
                                  
                                  (145.87
                                  )%Income
      from discontinued operation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,761
                                  
                                  
                                  
                                  0.00
                                  %
                                  
                                  
                                  (1,761
                                  )
                                  
                                  
                                  (100.00
                                  )%Gain
      from disposition of discontinued operation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  19,930
                                  
                                  
                                  
                                  0.04
                                  %
                                  
                                  
                                  (19,930
                                  )
                                  
                                  
                                  (100.00
                                  )%Net
      (loss) income
                                  
                                  
                                  (1,858,266
                                  )
                                  
                                  
                                  (4.58
                                  )%
                                  
                                  
                                  4,072,986
                                  
                                  
                                  
                                  7.65
                                  %
                                  
                                  
                                  (5,931,252
                                  )
                                  
                                  
                                  (145.62
                                  )%Foreign
      currency translation gain
                                  
                                  
                                  478,332
                                  
                                  
                                  
                                  1.18
                                  %
                                  
                                  
                                  1,097,290
                                  
                                  
                                  
                                  2.06
                                  %
                                  
                                  
                                  (618,958
                                  )
                                  
                                  
                                  (56.41
                                  )%Other
      comprehensive income, net
                                  
                                  
                                  478,332
                                  
                                  
                                  
                                  1.18
                                  %
                                  
                                  
                                  735,185
                                  
                                  
                                  
                                  1.38
                                  %
                                  
                                  
                                  (256,853
                                  )
                                  
                                  
                                  (34.94
                                  )%Comprehensive
      (loss) income
                                  
                                  
                                  (1,379,934
                                  )
                                  
                                  
                                  (3.40
                                  )%
                                  
                                  
                                  4,808,171
                                  
                                  
                                  
                                  9.03
                                  %
                                  
                                  
                                  (6,188,105
                                  )
                                  
                                  
                                  (128.70
                                  )%Weighted
      average shares outstanding basic and diluted
                                  
                                  
                                  12,640,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12,640,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (0.47
                                  )
                                  
                                  
                                  -Net
      (loss) income per share, basic and diluted
                                  
                                  
                                  (0.15
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0.32
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (0.47
                                  )
                                  
                                  
                                  -





Revenues





Revenues for the nine months ended
December 31, 2008 were $40,533,491, which represented a decrease of 23.84% from
the same period in the prior year. This decrease was mainly due to the continued
decrease in the selling price and sales volume of DME product. At the meanwhile,
the continued increase of the price of raw materials resulted in higher
production costs. As a result, the gross profit of DME decreased accordingly.
The Company adjusted its product structure and reduced the production volume of
DME.




31




Nine Months Ended
                                                                        December 31, 2008
                                                                      
                                                                      
                                                                      Nine Months Ended
                                                                        December 31, 2007
                                                                      
                                                                      
                                                                      ComparisonsProducts
                                                                      
                                                                      Amount
                                                                        US $
                                                                      
                                                                      
                                                                      Percentage
                                                                        of Revenues
                                                                        (%)
                                                                      
                                                                      
                                                                      Amount
                                                                        US $
                                                                      
                                                                      
                                                                      Percentage
                                                                        of Revenues
                                                                        (%)
                                                                      
                                                                      
                                                                      Change in
                                                                        Amount
                                                                        US $
                                                                      
                                                                      
                                                                      Increase
                                                                        (Decrease) in
                                                                        Percentage
                                                                        (%)Urea
                                                                      
                                                                      
                                                                      24,593,181
                                                                      
                                                                      
                                                                      
                                                                      60.67
                                                                      %
                                                                      
                                                                      
                                                                      22,648,524
                                                                      
                                                                      
                                                                      
                                                                      42.55
                                                                      %
                                                                      
                                                                      
                                                                      1,944,657
                                                                      
                                                                      
                                                                      
                                                                      8.59
                                                                      %Ammonium
      bicarbonate
                                                                      
                                                                      
                                                                      2,853,455
                                                                      
                                                                      
                                                                      
                                                                      7.04
                                                                      %
                                                                      
                                                                      
                                                                      1,875,453
                                                                      
                                                                      
                                                                      
                                                                      3.52
                                                                      %
                                                                      
                                                                      
                                                                      978,002
                                                                      
                                                                      
                                                                      
                                                                      52.15
                                                                      %Methanol
                                                                      
                                                                      
                                                                      909,053
                                                                      
                                                                      
                                                                      
                                                                      2.24
                                                                      %
                                                                      
                                                                      
                                                                      409,205
                                                                      
                                                                      
                                                                      
                                                                      0.77
                                                                      %
                                                                      
                                                                      
                                                                      499,848
                                                                      
                                                                      
                                                                      
                                                                      122.15
                                                                      %Liquefied
      Ammonia
                                                                      
                                                                      
                                                                      799,867
                                                                      
                                                                      
                                                                      
                                                                      1.97
                                                                      %
                                                                      
                                                                      
                                                                      771,453
                                                                      
                                                                      
                                                                      
                                                                      1.45
                                                                      %
                                                                      
                                                                      
                                                                      28,414
                                                                      
                                                                      
                                                                      
                                                                      3.68
                                                                      %DME
                                                                      
                                                                      
                                                                      11,090,320
                                                                      
                                                                      
                                                                      
                                                                      27.36
                                                                      %
                                                                      
                                                                      
                                                                      27,351,989
                                                                      
                                                                      
                                                                      
                                                                      51.39
                                                                      %
                                                                      
                                                                      
                                                                      (16,261,669
                                                                      )
                                                                      
                                                                      
                                                                      (59.45
                                                                      )%Ammonia
      Water
                                                                      
                                                                      
                                                                      287,615
                                                                      
                                                                      
                                                                      
                                                                      0.71
                                                                      %
                                                                      
                                                                      
                                                                      166,102
                                                                      
                                                                      
                                                                      
                                                                      0.31
                                                                      %
                                                                      
                                                                      
                                                                      121,513
                                                                      
                                                                      
                                                                      
                                                                      73.16
                                                                      %Total
                                                                      
                                                                      
                                                                      40,533,491
                                                                      
                                                                      
                                                                      
                                                                      100.00
                                                                      %
                                                                      
                                                                      
                                                                      53,222,726
                                                                      
                                                                      
                                                                      
                                                                      100.00
                                                                      %
                                                                      
                                                                      
                                                                      (12,689,235
                                                                      )
                                                                      
                                                                      
                                                                      (23.84
                                                                      )%





Sales of
DME decreased $16,261,669, or 59.45%, to $11,090,320 for the nine months ended
December 31, 2008 as compared to $27,351,989 for the nine months ended December
31, 2007. This decrease was mainly due to the continued decrease in the selling
price and sales volume of DME product. At the meanwhile, the continued increase
of the price of raw materials resulted in higher production costs. As a result,
the gross profit of DME decreased accordingly. The Company adjusted its product
structure and reduced the production volume of DME.





Divided
by Regions





Nine Months Ended
                                                                        December 31, 2008
                                                                      
                                                                      
                                                                      Nine Months Ended
                                                                        December 31, 2007
                                                                      
                                                                      
                                                                      ComparisonsProvinces
                                                                      
                                                                      Amount
                                                                        US $
                                                                      
                                                                      
                                                                      Percentage
                                                                        of Revenues
                                                                        (%)
                                                                      
                                                                      
                                                                      Amount
                                                                        US $
                                                                      
                                                                      
                                                                      Percentage
                                                                        of Revenues
                                                                        (%)
                                                                      
                                                                      
                                                                      Change in
                                                                        Amount
                                                                        US $
                                                                      
                                                                      
                                                                      Increase
                                                                        (Decrease) in
                                                                        Percentage
                                                                        (%)Henan
      Province
                                                                      
                                                                      
                                                                      15,380,771
                                                                      
                                                                      
                                                                      
                                                                      37.95
                                                                      %
                                                                      
                                                                      
                                                                      17,683,138
                                                                      
                                                                      
                                                                      
                                                                      33.22
                                                                      %
                                                                      
                                                                      
                                                                      (2,302,367
                                                                      )
                                                                      
                                                                      
                                                                      (13.02
                                                                      )%Guangdong
      Province
                                                                      
                                                                      
                                                                      16,184,684
                                                                      
                                                                      
                                                                      
                                                                      39.93
                                                                      %
                                                                      
                                                                      
                                                                      13,837,136
                                                                      
                                                                      
                                                                      
                                                                      26.00
                                                                      %
                                                                      
                                                                      
                                                                      2,347,548
                                                                      
                                                                      
                                                                      
                                                                      16.97
                                                                      %Hubei
      Province
                                                                      
                                                                      
                                                                      4,026,829
                                                                      
                                                                      
                                                                      
                                                                      9.93
                                                                      %
                                                                      
                                                                      
                                                                      10,418,522
                                                                      
                                                                      
                                                                      
                                                                      19.58
                                                                      %
                                                                      
                                                                      
                                                                      (6,391,693
                                                                      )
                                                                      
                                                                      
                                                                      (61.35
                                                                      )%Anhui
      Province
                                                                      
                                                                      
                                                                      1,686,159
                                                                      
                                                                      
                                                                      
                                                                      4.16
                                                                      %
                                                                      
                                                                      
                                                                      2,543,348
                                                                      
                                                                      
                                                                      
                                                                      4.78
                                                                      %
                                                                      
                                                                      
                                                                      (857,189
                                                                      )
                                                                      
                                                                      
                                                                      (33.70
                                                                      )%Hunan
      Province
                                                                      
                                                                      
                                                                      175,209
                                                                      
                                                                      
                                                                      
                                                                      0.43
                                                                      %
                                                                      
                                                                      
                                                                      268,714
                                                                      
                                                                      
                                                                      
                                                                      0.51
                                                                      %
                                                                      
                                                                      
                                                                      (93,505
                                                                      )
                                                                      
                                                                      
                                                                      (34.80
                                                                      )%Hebei
      Province
                                                                      
                                                                      
                                                                      485,284
                                                                      
                                                                      
                                                                      
                                                                      1.20
                                                                      %
                                                                      
                                                                      
                                                                      5,917,324
                                                                      
                                                                      
                                                                      
                                                                      11.12
                                                                      %
                                                                      
                                                                      
                                                                      (5,432,040
                                                                      )
                                                                      
                                                                      
                                                                      (91.80
                                                                      )%Jiangxi
      Province
                                                                      
                                                                      
                                                                      754,473
                                                                      
                                                                      
                                                                      
                                                                      1.86
                                                                      %
                                                                      
                                                                      
                                                                      2,369,812
                                                                      
                                                                      
                                                                      
                                                                      4.45
                                                                      %
                                                                      
                                                                      
                                                                      (1,615,339
                                                                      )
                                                                      
                                                                      
                                                                      (68.16
                                                                      )%Shandong
      Province
                                                                      
                                                                      
                                                                      1,840,082
                                                                      
                                                                      
                                                                      
                                                                      4.54
                                                                      %
                                                                      
                                                                      
                                                                      23,881
                                                                      
                                                                      
                                                                      
                                                                      0.04
                                                                      %
                                                                      
                                                                      
                                                                      1,816,201
                                                                      
                                                                      
                                                                      
                                                                      7,605.21
                                                                      %Zhejiang
      Province
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      160,851
                                                                      
                                                                      
                                                                      
                                                                      0.30
                                                                      %
                                                                      
                                                                      
                                                                      (160,851
                                                                      )
                                                                      
                                                                      
                                                                      (100.00
                                                                      )%Total
                                                                      
                                                                      
                                                                      40,533,491
                                                                      
                                                                      
                                                                      
                                                                      100.00
                                                                      %
                                                                      
                                                                      
                                                                      53,222,726
                                                                      
                                                                      
                                                                      
                                                                      100.00
                                                                      %
                                                                      
                                                                      
                                                                      (12,689,235
                                                                      )
                                                                      
                                                                      
                                                                      (23.84
                                                                      )%





The sales for the nine months ended
December 31, 2008 in Guangdong Province and Shandong Province increased by
16.97% and 7,605.21%, respectively as compared to the same period last year.
This was mainly attributable to the Company taking advantage of the increase in
the selling price of fertilizer product in the domestic market, adjusting its
product structure and enhancing its marketing efforts. The sales of Urea to
these provinces increased as compared to the same period last year.




32





The sales
for the nine months ended December 31, 2008 in other provinces decreased as
compared to the same period last year. The Company made adjustments to its
product structure, the sales volume of DME in these provinces decreased, and the
decrease was in line with the continued increase in the price of raw materials,
which resulted in higher production costs.





Cost
of Goods Sold





Cost of Goods Sold (“COGS”) for the
nine months ended December 31, 2008 was $40,097,429, which is 98.92% of total revenues and
represents a 9.62%
decrease, as compared to $44,366,458 and 83.36% of total revenues for the
nine months ended December 31, 2007. This was in line with the lower sales
volume offset by increased raw materials prices.





Gross
Profit





For the nine months ended December 31,
2008, as compared to the nine months ended December 31, 2007:





Nine Months Ended
                                                December 31, 2008
                                              
                                              
                                              Nine Months Ended
                                                December 31, 2007
                                              
                                              
                                              ComparisonsItem
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                of Revenues
                                                (%)
                                              
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                of Revenues
                                                (%)
                                              
                                              
                                              Change in
                                                Amount
                                                US $
                                              
                                              
                                              Increase
                                                (Decrease) in
                                                Percentage
                                                (%)Revenues
                                              
                                              
                                              40,533,491
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              53,222,726
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              (12,689,235
                                              )
                                              
                                              
                                              (23.84
                                              )%Cost
      of Goods Sold
                                              
                                              
                                              40,097,429
                                              
                                              
                                              
                                              98.92
                                              %
                                              
                                              
                                              44,366,458
                                              
                                              
                                              
                                              83.36
                                              %
                                              
                                              
                                              (4,269,029
                                              )
                                              
                                              
                                              (9.62
                                              )%Gross
      Profit
                                              
                                              
                                              436,062
                                              
                                              
                                              
                                              1.08
                                              %
                                              
                                              
                                              8,856,268
                                              
                                              
                                              
                                              16.64
                                              %
                                              
                                              
                                              (8,420,206
                                              )
                                              
                                              
                                              (95.08
                                              )%





Gross profit decreased $8,420,206, or
95.08%, to $436,062 for the nine months ended December 31, 2008 as compared to
$8,856,268 for the nine months ended December 31, 2007. This decrease was mainly
due to the continued decrease in the selling price of DME product, and the
continued increase of the price of raw materials, which resulted in higher
production costs. As a result, the Company adjusted its product structure, and
the production volume and the sales volume of DME decreased substantially as
compared to the same period last year.





Operating
Expenses





The Company incurred selling and
distribution expenses of $928,534 for the nine months
ended December 31, 2008, an increase of $1,158, or 0.12%, as compared to $927,376for the nine months
ended December 31, 2007. This increase was mainly attributable to the sales of
urea to other provinces which resulted in the increase in the selling and
distribution expenses as compared to the same period last year.





The Company incurred general and
administrative expenses of $1,996,928 for the nine months ended December 31,
2008, representing an increase of $203,418 or 11.34%, as compared to $1,793,510
for the nine months ended December 31, 2007. This increase was mainly due to the
increase in the implementation costs of internal control and the relevant
consulting fees as the Company has improved the corporate governance structure
and strengthened internal controls in this reporting period as compared to the
same period last year.




33





The Company incurred R&D expenses
of $123,392 for nine months ended December 31, 2008, representing an increase of
$123,392, or 100%, compared to $0 for the nine months ended December 31,
2007.





Income
from Operations





Consolidated operating income for the
nine months ended December 31, 2008 decreased 142.59% to a loss from operations
of $2,612,792 from income from operations of $6,135,382 for the nine months
ended December 31, 2007. This decrease was mainly due to the continued increase
in the price of raw materials, which resulted in higher production costs. The
Company made adjustments to its product structure, and the sales revenue of DME
decreased as compared to the same period last year.





Income
Tax





For the three months ended December 31,
2008, the Company had an income tax benefit of $195,324 due to the net operating
loss which can be carried forward for five years under PRC tax law. The Company
believes that it will generate sufficient profit in future years to deduct such
net operating loss.





Net
Income (Loss)





The Company’s net loss of $1,858,266
for the nine months ended December 31, 2008 represented a decrease of
$5,931,252, or 145.62%, as compared to a net income of $4,072,986 for the nine
months ended December 31, 2007. This decrease was mainly due to the following
factors: (i) the continued increase in the price of raw materials resulting in
higher production costs, in response to which the Company adjusted to its
product structure, (ii) the continued decrease in the selling price and the
sales volume of DME product which resulted in a substantial decrease in the
sales revenue of DME, and (iii) the increased general and administrative
expenses for the Company’s strengthened internal control in this reporting
period as compared to the same period last year.





The Company’s comprehensive loss of
$1,379,934 for the nine months ended December 31, 2008 represented a decrease of
$6,188,105 as compared to a comprehensive income of $4,808,171 for the nine
months ended December 31, 2007. This was mainly due to the following factors:
(i) the continued increase in the price of raw materials resulting in higher
production costs, in response to which the Company adjusted to its product
structure, (ii) the continued decrease in the selling price and the sales volume
of DME product which resulted in a substantial decrease in the sales revenue of
DME, and (iii) the increasing general and administrative expenses for the
Company’s strengthened internal controls in this reporting period as compared to
the same period last year.





Earnings (loss) per share decreased
from $0.32 to a loss per share of $0.15, which was due to a change from net
income to net loss as compared to the same period last year.




34




LIQUIDITY
AND CAPITAL RESOURCES





Cash
Flows




Nine months ended December 31,2008
                    
                    
                    
                    2007Net
      cash provided by (used in)Operating
      activities
                    
                    $
                    6,321,074
                    
                    
                    
                    $
                    4,460,517Investing
      activities
                    
                    
                    (12,800,892
                    )
                    
                    
                    
                    (10,666,995
                    )Financing
      activities
                    
                    
                    (706,223
                    )
                    
                    
                    
                    12,359,518Net
      change in cash and cash equivalents
                    
                    
                    (7,186,041
                    )
                    
                    
                    
                    6,153,040Effect
      of exchange rate changes on cash and cash equivalents
                    
                    
                    144,261
                    
                    
                    
                    
                    410,610Cash
      and cash equivalents at beginning of period
                    
                    
                    7,487,808
                    
                    
                    
                    
                    2,616,149Cash
      and cash equivalents at end of period
                    
                    $
                    446,028
                    
                    
                    
                    $
                    9,179,799





Cash flows provided by operating
activities during the nine months ended December 31, 2008 amounted to
$6,321,074, representing an increase of $1,860,557, or 41.71% as compared with
cash flows  provided in operating activities of $4,460,517 during the
nine months ended December 31, 2007. The increase in cash flow from operating
activities was due to the following factors: first, the increase in accounts
payable of $5,281,606 during the nine months ended December 31, 2008, which
represented a cash inflow increase of $5,575,972 or 1,894.23% as compared to the
same period of prior year; second, the increase in prepayment for goods of
$939,173, which represented a cash inflow increase of $4,358,991 or 127.46% as
compared to the same period of prior year; and third, the customer deposit
increasing the cash inflow by $3,915,950, or 308.17%, as compared to the nine
months ended December 31, 2007.





As of December 31, 2008, the cash used
in investing activities was $12,800,892, which represented an increase of
$2,133,897, or 20%, as compared to $10,666,995 for the nine months ended
December 31, 2007. This was mainly due to the purchases of construction in
progress, and the increasing cash outflow by $7,389,699, or 123.40%, which
represented the expenditure on construction of the third phase of the 600,000
tons DME facility project.





As of December 31, 2008, the cash used
in financing activities was $706,223 as compared to $12,359,518 for the nine
months ended December 31, 2007. This change was mainly due to an increase in the
cash outflow for the repayment of short-term debt in the reporting period as
compared to the same period last year.





Liquidity




The
Company has a working capital deficit of $30,681,789 as of December 31,
2008, and the Company incurred net loss of $2,130,827 and $1,858,266 for the
three and nine months ended December 31, 2008. The Company expects to
obtain new long term bank loans from a local bank. Its major
shareholder has committed to provide financing aid, if necessary. The
Company believes revenue and gross profits will increase in the near
term.
  35





The
Company believes that its existing internal liquidity, supported by commitment
from major shareholder, and anticipated improvement in cash flows from
operations should be adequate to fund normal business operations expected in the
near future.





Capital
Resources





As of December 31, 2008, our total
assets were $58,246,834 and our total liabilities were $42,337,275. Our debt to
asset ratio, calculated as total liabilities (including short-term debt and
payables) over total assets, was 73%.





As of December 31, 2008, our total
assets were $58,246,834 and our operating revenue for the nine months ended
December 31, 2008 was $40,533,491, reflecting a total asset turnover of
0.70.





As of December 31, 2008, we had working
capital deficiency of $30,681,789. This was mainly due to the increase in
capital expenditure for third phase of the 600,000 tons DME
project.




CONTINGENT
LIABILITIES





None.





OFF
BALANCE SHEET ARRANGEMENTS





None.





Item 3.                  Quantitative
and Qualitative Disclosures About Market Risk.





Not Applicable.





Item
4.                  Controls
and Procedures.





A.
Evaluation of Disclosure Controls and Procedures:





The Company maintains disclosure
controls and procedures and internal controls designed to ensure that
information required to be disclosed in the Company's filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. The Company's management, with the participation of its
principal executive and financial officers, has evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q. The Company's principal executive
and financial officers have concluded, based on such evaluation, that such
disclosure controls and procedures were effective for the purpose for which they
were designed as of the end of such period.





B.
Changes in Internal Control over Financial Reporting:





There was no change in the Company's
internal control over financial reporting that was identified in connection with
such evaluation that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.




36




PART
II – OTHER INFORMATION





Item
1.                  Legal
Proceedings.





There
have been no material developments in any legal proceedings since the
disclosures contained in the Company’s Form 10-Q for the fiscal quarter ended
September 30, 2008.





Item
1A.               Risk
Factors.





Not
required.





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.





(a)          
There is no information required to be disclosed on Form 8-K during the period
covered by this Form 10-Q that was not so reported.





(b)          
There were no material changes to the procedures by which security holders may
recommend nominees to the registrant's board of directors during the quarter
ended December 31, 2008.




37




Item
6.                   Exhibits.





The
following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:





Exhibit
                      Number
                    
                    Exhibit
      Description2.1
                    
                    Share
      Exchange Agreement dated as of October 11, 2006, between Sports Source,
      Kinfair Holdings Limited and Auto Chance International Limited.
      (2)2.2
                    
                    Share
      Transfer Agreement, dated February 29, 2006, between Kinfair Holdings
      Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu,
      Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)2.3
                    
                    Stock
      Purchase Agreement, dated February 19, 2006, by and between Henan Jinding
      Chemical Industry Co., Ltd. and Kinfair Holdings Limited.
    (2)3.1
                    
                    Certificate
      of Incorporation of the Company, as amended by the current report on Form
      8-K filed with the SEC on February 7, 2007 (1)3.2
                    
                    Bylaws
      of the Company, as amended by the current report on Form 8-K/A filed with
      the SEC on February 23, 2007 (1)4.1
                    
                    Specimen
      of Common Stock Certificate10.1
                    
                    Employment
      Contract, dated April 1, 2007, by and between New Oriental Energy &
      Chemical Corp. and Mr. Ben Wang (3)31.1
                    
                    Certification
      of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)31.2
                    
                    Certification
      of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)32.1
                    
                    Certification
      of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)32.2
                    
                    Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)99.1
                    
                    Loan
      Agreement, dated August 8, 2008, by and between New Oriental Energy &
      Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd.
      (5)





*  
Confidentiality treatment received for certain portions of these
agreements.


(1)
              Incorporation
      by reference to the Company's Registration Statement on Form SB-2, as
      amended (Registration No.
333-125131).


(2)
              Incorporated
      by reference to the Company's Current Report on Form 8-K dated October 13,
      2006.


(3)
              Incorporated
      by reference to the Company's Current Report on Form 8-K dated April 11,
      2007.


(4)
              Filed
      herewith.


(5)
              Incorporated
      by reference to the Company’s Form 10-Q for the period ended June 30,
      2008.
  38




SIGNATURES





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





NEW
      ORIENTAL ENERGY & CHEMICAL CORP.By:
                      /s/ Chen Si QiangChen
      Si QiangChief
      Executive Officer and Chairman of the BoardBy:
                      /s/ Donglai LiDonglai
      LiChief
      Financial
Officer





DATED:  February
23, 2009













INDEX
TO EXHIBITS


Exhibit
                      Number
                    
                    Exhibit
      Description2.1
                    
                    Share
      Exchange Agreement dated as of October 11, 2006, between Sports Source,
      Kinfair Holdings Limited and Auto Chance International Limited.
      (2)2.2
                    
                    Share
      Transfer Agreement, dated February 29, 2006, between Kinfair Holdings
      Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu,
      Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)2.3
                    
                    Stock
      Purchase Agreement, dated February 19, 2006, by and between Henan Jinding
      Chemical Industry Co., Ltd. and Kinfair Holdings Limited.
    (2)3.1
                    
                    Certificate
      of Incorporation of the Company, as amended by the current report on Form
      8-K filed with the SEC on February 7, 2007 (1)3.2
                    
                    Bylaws
      of the Company, as amended by the current report on Form 8-K/A filed with
      the SEC on February 23, 2007 (1)4.1
                    
                    Specimen
      of Common Stock Certificate (4)10.1
                    
                    Employment
      Contract, dated April 1, 2007, by and between New Oriental Energy &
      Chemical Corp. and Mr. Ben Wang (3)31.1
                    
                    Certification
      of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)31.2
                    
                    Certification
      of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)32.1
                    
                    Certification
      of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)32.2
                    
                    Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)99.1
                    
                    Loan
      Agreement, dated August 8, 2008, by and between New Oriental Energy &
      Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd.
      (5)





*  
Confidentiality treatment received for certain portions of these
agreements.


(1)
              Incorporation
      by reference to the Company's Registration Statement on Form SB-2, as
      amended (Registration No.
333-125131).


(2)
              Incorporated
      by reference to the Company's Current Report on Form 8-K dated October 13,
      2006.


(3)
              Incorporated
      by reference to the Company's Current Report on Form 8-K dated April 11,
      2007.


(4)
              Filed
      herewith.


(5)
              Incorporated
      by reference to the Company’s Form 10-Q for the period ended June 30,
      2008.