UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM 10-K









x
            Annual report
      pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934.





For
the fiscal year ended December 31, 2008





o
            Transition
      report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934.





Commission
file number 0-52549




RINO
International Corporation


(Exact
name of registrant as specified in its charter)




Nevada
              
              41-1508112(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer Identification No.)




11
Youquan Road, Zhanqian Street, Jinzhou District


Dalian,
China 116100


(Address
of principal executive offices)




00186
411 8766 1222


(Registrant’s
telephone number)




Securities
registered pursuant to Section 12(b) of the Act:




None




Securities
registered pursuant to Section 12(g) of the Act:




Common
stock, par value $.0001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes o  No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes o  No x




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No  o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10-K.  x




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
definition of “accelerated filer, large accelerated filer and smaller reporting
company” in Rule 12b-2 of the Exchange Act (Check one):




Large Accelerated Filer  o    Accelerated
Filer  o    Non-Accelerated Filer  o   Smaller Reporting Company  x




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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant (assuming for these purposes, but without
conceding, that all executive officers and directors and 10% stockholders are
“affiliates” of the Registrant) as of June 30, 2008 (based on the closing sale
price on such date of the Registrant’s common stock, on the Over-the-Counter
Bulletin Board as reported on Yahoo Finance) was $46,538,695.




DOCUMENTS
INCORPORATED BY REFERENCE




None


2


RINO
International Corporation


Annual
Report on Form 10-K


For
the Year Ended December 31, 2008




Table
of Contents




PART
      IItem
      1.
                    Business
                    4Item
      1A.
                    Risk
      Factors
                    23Item
      1B.
                    Unresolved
      Staff Comments
                    41Item
      2.
                    Properties
                    41Item
      3.
                    Legal
      Proceedings
                    42Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    42PART
      IIItem 5.
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    42Item
      7.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    45Item
      8.
                    Financial
      Statements
                    58Item
      9.
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    58Item 9A.
                    Controls
      and Procedures
                    59PART
      IIIItem 10.
                    Directors,
      Executive Officers and Corporate Governance
                    62Item
      11.
                    Executive
      Compensation
                    66Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    69Item 13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    70Item 14.
                    Principal
      Accountant Fees and Services
                    72PART
      IVItem
      15.
                    Exhibits
      and Financial Statement Schedules
                    72Signatures
                    75


3


PART I.




Disclosure
Regarding Forward Looking Statements




Certain
statements made in this report, and other written or oral statements made by or
on behalf of RINO International Corporation, may constitute
“forward-looking statements” under the Private Securities Litigation
Reform Act of 1995, which represent the expectations or beliefs of,
including, but not limited to, statements concerning the operations,
performance, financial condition and growth of RINO International Corporation,
together with its direct and indirect subsidiaries and controlled-affiliates.
For this purpose, any statements contained in this report that are not
statements of historical fact may be deemed forward-looking statements.
Without limiting the generality of the foregoing, when used in this report, the
word “believes,” “expects,” “estimates,” “intends,” “will,” “may,” “anticipate,”
“could,” “should,” “can,” or “continue” or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Examples of such statements in this report include descriptions of
our plans and strategies with respect to developing certain market
opportunities, our overall business plan, our plans to develop additional
strategic partnerships, our intention to develop our products and
platform technologies, our continuing growth and our ability to contain our
operating expenses. All forward-looking statements are subject to certain risks
and uncertainties that could cause actual events to differ materially from those
projected, including those described under the caption “Risk Factors” in
Item 1A of this report. We believe that these forward-looking statements
are reasonable; however, you should not place undue reliance on such statements.
These statements are based on current expectations and speak only as of the date
of such statements. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of future events, new information
or otherwise.





Except
as otherwise specifically stated or unless the context otherwise requires, the
"Company", "we," "us,"and "our" refer to (i) RINO International Corporation
(formerly Jade Mountain Corporation), (ii) Innomind Group Limited (“Innomind
Group”), a wholly-owned subsidiary of RINO International Corporation organized
under the laws of the British Virgin Islands, (iii) Dalian Innomind Environment
Engineering Co., Ltd. (“Dalian Innomind”), a wholly-owned subsidiary of Innomind
Group organized under the laws of the People’s Republic of China (the “PRC” or
“China”), (iv) Dalian RINO Environment Engineering Science and Technology Co.,
Ltd., a contractually controlled affiliate of Dalian Innomind organized under
the laws of the PRC (“Dalian Rino”); and (v) and Dalian Rino’s wholly owned
subsidiaries, Dalian Rino Environmental Engineering Project Design Co., Ltd.
(“Dalian Rino Design”) and Dalian Rino Environmental Construction &
Installation Project Co., Ltd. (“Dalian Rino Installation”).




ITEM 1.         BUSINESS





Through
our contractually controlled affiliates in the People’s Republic of China, since
October 5, 2007, we have been engaged in the business of environmental
protection and remediation. Our business consists of designing, manufacturing,
installing and servicing wastewater treatment and flue gas desulphurization
equipment principally for use in China’s iron and steel industry, and
anti-oxidation products and equipment designed for use in the manufacture of hot
rolled steel plate products. At the present, RINO International’s sole business
activities are acting as a holding company of our direct and indirect
subsidiaries, Innomind Group Limited, a company organized under the laws of the
British Virgin Islands, and Dalian Innomind Environment Engineering Co., Ltd.
(“Dalian Innomind”), a limited liability company organized under the laws of the
People’s Republic of China (“PRC”), which contractually controls and operates
our affiliate Dalian Rino Engineering Science and Technology Co., Ltd. (“Dalian
Rino”), a limited liability company organized under the laws of the PRC, and its
subsidiaries Dalian Rino Environmental Engineering Design Co., Ltd. and Dalian
Rino Environmental Construction and Installation Engineering Project Co.,
Ltd.





Our
History





We were
originally incorporated in Minnesota in 1984 as Applied Biometrics, Inc., for
the purpose of developing and marketing a cardiac output monitoring system. In
August, 2000, the Company’s Board of Directors (“Board of Directors” or “Board”)
determined that the Company would be unable to complete the development of its
primary product, and thereupon ceased its business operations. During the latter
part of 2000 we wound down our operations, eliminated most expenses and
negotiated the termination or satisfaction of all of the Company’s
obligations.


4


On May
14, 2002, we filed a Form 15 with the Securities and Exchange Commission (the
“SEC”) and ceased being a reporting company under the Securities Exchange Act of
1934, as amended (the “Exchange Act”).


At a
special meeting held on August 4, 2005, our shareholders voted to adopt a plan
of complete liquidation and dissolution of the Company (the “Plan”). After that
shareholder vote, but before the Company’s remaining funds were distributed, on
October 20, 2005, Glenn A. Little (“Little”) contacted the Company and proposed
a reorganization that consisted of: (i) revoking the Plan; (ii) Little
lending $100,000 to the Company (the “Loan”) pursuant to a convertible
promissory note (the “Convertible Note”); (iii) a one-time distribution of all
of the Company’s assets (including $75,000 of the Loan) to all of our
shareholders other than Little; and (iv) amending the Company’s Articles of
Incorporation to increase the authorized capital in order to permit the
conversion of the Convertible Note. At a special shareholders’ meeting held on
February 8, 2006, Little’s proposal was approved, and the Convertible Note was
subsequently converted to 10,000,000 shares of the Company’s common stock (which
became 5,000 shares subsequent to the reverse stock splits described below). As
a result, Little became the Company’s majority shareholder with (at the time)
64.1% of the issued and outstanding shares.





At a
special meeting held on October 18, 2006, the shareholders voted to approve a
proposal to change the Company’s state of incorporation from Minnesota to
Nevada, and to authorize the Board of Directors to change the Company’s name
from “Applied Biometrics, Inc.” to such other name as the Board deemed
appropriate. In January 2007 the Company (still named Applied Biometrics) merged
with and into its wholly owned subsidiary, RINO International Corporation (a
Nevada corporation), in order to effect a change of domicile from Minnesota to
Nevada. The Company’s name became RINO International Corporation.





By
written consent of the holder of a majority of the outstanding shares of our
common stock, on June 5, 2007, the shareholders authorized a two hundred
thousand (200,000) for one (1) reverse stock split (with fractional shares
rounded up to the nearest whole number), which was effectuated on July 16,
2007.





On August
31, 2007, our Board of Directors authorized an amendment to its Articles of
Incorporation to: (i) increase the number of its authorized shares of common
stock from 100,000,000 shares, par value $.0001 per share, to 10,000,000,000
shares, par value $.0001 per share (the “Authorized Share Increase”); and (ii)
forward split its issued and outstanding common stock on a one share for one
hundred (100) shares basis (the “Forward Split”). Under Nevada law, neither the
Authorized Share Increase nor the Forward Split required the approval of the
Company’s shareholders.





Recent
Development





Share
Exchange Transaction





On
October 5, 2007, the Company acquired Innomind Group Limited, a British Virgin
Islands corporation (“Innomind Group”), in a share exchange transaction whereby
the Company issued 17,899,643 shares of our common stock (“Control Shares”) to
the sole holder of 100% of the capital stock of Innomind Group, Mr. Zhang Ze, a
PRC resident, in exchange for all the capital stock of Innomind Group held by
Zhang Ze. As a result of the share exchange transaction, Innomind Group became
our wholly owned subsidiary and Innomind Group’s wholly-owned subsidiary, Dalian
Innomind Environment Engineering Co., Ltd. (“Dalian Rino”), a limited liability
company organized under the laws of the PRC, became the Company’s indirect
subsidiary (the “Share Exchange Transaction”).


5


Simultaneously
with the consummation of the Share Exchange, Zhang Ze transferred and conveyed
all of the Control Shares (and all of his right, title and interest in and to
the Control Shares) to The Innomind Trust, a trust established under the laws of
and domiciled in the British Virgin Islands, of which Zou Dejun and Qiu
Jianping, the founders and sole equity owners of Dalian Rino, are the sole
beneficiaries. As of December 31, 2008, the Control Shares represent 71.5% of
our total outstanding common stock.





The
acquisition of Innomind Group and Dalian Innomind on October 5, 2007 by RINO
International Corporation effected a change in control and was accounted for as
a “reverse acquisition” whereby Innomind Group is the accounting acquirer for
financial statement purposes. Accordingly, for all periods and filings
subsequent to the October 5, 2007 “reverse acquisition” transaction, the
historical financial statements of the Company reflect the consolidated
financial statements of Innomind Group since its inception and the operations of
RINO International subsequent to October 5, 2007. See the Current Report on Form
8-K that we filed with the Securities and Exchange Commission on October 12,
2007 for additional information.





Please
refer to the Current Report on Form 8-K filed with the SEC on October 12, 2008
and the Annual Report on Form 10K for the fiscal year 2007 filed with the SEC,
as for more details about the Share Exchange Transaction.





Private
Placement





In
connection with the Share Exchange Transaction, on October 5, 2007, we completed
a private placement transaction with 24 accredited investors in which we raised
$24,480,319 in gross proceeds (or $21,251,000 in net proceeds) from the sale of
5,464,357 shares of our common stock to these investors pursuant to a Securities
Purchase Agreement with such investors dated the same date (the “Securities
Purchase Agreement”). As part of the private placement transaction, we entered
into a Registration Rights Agreement with the investors in the private placement
to register for resale of the shares issued to the investors under the
Securities Purchase Agreement under the Securities Act of 1933, as amended. We
also granted piggy-back registration right to Glenn Little, our majority
shareholder and executive officer prior to the Share Exchange Transaction, as to
116,071 of the shares of common stock beneficially owned by him.  Also
as part of the private placement and Share Exchange Transaction, we entered into
lock-up agreements with Mr. Zou Dejun, our CEO and director, and his wife Ms.
Qiu Jianping, our Chairman of the Board, who together beneficially own 71.5% of
our common stock as of the date of this report,  which generally
prohibit them from selling our stock until October 3, 2009 (the transactions
contemplated under the foregoing Securities Purchase Agreement, the Registration
Rights Agreement and related agreements, collectively, the “Private Placement
Transaction” or “Private Placement”).





The
Securities Purchase Agreement and Registration Rights Agreement contain certain
covenants on our part, including the following:





Board Appointment
Right.





Pursuant
to the Securities Purchase Agreement, Hare & Co., an investor in the Private
Placement, has the right to designate one member of our (or at their election,
Dalian Innomind’s or Dalian Rino’s) Board of Directors. As of the date of this
Prospectus, Hare & Co. has not designated a member of the
board.





Continued
Listing.





Pursuant
to the Securities Purchase Agreement, if we apply to have our common stock
traded on another trading market, we are required to include in that application
all of the shares of common stock purchased in the private placement. We are
also required to take all reasonably necessary action to continue the listing
and trading of our common stock on the OTC:BB and any other trading market on
which the common stock is listed, and to comply with all applicable rules of the
trading market.


6


Delivery of up to 5,580,000
Additional Shares of Common Stock from Escrow Based on After-Tax Net
Income.





Pursuant
to the Securities Purchase Agreement, a total of 5,580,000 shares of our common
stock beneficially owned by our founders Mr. Zou Dejun and his wife, Ms. Qiu
Jianping, through the Innomind Trust, are subject to escrow in order to secure
our obligation under the Securities Purchase Agreement to deliver additional
common stock to the private placement investors in the event we fail to achieve
certain financial performance targets for fiscal years 2007 and 2008 (“Make Good
Escrow Shares”). In the event we do not achieve these financial performance
targets, we are required to release and distribute the Make Good Escrow Shares
to the investors.  Those targets are $16,000,000 in after-tax net
income for the fiscal year ended December 31, 2007, $28,000,000 in after-tax net
income for the fiscal year ending December 31, 2008 and $1.120 for earnings per
share on a fully-diluted basis for 2008. In the event we do not achieve the 2007
net income target, we are obligated to transfer 1,674,000 shares of our common
stock to the private placement investors on a pro-rata basis, and if we fail to
achieve the 2008 net income or earnings per share targets, we must transfer to
the investors a further 3,906,000 shares. In the event the Company is required
to recognize any expense or deduction from revenue or income for releasing the
Made Good Escrow Shares to the investors or the founders, as the case maybe,
then such expense or deduction will be excluded for purposes of determining
whether the company’s after-tax net incomes and earnings per share (for fiscal
year 2008) have met the respective targets.  In connection with the
release of the Make Good Escrow Shares to the Innomind Trust, which releases are
deemed as stock compensation to Mr. Zou and Ms. Qiu, we accrued $17.5 and $7.5
million of compensation expense for fiscal years 2008 and 2007,
respectively.





Liquidated Damages for late
appointment of independent board members and registration related
matters.





Under the
Registration Rights Agreement, we are obligated to cause the registration
statement filed with the SEC covering and registering under the Securities Act
of 1933, as amended, for the re-sale of all the common stock offered and sold in
the private placement to be declared effective by the SEC by March 3, 2008. If
we fail to comply with the foregoing, we are obligated to pay liquidated damages
to the investors equal in amount to 1% of the total investment amount invested
by the investors on the first day of such failure and for each month (or part of
a month)(an aggregate of $244,353) after March 3, 2008, until the registration
statement is declared effective (“Effectiveness Damages”), which are capped at
10% ($2,494,600) of the total investment amount raised in the Private Placement
Transaction.  The registration statement was declared effective by the
SEC on October 2, 2008.  Consequently, we incurred liquidated damages
in the amount of $1,971,116.
 
 Under the
Securities Purchase Agreement, we are obligated to appoint a board of directors
with a minimum of 5 members, a majority of whom must be “independent directors”
as defined in NASDAQ Marketplace Rule 4200(a)(15) by February 2,
2008.  Until this covenant is complied with, we are required to hold
$1,000,000 in escrow (“Board Escrow Holdback”) for distribution to the investors
as liquidated damages equal in amount to 1% of the total investment amount
invested by the investors on the first day of such failure and for each month
(or part of a month)(an aggregate of $244,353) after February 2, 2008. On March
20, 2008, we appointed three independent directors to our Board of Directors and
fulfilled this obligation. As a result, we incurred liquidated damages in the
amount of $627,173.
 
 Such
liquidated damages payable by the Company are accounted for in accordance with
FSP EITF 00-19-2. Estimated damages at the time of closing are recorded as a
liability and deducted from additional paid-in capital as costs of issuance.
Estimated damages determined later pursuant to the criteria for SFAS 5 are
recorded as a liability and deducted from operating income.


Liquidated
Damages for PRC Governmental Rescission of Restructuring
Transaction.





If any
governmental agency in the PRC challenges or otherwise takes any action that
adversely affects the transactions contemplated by the Restructuring Agreements
or the Share Exchange Agreement, and the Company cannot undo or otherwise
address its materially adverse effect to the investors’ reasonable satisfaction
within sixty (60) days of the occurrence of the PRC governmental action, then,
upon written demand from an investor, we are required to, within thirty (30)
days from the date of the written demand, pay to the investor, as liquidated
damages, an amount equal to the entire amount that he or it invested in the
private placement, without interest.


7


The cash
held in escrow pursuant to the Board Escrow Holdback as described above is
accounted for as other current assets and are not  shown as cash or
cash equivalents on the our balance sheet until such funds have been released
from escrow pursuant to the terms of the Securities Purchase Agreement. The
shares held in escrow as Make Good Escrow Shares will not be accounted for on
our books until such shares are released from escrow pursuant to the terms of
the Securities Purchase Agreement. If any Make Good Escrow Shares are released
to the Company’s management or employees, the value of such shares at the time
of release will be recorded as compensation expense with a corresponding offset
to additional paid-in capital in accordance with SFAS 123(R) paragraph 11. If
any Make Good Escrow Shares are released to the Investors, no entry will be
made. During the time such Make Good Escrow Shares are held in escrow, they are
accounted for as contingently issuable shares in determining the EPS denominator
in accordance with SFAS 128.


Liquidated
damages potentially payable by the Company under the Securities Purchase
Agreement and the Registration Rights Agreement will be accounted for in
accordance with FSP EITF 00-19-2. Estimated damages at the time of closing will
be recorded as a liability and deducted from additional paid-in capital as costs
of issuance. Estimated damages determined later pursuant to the criteria for
SFAS 5 will be recorded as a liability and deducted from operating income. The
Company may be required to pay to the investors, as liquidated damages, an
amount equal to the entire amount that the investors invested in the private
placement, without interest, if any governmental agency in the PRC challenges or
otherwise takes any action that adversely affects the transactions contemplated
by the Restructuring Agreements or the Share Exchange Agreement, and the Company
cannot undo or otherwise address its materially adverse effect to the investors’
reasonable satisfaction. Such liquidated damages have the initial appearance of
a redemption provision, in that there is no apparent end date to the provision
and it appears to be outside the control of the Company. However, according to
the legal opinion issued by the Company’s PRC counsel, the Restructuring
Agreements and the organizational structure resulted thereunder are legal and
enforceable under current PRC law and that changes to current law would need to
be enacted in order for the PRC government or any of its entities to challenge
the structure of the Company. Therefore, the Company believes that the chances
of the restructuring structure being successfully challenged are remote, and
therefore such liquidated damages are not recordable as a liability under SFAS
5.





The
warrants to purchase 382,500 shares of our common stock issued to Douglas
Capital, our placement agent, qualify as permanent equity under EITF 00-19, the
value of which warrants has created offsetting debit and credit entries to
additional paid-in capital.




Please
refer to the Current Report on Form 8-K filed with the SEC on October 12, 2008
and the Annual Report on Form 10K for the fiscal year 2007, as amended filed
with the SEC for more details about the Share Exchange Transaction.




Restructuring
Agreements to Acquire Dalian Rino’s Operating Business





In
connection with the consummation of the Share Exchange Transaction and the
Private Placement, Dalian Innomind, entered into and consummated a series of
transactions (collectively, the “Restructuring Transactions” and the agreements
related thereto, collectively, the “Restructuring Agreements”), with Dalian
Rino. Pursuant to the Restructuring Agreements, Dalian Innomind purchased and
leased substantially all of the assets of Dalian Rino and assumed control of the
operations and management of Dalian Rino’s business. As part of the
Restructuring Agreements, the shareholders of Dalian Rino, Dalian Rino and
Dalian Innomind entered into an Entrusted Management Agreement, pursuant to
which the shareholders of Dalian Rino and Dalian Rino entrusted Dalian Innomind
with the operations and management of Dalian Rino’s business.  Under
the agreement, Dalian Innomind will manage Dalian Rino’s operations and assets,
control all of Dalian Rino's cash flow through an entrusted bank account, will
be entitled to the payment of Dalain Rino's net profits as a management fee, and
will be obligated to pay all Dalian Rino’s payables and loan payments. The
Entrusted Management Agreement will remain in effect until Dalian Innomind
acquires all of the assets or equity of Dalian Rino (as more fully described
below under “Exclusive Option Agreement”). Prior to that acquisition, Dalian
Rino will only own those certain assets that have not been sold or leased to
Dalian Innomind pursuant to the Restructuring Agreements. As part of the
Restructuring Agreements, Dalian Rino transferred its employees and provided its
supply and sales channels to Dalian Innomind, and Dalian Rino and Dalian Rino’s
founders transferred certain patents and trademarks to Dalian
Innmond.


8


The
following ancillary agreements were also entered into as part of the
Restructuring Agreements:




Shareholders’ Voting Proxy
Agreement. Under the shareholders' voting proxy agreement among the
Dalian Rino shareholders and Dalian Innomind, the Dalian Rino shareholders
irrevocably and exclusively appointed the members of Dalian Innomind’s board of
directors as their proxies to vote on all matters that require Dalian Rino
shareholder approval.





Exclusive Option Agreement.
Under the exclusive option agreement among Dalian Innomind, Dalian Rino and the
Dalian Rino shareholders, the Dalian Rino shareholders have granted Dalian
Innomind an irrevocable and exclusive purchase option (the “Option”) to acquire
Dalian Rino’s equity and/or remaining assets, but only to the extent that
the acquisition does not violate limitations imposed by PRC law on such
transactions. Current PRC law does not specifically provide for a non-PRC
entity's equity to be used as consideration for the purchase of a PRC entity's
assets or equity. Accordingly, the Option is exercisable when PRC law would
allow foreign equity to be used as consideration to acquire a PRC entity's
equity interests and/or assets, or when the Company has sufficient funds to
purchase Dalian Rino's equity or remaining assets. The consideration for the
exercise of the Option is to be determined by the parties and memorialized in
future, definitive agreements setting forth the kind and value of such
consideration. To the extent the Dalian Rino shareholders receive any of such
consideration, the Option requires them to transfer (and not retain) the same to
Dalian Rino or Dalian Innomind.





Share Pledge Agreement. Under
the share pledge agreement among Dalian Innomind and the Dalian Rino
shareholders (the "Share Pledge Agreement"), the Dalian Rino shareholders have
pledged all of their equity interests in Dalian Rino, including the proceeds
thereof, to guarantee all of Dalian Innomind's rights and benefits under the
Restructuring Agreements. Prior to termination of the Share Pledge Agreement,
the pledged equity interests cannot be transferred without Dalian Innomind's
prior written consent.





Please
refer to the Current Report on Form 8-K filed with the SEC on October 12, 2008
and the Annual Report on Form 10K for the fiscal year 2007, as amended filed
with the SEC for more details about the Share Exchange Transaction.





As a
result of the Restructuring Agreements, Dalian Rino became an indirectly
contractually controlled affiliate of the Company. As of the date of this
report, Dalian Rino has two wholly owned subsidiaries: Dalian Rino Environmental
Engineering Project Design Co., Ltd. (“Dalian Rino Design”) and Dalian Rino
Environmental Construction & Installation Project Co., Ltd. (“Dalian Rino
Installation”).





The
Company’s current structure is set forth in the diagram below:


9








Organizational
History of Innomind Group Limited (“Innomind Group”) and Dalian Innomind
Environment Engineering Co., Ltd. (Dalian Innomind”)





Innomind
Group.





Innomind
Group Limited was incorporated under the laws of the British Virgin Islands on
November 17, 2006. Until the consummation of the Share Exchange Transaction,
Innomind Group’s sole shareholder was Zhang Ze, a citizen and resident of the
PRC.




Dalian Innomind
Environment Engineering Co., Ltd. (“Dalian
Innomind”).





On July
9, 2007, Innomind Group incorporated Dalian Innomind under the laws of the PRC.
All of Dalian Innomind’s outstanding capital stock is held by Innomind, and by
virtue of such ownership Dalian Innomind is a “wholly foreign owned enterprise
(“WFOE”) under PRC law.


10


Organizational History of Dalian Rino
Engineering Science and Technology Co., Ltd (“Dalian Rino”)




Dalian
Rino Engineering Science and Technology Co., Ltd. (unless the context indicate
otherwise, together with its subsidiaries, collectively, “Dalian Rino”) was
formed on March 5, 2003, under PRC law. Its initial registered capital was RMB
7,000,000 (approximately US $922,327), which was increased to RMB 30,500,000
(approximately US $4,018,711) on April 18, 2006. Dalian Rino is owned by its two
founders, Zou Dejun (90%) and his wife, Qiu Jianping (10%). Since its founding,
Dalian Rino has been engaged in developing, marketing and selling its three
principal products: the Lamella Inclined Tube Settler Wastewater Treatment
System (also called the “Lamella Wastewater System”), the Circulating Fluidized
Bed Flue Gas Desulphurization System (also called the “Desulphurization
System”), and the High Temperature Hot Rolled Steel Anti-Oxidation System (also
called the “Anti-Oxidation System”).





On
September 24, 2008, Dalian Rino formed Dalian Rino Environmental Engineering
Project Design Co., Ltd. (“Dalian Rino Design”), as a wholly owned subsidiary
under the laws of the PRC, to focus on research, development and the technical
design aspects of our business. Pursuant to the business permits, Dalian Rino
Design’s right of operation expires on September 23, 2018 and its business
permit is renewable upon expiration.





On
October 14, 2008, Dalian Rino formed Dalian Rino Environmental Construction
& Installation Project Co., Ltd. (“Dalian Rino Installation”), as a
wholly-owned subsidiary under the laws of the PRC.  Pursuant to its
business license, Dalian Rino Installation is permitted and will focus primarily
on installation of environmental protection and energy saving equipment. Dalian
Rino Installation’s right of operation expires on October 13, 2018 and its
business permit is renewable upon expiration.





Description of the
Business





We are an
industrial technology-based, PRC environmental protection and remediation
company. Specifically, through our subsidiaries and controlled affiliates in
China, we are engaged in the business of designing, manufacturing, installing
and servicing wastewater treatment and exhaust emission desulphurization
equipment principally for use in China’s iron and steel industry, and
anti-oxidation products and equipment designed for use in the manufacture of hot
rolled steel plate products. All of our products are custom-built for specific
project installations, and we execute supply contracts during the design phase
of our projects. Our products are all designed to reduce either or both
industrial pollution and energy utilization, and comply with ISO 9001 Quality
Management System and ISO 14001 Environment Management System requirements, for
which RINO received certificates in 2004.





Since
1978, the PRC has undergone a substantial economic transformation and rapid
economic growth, becoming the world’s fourth largest national economy, with the
world’s largest and most rapidly growing iron and steel market. Through its
continuous focus on nation-wide economic development, China’s overall industrial
pollution output has become a central issue for the national government, and a
priority in the PRC’s eleventh five-year plan. For example, in 2006 China’s
industrial enterprises emitted 25.9 million tons of sulphur dioxide, the
principal cause of “acid-rain,” and the PRC has become the world’s largest
emitter of sulphur dioxide pollution. As a consequence of this and other
industrially-based environmental challenges, Dalian Rino’s customer base - the
Chinese iron and steel industry - faces governmental mandates to decrease or
eliminate water pollution and sulphur emissions, which are key applications for
our technologies.




Accordingly,
environmental protection and remediation is a relatively new industry in the
PRC. Nonetheless, like the Chinese economy, it is rapidly growing – we estimate
that in the next 5 years, there is a wastewater remediation market of $260
million per year and the desulphurization market will grow at approximately 5%
annually..  Further, the market for the Company’s products is highly
regulated by the central PRC government, which sets specific pollution output
targets for industrial enterprises. For this reason, we believe that the demand
for our products is predictable, and will follow the growth of the PRC’s iron
and steel industry and government-mandated pollution control standards that are
being made more stringent annually. We also believe that our revenue and
profitability growth to date arises from these same factors. Our revenues
increased 119.8% to $139.3 million for fiscal year 2008 from $63.4 million for
fiscal year 2007. Our gross profit increased 78.3% to $54.3 million for fiscal
year 2008 from $30.5 million for fiscal year 2007. Our income from operations
increased 36.9% to $21.6 million for fiscal year 2008 from $15.8 million. Our
after-tax net income increased 108.3% to $21.3 million for fiscal year 2008 from
$10.2 million for fiscal year 2007.  Without taking into account
certain non-cash stock compensation expenses that we incurred in connection with
our release of the Make Good Escrow Shares to the Innomind Trust with our
founders as beneficiaries, our income from operations increased 67.9% to $39.1
million for fiscal year 2008 from $23.3 million from fiscal year 2007, and our
after-tax net income increased 118.9% to $38.8 million for fiscal year 2008 from
$17.7 million for fiscal year 2007.


11


Principal
Products




Traditionally,
we have three principal products and product lines: the “Lamella Inclined Tube
Settler Waste Water Treatment System,” the “Circulating, Fluidized Bed, Flue Gas
Desulphurization System,” and the “High Temperature Anti-Oxidation System for
Hot Rolled Steel.”





In
addition to the environmental remediation and protection systems above, since
late 2005 we have also been using our over capacity during “down time” to
perform contract machining services for third-party industrial
enterprises.





Lamella Inclined
Tube Settler Wastewater Treatment System.





Our core
product, the “Lamella Wastewater System,” is a highly efficient wastewater
treatment system that incorporates our proprietary and patented ‘Lamella
Inclined Tube Settler’ technology. We believe that the System is among the
most technologically advanced wastewater treatment systems presently in use in
China’s iron and steel industry. It includes industrial water treatment
equipment, complete sets of effluent-condensing equipment, highly efficient
solid and liquid abstraction dewatering equipment and coal gas dust removal and
cleaning equipment. The technology has received numerous regional and national
design awards, and has been successfully installed and used at some of the
largest steel mills in China, including Jinan Iron & Steel Group Co., Ltd.,
Benxi Iron & Steel (Group) Co., Ltd., Handan Iron & Steel Group Co.,
Ltd., Tianjin Tiangang Group Co., Ltd., Shijiazhuang Iron & Steel Group Co.,
Ltd., Panzhihua Iron & Steel Group Co., Ltd., Anyang Iron & Steel Group
Co., Ltd., Nanchang Changli Steel Co., Ltd., Shaogang Steel Co., Ltd., Linggang
Steel Co., Ltd. and Puyang Steel.




Our
combination of proprietary system design and patented technology allows
wastewater to flow through the system in layers while at the same time settling
particulate matter without disturbing the water flow. Operating results of the
above, Lamella Wastewater System installations, show that our technology
improves the stability of the settling deposition, increases the available
settling area, shortens the settling distance for waste particles, reduces the
settling time, and results in particle removal efficiency rates of up to 99%.
After treatment with our technology and system, coal gas wastewater and
wastewater containing iron mineral powder can be reused and returned to the
production process without further treatment, allowing users to create a
closed-loop. This lowers the overall use of industrial water for the enterprises
utilizing our technology, reduces the output of solid industrial waste, and
improves the efficient use of resources.





Compared
with alternative inclined plate technology, the Lamella Wastewater System has
several important advantages as shown in the following table:





Normal
      Inclined Plate Settling Pool
                        
                        Lamella
      Inclined Tube SettlerWater
      power staying time 30 min, surface load 3m3/m2·h, small volume, small
      space use coefficient, short waterpower process (with short current in
      winter).
                        
                        Water
      power staying time 45 min with surface load 8m3/m2·h, large
      use coefficient, long water power process.First
      settling, is not fit for a wide range wave of floats, affected by the
      stability and effect of the water outlet
                        
                        Tertiary
      settling (with sludge abstraction collection system in every layer)
      anti-pump load, no interference between water inlet and sludge outlet,
      water outlet
stable.


12





Water
      inlet float content: SS3000 ~ 5000mg/L, water outlet float content: SS100
      ~ 200 mg/L, low treatment efficiency.
                    
                    Water
      inlet float content: SS3000 ~ 16000mg/L water outlet float content: SS50 ~
      80 mg/L, high treatment efficiency.Inclined
      plate, inclining angle 60 degree, small settling deposition
      area.
                    
                    Inclined
      plate, inclined tube inclining angle 450,
      results show that the smaller the inclining angle of the inclined tube or
      plate, the smaller the settling particles removed, the higher settling
      efficiency for removal of particulate matter.Adopt
      glass steel and compound Nylon Ether ketone, easy to age degrade and
      become clogged with sludge, needs to be changed often, has high operation
      and maintenance costs.
                    
                    Compound
      new material plate, PP inner Surface Coating, resistant corrosion, smooth
      and clean surface, minimal sludge collection.Small
      sludge abstraction area, bad sludge water abstraction efficiency, short
      life cycle of the sludge outlet, high and unstable water content of
      sludge, adds difficulty to the next sludge treatment
    process.
                    
                    With
      sludge water abstraction area and dust collection transmission device,
      long sludge outlet circle, special sludge disposal equipment sludge
      outlet, lower water content of sludge, convenient for new process to
      recycle.





The
      low carbon steel structures - such as pool surface frame - exposed to
      humidity and high temperature, easily corrode, which greatly reduces the
      life of equipment.
                
                Lamella
      Inclined Tube Settler system is enclosed, the high humidity of the tank
      will not cause corrosion of the equipment.Occupies
      large area - large footprint, strict requirement for
      placement.
                
                Occupying
      small area - small footprint - equipment can save over 30% area to treat
      same amount of water and is flexible for installation.Complicated
      system technique, complicated equipment configuration, high maintenance,
      inconvenient for use with automated control, often creates secondary
      pollution.
                
                Short
      technical process, simple equipment, low failure rate - high MTBF, easy
      maintenance, highly automated, low operational cost, closed-end
      circulating treatment, without secondary
  pollution.





Circulating,
Fluidized Bed, Flue Gas Desulphurization System.





The
Circulating, Fluidized Bed, Flue Gas Desulphurization System (the
“Desulphurization System”) is a highly effective system that removes particulate
sulphur from flue gas emissions generated by the sintering process in the
production of iron and steel (a process in which sulphur and other impurities
are removed from iron ore by heating, without melting, pulverized iron ore) with
the resulting discharge meeting all relevant PRC air pollution standards.
Without treatment, flue gasses that result from sintering contain high content
of sulphur dioxide which reacts with atmospheric water and oxygen to produce
sulphuric acid that precipitates as “acid rain.”  As illustrated
below, the Desulphurization System is comprised of a desulphurization agent
inlet system, circulating fluidized bed desulphurization reactor, dust removal
system, desulphurization dust removal treatment system, desulphurization wind
pump system, monitoring system, electrical control system, and smoke flue
system.


13








The
Desulphurization System utilizes proprietary technology jointly developed by
RINO and the Chinese Academy of Sciences. On May 18, 2007, Dalian Rino acquired
the intellectual property rights to this technology (including the right to
patent the same) from the Chinese Academy of Sciences for RMB
1,000,000.





As
compared with equipment using other desulphurization technologies, our
proprietary technology has the following advantages: our equipment has a smaller
footprint, a shorter circulation process and a low calcium sulphur ratio, the
cost of operating the system is lower; the system is more efficient with higher
desulphurization rates (for coal with a high (i.e., 6%) sulphur content,
desulphurization rates can reach 92%). Our desulphurization process does not
generate wastewater, dust or other secondary pollutants. In addition, the costs
for the manufacturing and installation of the equipment are relatively
affordable to the targeted iron and steel mills.


Although
historically we have concentrated our marketing and efforts for this system in
the PRC iron and steel industry, the technology also can be widely used in
fields such as metallurgy, electrical power generation, rubbish treatment. We
plan to expand our sales and marketing to such additional applications both in
the PRC and internationally.





High Temperature
Anti-Oxidation System for Hot Rolled Steel





The
Anti-Oxidation System is a set of products and a mechanized system, to
substantially reduce oxidation-related output losses in the production of
continuous cast, hot rolled steel.   In the process of continuous
cast, hot rolled steel, oxidation-related output loss ranges from 2% -5% on
average. This translates into a loss of production output or throughput of
2%-5%.  Our Anti-Oxidation System reduces oxidation-related output
loss by over 60%, from the current level of approximately 3% to around
1.2%.  In addition, oxidation in high-temperature steel production
results in the waste of water and energy and generates pollution.  In
the United States, Japan, and Europe, technology has been developed to
ameliorate this problem, but the cost of the coating used in the process and the
inability of the equipment to be utilized in high temperature environments
limits its application to specialty steel products such as stainless steel, and
silicon and carbide steel products.





Our
Anti-Oxidation System is specifically designed to work effectively with hot
rolled steel product in high temperature environment.  As illustrated
below, our system operates at significantly higher product temperatures than its
competitors, thereby increasing its general utility and its range of steel
product applications.  We believe that in design and technology the
Anti-Oxidation System is the only anti-oxidation process available for the iron
and steel industry (both in the PRC and internationally) that can be applied in
high temperature environments, and is a unique solution to the loss of
production output due to high-temperature oxidation, which is a long-standing
problem in the world-wide iron and steel industry.


14







The
technology used in our Anti-Oxidation System is jointly developed by Dalian RINO
and the Chinese Academy of Sciences. In March, 2006, Dalian Rino acquired the
technology from the Chinese Academy of Sciences under an agreement that provides
for the co-ownership of the intellectual property rights to the formula for the
anti-oxidizing paint used in the system and to the spray system for applying the
paint, co-ownership of any patents granted, and the transfer to Dalian Rino of
all commercialization rights.





As hot
rolled steel consists of approximately 90% of the PRC steel production and 90%
of world-wide production, we believe that our technology has a far broader
market both in China and internationally than is the case for competing systems
and technologies.





Each unit
of our Anti-Oxidation System services one steel line and costs approximately
$1.4 million installed.  The coating material developed by Dalian Rino
for use with the anti-oxidation equipment can be produced at relatively low cost
at approximately $1,264 per ton which covers approximately 1180 tons of steel.
The coating material is usable in high temperature environments and is easily
applied in a uniform manner. That coating can be directly sprayed onto hot steel
slabs at temperatures of 600°-1000° C, thereby saving the increased costs and
energy utilization that all other anti-oxidation equipment entails.





In July
2007, our Anti-Oxidation System has first been installed, tested and accepted by
Jinan Iron & Steel Group Co., a major PRC steel manufacturer. The
installation results show that the coating system fully conforms to the hot
rolling mill environment, effectively reduces oxidation loss by 60%, saves
energy, and increases production throughput.





Additional
Line of Business





In
addition to the environmental remediation and protection systems above, since
late 2005 we have also being using our over capacity during “down time” to
perform contract machining services for third-party industrial
enterprises.





The
specialized heavy machinery and equipment that we use to produce our Lamella
Wastewater System, Desulphurization System and Anti-Oxidation System also
provides us with a substantial capacity to undertake the machining of
large, high-precision and advanced structures from areas outside of northeast
China. To this end, Dalian Rino established and the Company maintains strategic
cooperation relationships with Dalian Heavy Industry (Zhonggong) and China First
Heavy Industries with which we contract to provide production time on our
heavier machine tools, during “down time” on our own production. For fiscal
years 2006, 2007 and 2008, such contract manufacturing business has provided the
Company with $3,608,075, $13,021,070 and $13,884,528 in revenues, respectively,
and $2,473,614, $6,625,134 and $6,702,975 in gross profit,
respectively.




The
Company expects that as sales of its own products increase, we will reduce or
eliminate contracting the use of our machines and equipment to third
parties.


15


New
Products and Product Development





Integrated
Dust Catching System





In the
first quarter of 2008, the Company commercialized and received initial purchase
orders for a new integrated dust catching system which removes up to 99% of the
dust from sintering iron during the production process and complements its
current desulphurization equipment.





The
integrated dust catching system uses electric preceptors to remove part of the
dust load from flue gases, followed by a bag filtration system, which together
achieve dust removal rates of up to 99%. The integrated dust catching system
completes the treatment of sintering flue gases begun by the Company’s
desulphurization equipment. Adoption of the integrated dust catching system is
being driven in part by China’s regulatory pressure to reduce particulate
emissions to as low as 30mg/cubic meter of flue gas, down from levels usually
above 80mg/cubic meter. New Chinese regulations for dust content of flue gases
in major cities will be comparable to those in place in the European Union. To
date, the Company’s integrated dust catchers have been installed in several
steelmaker in China. The Company anticipates the average selling price will be
around US$2.0 million and the time from contract signing to final installation
will equate to approximately two to three months.





Sludge
Treatment System





In
November 2008, we successfully developed a new sludge treatment system through
cooperation with the Dalian University of Technology. The new sludge treatment
system can be used to treat sludge generated by the municipal wastewater
treatment process, industrial sludge generated by the chemical industry and oil
sludge generated by oil industry. We estimate that there is a market of
approximately $28.8 billion for the treatment of sludge generated by various
municipal wastewater and industrial processing systems in the PRC
market.  To treat the sludge, the first and most critical step is to
remove water from the sludge through a dehydration process, which will reduce
the quantity of the sludge and make it easier to be incinerated. Depending on
the heavy metal content of the desiccated sludge, the final product can be used
as agricultural fertilizer if the heavy metal content is low, or, after further
processing, as a component in various construction materials if the heavy metal
content is high.
 
 The
current best sludge treatment technology available in the PRC market (provided
by a Korean company) allows for a 30% reduction of water in the sludge while our
technology, using superheated steam to dehydrate sludge, provides an improvement
of 10% in water reduction.  In addition, our new sludge treatment
system costs approximately 50% less than imported products and the costs of
daily operation are approximately 45% less. The Chinese government recently
promulgated a new regulation requiring at least 60% of municipal wastewater be
treated by 2010, the implementation of which is expected to significantly
increase the amount of sludge generated by the wastewater treatment process in
China in the next several years. We estimate the profit to process one ton of
sludge generated by municipal wastewater treatment process varies between $12
and $19 depending on the steam source. Currently, approximately 27.8 million
metric tons of sludge is being generated by the wastewater treatment process
annually with a water content of approximately 80%.


Northeastern
China, where Dalian RINO is located, is the oil industry center and this region
generates approximately 2 million tons of oil sludge annually. The profit to
process one ton of oil sludge ranges between $39 and $44.





Dalian
University of Technology has made a patent application for this technology in
China (Application number: 200710011115.0).  Based our agreement with
Dalian University of Technology, Dalian Rino will pay an ongoing royalty of
approximately 5% of sales to the university.


16


Environmental
Challenges in the PRC





China
currently had been in the midst of extraordinarily rapid economic growth and
reform that is closely tied to its pace of industrial development. In 2004, the
PRC’s total industrial output reached RMB 7,238.7 billion (US $934 billion).
Since 1978, China’s real GDP has grown at an average rate of approximately 11.3%
per year, while its share of world trade has risen from less than 1% to almost
8% in the same timeframe. Foreign trade growth has averaged nearly 15% over the
same period, or more than 2,700% in the aggregate. Over the last decade the PRC
has become a preferred destination for direct foreign investment, and in
2005 attracted $72.4 billion in foreign direct investment, according to the
Chinese Ministry of Commerce. China also is competitive in many advanced
technologies and continues to be a preferred destination for the relocation of
global manufacturing facilities in virtually every manufacturing sector. China
is now the fourth largest economy and the third largest trader in the
world.





With the
PRC’s rapid industrial expansion has come its inevitable by-product:
industrially generated pollution of water, the air and the environment,
generally. It is estimated that approximately 80% of China’s environmental
pollution results from industry-produced solid waste, waste water and waste gas
emissions. During the 1990’s the extent of and dangers posed by China’s
increasing levels of environmental pollution became widely perceived and
developed into a priority for the PRC’s central government. During the 2000-2005
period, China expended over $90 billion on environmental protection efforts.
Prior to the global financial crisis, for the eleventh five-year plan
(2006-2010), the PRC is expected to spend approximately $193 billion on such
efforts The reduction or elimination of waste water and airborne pollutants has
become a key element in the country’s next five year economic
plan.





In
addition, in response to the recent global financial crisis, the PRC government
introduced a 4 trillion RMB stimulus program on November 27, 2008. The stimulus
package - to be spread over a period of two years - aimed to boost the
slowing Chinese economy by spurring domestic spending and demand, as its GDP
growth slid to 9% in 2008 after years of double-digit growth. On February 26,
2009, China’s State Council reinforced China’s 2008 stimulation package by
further measures to stimulate specific industries in 2009. Specifically, 5.3% of
the total stimulus package will be spent on sustainable development that
promotes energy saving and environmental control.





Based on
the breakdown of the stimulus spending unveiled by China’s top economic planner,
the National Development and Reform Commission (NDRC), the percentage allocation
of the total stimulus package is as follows: approximately 38% to public
infrastructure (such as railway, road, irrigation, and airport construction),
25% to post-quake reconstruction (construction of low-cost housing,
rehabilitation of slums, and other social safety net projects), 9% to technology
advancement (projects to upgrade the Chinese industrial sector, gearing towards
high-end production to move away from the current export-oriented and
labor-intensive mode of growth),  5% to sustainable development
(projects to promote energy saving and cuts in harmful gas emissions, and
environmental engineering projects), 4% to educational & cultural projects
and 9% to rural development (building public facilities, resettling nomadic
people, supporting agriculture works, and providing safe drinking
water).





Serving
the environmental control needs for the iron and steel industries, we believe we
stand to benefit from the stimulus spending on both environment control related
projects and from the growth of the iron and steel industries which will be
beneficiaries of the infrastructural spending under the stimulus
package.





PRC
Markets for Dalian Rino’s Products and Technologies





Wastewater
Treatment Market.





China is
a country that has limited water resources, with approximately 2,200 cubic
meters per person, or one-fourth the world average. Conservation through the
improvement of usage efficiency is the fundamental way to resolve this tension
between water supply and demand. China’s very high rate of industrial water
consumption (as compared to that of developed countries) offers great potential
for water conservation and re-usage programs. Our principal target market, the
iron & steel industry, consumes large quantities of water by the nature of
the processes employed, and, therefore, has an inherent need to increase
efficiency and thereby reduce its usage costs, as well as reclamation costs and
governmental penalties.


17


Today,
there are approximately 730 iron-making blast furnaces over 300 cubic meters in
size operating in China. Of these, 495 have already adopted wastewater treatment
facilities, some of which are utilizing the traditional inclined plate settling
pool technology, while 235 have no wastewater treatment whatsoever. The average
cost of equipment for wastewater treatment of a blast furnace of this size is
$2,000,000. Additionally, there are 670 steel-making converters in China with a
capacity of over 75 tons. 360 of these converters have existing wastewater
treatment equipment, while 310 converters have no wastewater treatment
facilities whatsoever.   The average cost of equipment for a
converter of this size is $1,700,000. The PRC government has mandated that all
blast furnaces and converters have wastewater treatment facilities in place by
2012. Accordingly, these mandates have created a $216 million annual market for
the next several years.





In
addition to the blast furnaces and converters with no wastewater treatment
facilities, we believe that there is a large replacement market potential for
those operations with wastewater treatment systems that utilize the traditional
inclined plate settling pool technology. This is older technology introduced by
the former Soviet Union in the late 1970s and applied in iron & steel
industry in the 1980s. Compared with our proprietary Lamella Wastewater System
technology, wastewater treatment systems using the traditional inclined plate
settling pool technology has lower throughput capability, a much larger
footprint and involves high maintenance requirements and expenses. Based on our
market research with our end-use customers as well as market investigation with
other iron & steel foundries and mills, we believe there will be a
substantial need to replace this aging technology in 10 years, thereby creating
an additional market of $87,900,000 for blast furnace and converter retrofits
based on an average cost of $2 million to retrofit a blast furnace and $1.7
million to retrofit a converter.





Using
proprietary and patented technology which removes up to 98% of particulates,
producing 100-150 m3 of effluent water per hour with an average of 50mg/L of
particulates, we believe our Lamella Wastewater System has been a market leader
for wastewater treatment in the iron & steel industry.  For fiscal
years 2007 and 2008, revenues generated from our wastewater treatment business
was $7.0 million and $14.4 million, respectively, representing 11.0% and 10.4%
of our total revenues for fiscal years 2007 and 2008, respectively.




Desulphurization
Market





In China,
the main cause of airborne pollution is sulfur dioxide emissions from coal.
According to joint research by the Chinese Institute of Environmental Science
and Tsinghua University, sulphur dioxide-induced acid rain costs China over
$13.3 billion annually in various losses, and atmospheric pollution results in
an annual loss equivalent to two or three percent of China's GDP.





In 2005,
the latest year for which statistics are available, the Chinese iron & steel
industry discharged 1.24 million metric tons of sulphur dioxide into the
atmosphere. Decades of lightly monitored growth in this industry sector, with
little or no consequences attached to sulphur dioxide emissions, combined with
mandatory, industry-wide sulphur dioxide reductions over the next few years,
presents the industry with a pressing need to remediate these emissions from
iron & steel sinters.





Based on
government mandates, over the next few years, coal-fired sinters and other like
furnace operations must install desulphurization equipment or face stiff,
monthly penalties or, possibly, have their operations shut down. We believe
that, because our Desulphurization System is the only sinter processing
equipment available in the PRC market that is specifically designed for flue gas
desulphurization applications that are larger than 90 square meters - the
standard size for sinter operations in the PRC iron & steel industry - the
Company has a substantial competitive advantage over its international
competitors.


18


Today,
there are around 200 coal-fired sinters in China without flue gas
desulphurization equipment (this number is expected to rise along with the
expansion of China’s iron and steel industry).  Prior to June 2008,
government policy only capped total gas emissions in a geographic area and there
was no restriction on the gas emissions of any individual coal-fired sinter.
Accordingly, some coal-fired sinters only had desulphurization equipment that
partially treated their gas emissions and some had no desulphurization equipment
installed so long as the emission cap in the area was not
exceeded.  After June 2008, the government tightened gas emission
control and is now requiring all coal-fired sinters to have desulphurization
equipment installed.  This translates into a cumulative market for our
desulphurization technology of more than $1 billion in the next few years based
on our estimate. We plan to penetrate this market aggressively by marketing the
Desulphurization System as a turn-key solution for the Chinese iron & steel
industry’s sulphur dioxide emission problems.





Our
desulphurization system has been installed in steel mills such as Jinan Iron
& Steel Co., Panzhihua Iron & Steel, Shengfeng Iron & Steel, Handan
Iron & Steel, Chongqing Iron & Steel.  and Kunming Iron &
Steel, Hulingnianyuan Iron and Steel, Nanchangchangli Iron & Steel, Qianjing
Iron & Steel and Yuhua Iron & Steel.  For fiscal years 2007
and 2008, revenues generated from our desulphurization business was $33.1
million and $105.3 million, respectively, representing 52.3% and 75.6% of our
total revenues for fiscal years 2007 and 2008, respectively.





Anti-Oxidation
Market




The
oxidation of hot rolled steel results, on average, in the loss of 3% of the
output in steel production. Although a number of U.S. and European
anti-oxidation systems are available internationally, the high costs of the
paints and coatings they use, as well as their ineffectiveness at high
temperatures, have limited their application and utility to low temperature,
specialty steel products. The suppliers of these anti-oxidation systems include
America Advanced Technical Products, ATP Metallurgical, Duffy, Condursal, and
Berktekt. Because of the high cost of usage, these paint/coating systems are all
applied on only specialty steel and additionally, have limitations of low
temperature application - they cannot be used on-line.




Importantly,
the temperature range limitations of these systems prevent them from being used
“on-line” in the high temperature ranges of hot rolled steel products, which
historically account for over 90% of the PRC’s crude steel production. China is
estimated to have produced approximately 500 million tons of steel in 2008, of
which the expected output of hot rolled steel is estimated at 450 million tons.
On this basis, it can be expected that, if not treated, China would lose
approximately 13.5 million tons from its 2008 hot rolled steel production - a
volume that is equal to a large steel producer’s annual output. Unlike its
international competition, our Anti-Oxidation System is specifically designed to
use less costly coating material and to operate effectively at temperatures
ranging from 600° - 1,000° C - the environment of hot rolled steel plate. Based
on the confirmed results of the installation of our anti-oxidation equipment and
technology at Jinan Iron & Steel in 2007, we believe that the Anti-Oxidation
System reduces hot rolled steel oxidation loss by a minimum of 60%. This would
have resulted in an increase of 8.1 million tons of China’s 2008 output, and
estimated commensurate savings in coal (6.4 million tons) and water (80 million
tons) consumption for processing and throughput.




Using the
PRC hot rolled steel estimate for 2008 as a benchmark, we estimate that the full
application of the Anti-Oxidation System to that projected production output
would result in approximately $567,000,000 in water and cost savings per
year.





With
these factors in mind, we believe that our Anti-Oxidation System can achieve a
significant degree of penetration in the PRC market, as it addresses a domestic
production need which is beyond the applicability of presently available U.S.
and European technologies and systems.





For
fiscal years 2008 and 2007, revenues generated from our anti-oxidation business
was $5.7 million and $2.0 million, respectively, representing 4.1% and 3.1% of
our total revenues for fiscal years 2008 and 2007,
respectively.


19


Raw
Materials Supply





The
principal raw materials used in our business are steel and steel products,
ancillary components used in our final products (such as motors), electrical
cable, lubricants, cutting and welding material, and special plastic tubes used
in our wastewater treatment system.  Our principal supplier, Dalian
Shuntongda Trading Co., Ltd., provided approximately 82% of the Company’s
purchases of raw materials for the year ended December 31, 2008 and 95% of the
Company’s purchase of raw materials for the year ended December 31, 2007. Dalian
Shuntongda is well connected in the iron and steel industries and can obtain
steel and steel products from numerous suppliers in the PRC market at favorable
(often below market) prices.  In addition, we are able to purchase
steel and steel products from other suppliers and we intend to work with other
qualified suppliers if the supply terms are more competitive than the existing
terms available to us.





Intellectual
Property





Set forth
below is a list of the patents that we own or with regard to which we have
submitted applications for patent approval:





Jurisdiction
                                                                                                                                              
                                                                                                                                              Project
      description
                                                                                                                                              
                                                                                                                                              Patent
      No.
                                                                                                                                              
                                                                                                                                              Patent
      type
                                                                                                                                              
                                                                                                                                              Patent
      Status
                                                                                                                                              
                                                                                                                                              Expiration
      DateChina
                                                                                                                                              
                                                                                                                                              Desilting
      Inclined Plate and Tube Settler in Full Automation
                                                                                                                                              
                                                                                                                                              200920010319.7
                                                                                                                                              
                                                                                                                                              Practical new
                                                                                                                                              
                                                                                                                                              Application
      under reviewChina
                                                                                                                                              
                                                                                                                                              Inclined
      Plate and Tube Settler of Deposition with Three Continuous Processes
                                                                                                                                              
                                                                                                                                              200920010318.1
                                                                                                                                              
                                                                                                                                              Practical new
                                                                                                                                              
                                                                                                                                              Application
      under reviewChina
                                                                                                                                              
                                                                                                                                              Slurry
      Cleaning Equipment
                                                                                                                                              
                                                                                                                                              032119135
                                                                                                                                              
                                                                                                                                              Practical new
                                                                                                                                              
                                                                                                                                              Granted
                                                                                                                                              
                                                                                                                                              March 13, 2013China
                                                                                                                                              
                                                                                                                                              Wastewater
      comprehensive treatment system and method
                                                                                                                                              
                                                                                                                                              ZL03111178.5
                                                                                                                                              
                                                                                                                                              Invention patent
                                                                                                                                              
                                                                                                                                              Granted
                                                                                                                                              
                                                                                                                                              March 13, 2023China
                                                                                                                                              
                                                                                                                                              Desulphurization
      Process of Sintering Flue Gas
                                                                                                                                              
                                                                                                                                              200810128193.3
                                                                                                                                              
                                                                                                                                              Invention
      patent
                                                                                                                                              
                                                                                                                                              Application
      under reviewPCT
      International
                                                                                                                                              
                                                                                                                                              Antioxidation
      Coating for Steel and Antioxidation Method Using the Same
                                                                                                                                              
                                                                                                                                              7494692
                                                                                                                                              
                                                                                                                                              Invention patent
                                                                                                                                              
                                                                                                                                              Granted
                                                                                                                                              
                                                                                                                                              April 3, 2028PCT
      International
                                                                                                                                              
                                                                                                                                              Inorganic
      Composite Binders with High-temperature Resistance
                                                                                                                                              
                                                                                                                                              PCT/CN2007/000568
                                                                                                                                              
                                                                                                                                              Invention patent
                                                                                                                                              
                                                                                                                                              Application
      under reviewPCT
      International
                                                                                                                                              
                                                                                                                                              Anti-oxidation
      Spray Methods and Spray Equipment for Steel Billets
                                                                                                                                              
                                                                                                                                              PCT/CN2007/001475
                                                                                                                                              
                                                                                                                                              Invention patent
                                                                                                                                              
                                                                                                                                              Application
      under review





International
patent applications are administered under the Patent Cooperation Treaty (the
“PCT”). A PCT application covers all the PCT member countries, which include
most major industrialized countries. The PRC became a member of the PCT in
1994.


20


There are
two phases in a PCT application. The first phase is the International Phase.
Under this phase, an applicant like the Company can file an application using
Chinese language in the PRC. Then it will have one year to claim the priority of
its PRC filing date in other member countries. The main benefit of filing under
the PCT instead of directly in the member countries is to allow an applicant to
delay the “National Phase” filing in the member countries up to 30 months from
the initial filing, which is 18 months more than the applicant would normally
have when filing directly in foreign countries. During this International Phase,
the applicant can gather more market information and have more time to make
decisions about where to file patent applications. At the end of the
International Phase period, it will enter the National Phase by filing national
applications in each country in which the applicant desires a patent. The
Trade-Related Aspects of Intellectual Property Rights (the “TRIPS”) determine
the term of a patent applied under the PCT in the member countries.





Trademark and
Logo.





The
Chinese version of the “RINO” trademark,绿诺,and associated
logo are both registered by Dalian Rino in the PRC. Their perpetual,
royalty-free use by Dalian Innomind is authorized as part of the Restructuring
Agreements.





Other Intellectual Property Rights
Protections in the PRC.




In
addition to patent protection law in the PRC, we also rely on contractual
confidentiality provisions to protect our intellectual property rights and our
brand. The Company’s research and development personnel and executive officers
are subject to confidentiality agreements to keep our proprietary information
confidential. In addition, they are subject to a three-year covenant not to
compete following the termination of employment with our Company. Further, they
agree that any work product belongs to our Company.





Customers





Historically,
we generate revenues from large scale projects based on long-term fixed price
contracts with customers for the manufacturing and installation of customized
industrial equipment.  Five major customers accounted for 88% of the
sales for the year ended December 31, 2007. Due to the size of our projects, we
generally work on a limited number of projects with a limited number of
customers at any given period of time.  Generally, each of our
projects involves the manufacturing, installation and testing of the equipment
we sell. Due to the size of our projects and the length of time to complete our
projects (averaging six to eight months), it appears that our revenues are
generated from a limited number of customers at any given period of
time.  However, we do not rely on a limited number of customers for
revenue generation over time, as they constantly
change.   Nevertheless, given the cost of our Lamella Wastewater
System, Desulphurization System and Anti-Oxidation System products, we believe
that for the foreseeable future the Company will continue to rely on large
customers for a substantial portion of its gross revenues. There are
approximately 34 iron and steel companies in the PRC of a size and with annual
production levels that make our products feasible for sale and
installation.  In order to expand our sales, we plan to capture
increasing numbers of these potential customers for primary product sales, and
aggressively cross-sell our products to each customer.In fiscal year 2008, we
enlarged our customer base and revenue generation was much less
concentrated.  As a result, 2008 revenues generated from our prior
year top customers did not account for a large percentage of total revenues in
fiscal year 2008. In fiscal year 2008, revenues generated from our top six
customers accounted for 34.7% of our total gross revenues.





During
the year ended December 31, 2008, the Company has enlarged its customer base and
no customer accounted for more than 10% of the Company’s total sales, and during
the year ended December 31, 2007, the Company made sales to a small number of
customers with five customers accounting for 88% of the Company’s total sales.
Accounts receivable from those five customers totaled $18,479,541 as of December
31, 2007.


21


Competition





Lamella
Wastewater System.





Prior to
Dalian Rino’s introduction of its Lamella Wastewater System, the typical
industrial wastewater treatment technology used in China relied on an inclined
“plate settling pool” process. Such systems continue to be generally available
in the PRC, and a substantial portion of them are self-installed by iron and
steel companies. The Lamella Wastewater System’s advanced technology results in
the following competitive advantages: lower installation and usage costs,
increased throughput, smaller equipment footprint, and lower ongoing maintenance
costs. We know of no comparable technology presently available in China, and we
will emphasize the foregoing cost and efficiency advantages as we compete for
customers.




Desulphurization
System.





In the
PRC, the sulphur dioxide emitted in flue gases from the sintering of iron
during steel-making, is a major component of the environmental pollution that
has followed China’s industrial expansion. Sintering is a step in steel-making,
in which sulphur and other impurities are removed from raw iron by heating
(without melting) pulverized iron ore. Removing the sulphur dioxide from a steel
mill’s hot flue gas emissions is, therefore, a principal way of controlling acid
rain.


Presently
in China, major companies engaged in the desulphurization equipment market
include: Beijing Guodian Longyuan Environmental Company, Zhejiang Feida Company,
Fujian Longjing Environmental Company, Wuhan Kaidi Electric Power Company,
Jiulong Electric Power Company, and Qinghua Tongfang Company. To the best of our
knowledge, these companies have little or no production and installation
experience in the iron and steel industry, and do not currently design or
manufacture equipment that is applicable to sintering processes. We believe we
are the first company to design, manufacture and complete an iron and steel
sinter machine desulphurization installation in the PRC. Accordingly, we do not
expect to have any direct competitors in this sector for approximately 2-3 years
- the minimum time necessary for potential competitors to complete product
development.





Anti-Oxidation
System.





We
believe that the Company’s Anti-Oxidation System is unique and virtually without
competition in the China market. We know of no entity other than the Company
that is engaged in developing or supplying anti-oxidation technology that can
operate on-line at the high temperatures (600° - 1,000° C) involved in hot
rolled steel production - which represents 90% of China’s steel output. A number
of anti-oxidation technologies are available internationally from suppliers that
include: Advanced Technical Products Company, ATP Metallurgical Coatings, Duffy
Company, Condursal and Berktekt. However, the high costs of the anti-oxidizing
coatings these technologies rely on, and most especially their ineffectiveness
at high temperatures, have limited their market to specialty steels, and have
made them ill-suited to China’s iron and steel industry.




Research
and Development; Growth Strategy





In 2008,
Dalian Rino expended approximately $0.7 million for product research and
development, approximately $0.6 million of which was directed at flue gas
desulphurization and $0.1 million was directed at the new sludge treatment
system.  In 2007, Dalian Rino expended approximately $0.8 million for
product research and development, approximately $0.5 million of which was
directed at anti-oxidation research and approximately $0.3 million of which was
directed at flue gas desulphurization. The Company’s continuing research and
development program is linked to our growth strategy directed towards 2009 and
several years thereafter, during which time we will develop export markets for
our products in the United States and Western Europe and seek to develop new
applications for our products suited to and targeted at these new, international
markets.  In conducting our research and development, the Company
expects to continue its collaborative relationship with the Chinese Academy of
Sciences, and also collaborate with Dalian Technology
University.


22


ITEM
1A. RISK FACTORS





An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this report before deciding to invest in our common stock.





If any of
the following risks, or any other risks not described below because they are
currently unknown to us or we currently deem such risks as immaterial but they
later become material, actually occurs, it is likely that our business,
financial condition, and operating results could be seriously harmed. As a
result, the trading price of our common stock could decline and you could lose
part or all of your investment.





Risks
Related to our Business





The
recent global financial crisis could negatively affect our business,
results of operations, and financial condition.





The
recent credit crisis and turmoil in the global financial system may have an
adverse impact on our business and our financial condition, and we may face
challenges if conditions in the financial markets do not improve.  Our
ability to access the capital markets may be restricted at a time when we would
like, or need, to raise capital, which could have an impact on our flexibility
to react to changing economic and business conditions.  In addition,
these economic conditions also impact levels of commercial and
consumer spending, which have recently deteriorated significantly and may remain
depressed for the foreseeable future.  It is uncertain how long the
global crisis in the financial services and credit markets will continue and how
much of an impact it will have on the global economy in general or the Chinese
economy in particular.  If demand for our products and services
fluctuates as a result of economic conditions or otherwise, our revenue and
gross margin could be harmed.





Pollution
control for China’s iron and steel sector is a relatively immature and growing
sector, but we do not know how sensitive we might be to a slowdown in economic
growth or other adverse changes in the PRC economy which might affect demand for
iron and steel pollution control equipment. A slowdown in overall economic
growth, an economic downturn, a recession or other adverse economic developments
in the PRC could significantly reduce the demand for our products and harm our
business.





Although
compliance with environmental regulations suggests continued growth with respect
to our target market, we believe that the success and growth of our business for
the foreseeable future will continue to depend upon the sustained presence of
clients in our target markets, primarily associated with the iron and steel
industries.  Our client's need to comply with government
regulations extends only to the degree that they survive the current economic
crisis.  As such, many of our customers may be subject to
budgetary constraints and our continued performance under our contracts
could be jeopardized by spending reductions or budget cutbacks atthese
clients.





Our limited operating history may
not serve as an adequate basis to judge our future prospects and results of
operations.




Dalian
Rino began its operations in 2003. Our limited operating history in the
environmental protection industry may not provide a meaningful basis on which to
evaluate our business. Although Dalian Rino’s revenues have grown rapidly since
its inception, we cannot assure you that we will maintain our profitability or
that we will not incur net losses in the future. We expect that our operating
expenses will increase as we expand. Any significant failure to realize
anticipated revenue growth could result in significant operating losses. We will
continue to encounter risks and difficulties frequently experienced by companies
at a similar stage of development, including our potential failure
to:


·
            maintain our cutting edge
      proprietary technology;


23


·
            expand our product offerings and
      maintain the high quality of our
  products;





·
            manage our expanding operations,
      including the integration of any future
    acquisitions;




·
            obtain sufficient working capital
      to support our expansion and to fill customers’ orders in
      time;





·
            maintain adequate control of our
      expenses;




·
            implement our product
      development, marketing, sales, and acquisition strategies and adapt and
      modify them as needed;




·
            anticipate and adapt to changing
      conditions in the iron and steel industry markets in which we operate
      as well as the impact of any changes in government regulation, mergers and
      acquisitions involving our competitors, technological developments and
      other significant competitive and market
  dynamics.




If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.





We
may encounter substantial competition in our business and our failure to compete
effectively may adversely affect our ability to generate revenue.





We
believe that existing and new competitors will continue to improve the design
and performance of their products and to introduce new products with competitive
price and performance characteristics. We expect that we will be required to
continue to invest in product development and productivity improvements to
compete effectively in our markets. Our competitors could develop a more
efficient product or undertake more aggressive and costly marketing campaigns
than ours, which may adversely affect our marketing strategies and could have a
material adverse effect on our business, results of operations and financial
condition.





Our major
competitors may be better able than we to successfully endure downturns in our
industrial sector. In periods of reduced demand for our products, we can either
choose to maintain market share by reducing our selling prices to meet
competition or maintain selling prices at the expense of our market share. Sales
and overall profitability would be reduced in either case. In addition, we
cannot assure you that additional competitors will not enter our existing
markets, or that we will be able to compete successfully against existing or new
competition.





Our
inability to fund our capital expenditure requirements may adversely affect our
growth and profitability.





Our
continued growth is dependent upon our ability to raise capital from outside
sources. Our ability to obtain financing will depend upon a number of factors,
including:




·
            our financial condition and
      results of operations,




·
            the condition of the PRC economy
      and the environmental protection product industry in the PRC,
      and




·
            conditions in relevant financial
      markets


24


As a
result of slowing global economic growth, the credit market crisis, declining
consumer and business confidence, fluctuating commodity prices, and other
challenges currently affecting the global economy, our ability to raise
financing from outside sources is adversely affected. If we are unable to obtain
financing, as needed, on a timely basis and on acceptable terms, our financial
position, competitive position, growth and profitability may be adversely
affected.





We may not be
able to effectively control and manage our growth





Our sales
revenues have increased from $63.4 millionfor the fiscal year
ended December 31, 2007 to $139.3 million for the fiscal year ended
December 31, 2008. If our business and markets continue to grow and develop, it
will be necessary for us to finance and manage expansion in an orderly fashion.
In addition, we may face challenges in managing expanding product offerings and
in integrating acquired businesses with our own. These eventualities will
increase demands on our existing management, workforce and facilities. Failure
to satisfy these kinds of increased demands could interrupt or adversely affect
our operations and cause production backlogs, longer product development time
frames and administrative inefficiencies.




If
we are unable to successfully complete and integrate strategic acquisitions in a
timely manner, our growth strategy may be adversely impacted.





An
important element of our growth strategy is expected to be the pursuit of
acquisitions of other businesses that increase our existing market share and
expand our production capacity.  However, integrating businesses
involves a number of special risks, including the possibility that management
may be distracted from regular business concerns by the need to integrate
operations, unforeseen difficulties in integrating operations and systems,
problems relating to assimilating and retaining the employees of the acquired
business, accounting issues that arise in connection with the acquisition,
challenges in retaining customers, and potential adverse short-term effects on
operating results. In addition, we may incur debt to finance future
acquisitions, and we may issue securities in connection with future acquisitions
that may dilute the holdings of our current or future stockholders. If we are
unable to successfully complete and integrate strategic acquisitions in a timely
manner, our growth strategy may be adversely impacted.





Due
to the large size of our projects, we may depend on a concentration of customers
at a given period of time.





Historically,
we generate revenues from large scale projects based on long-term fixed price
contracts with customers for the manufacturing and installation of customized
industrial equipment.  Five major customers accounted for 88% of the
sales for the year ended December 31, 2007. Due to the size of our projects, we
generally work on a limited number of projects with a limited number of
customers at any given period of time.  Generally, each of our
projects involves the manufacturing, installation and testing of the equipment
we sell. Due to the size of our projects and the length of time to complete our
projects (averaging six to eight months), it appears that our revenues are
generated from a limited number of customers at any given period of
time.  However, we do not rely on a limited number of customers for
revenue generation over time, as they constantly
change.   Nevertheless, given the cost of our Lamella Wastewater
System, Desulphurization System and Anti-Oxidation System products, we believe
that for the foreseeable future we will continue to rely on large customers for
a substantial portion of our gross revenues. Our inability to continue to secure
and maintain a sufficient number of large customers would have a material
adverse effect on our business, operating results and financial condition.
Moreover, our success will depend in part upon our ability to obtain orders from
new customers, as well as the financial condition and success of our customers
and general economic conditions.





Any
significant fluctuation in price of our raw materials may have a material
adverse effect on the manufacturing cost of our products.





The
prices of steel, electronic components and power systems, valves, machine tools,
paints and welding rods, our principal raw materials, are subject to market
conditions and generally we do not, and do not expect to, have long-term
contracts with our suppliers for those items. While these raw materials are
generally available and we have not experienced any raw material shortage in the
past, we cannot assure you that the necessary materials will continue to be
available to us at prices currently in effect or acceptable to us. The prices
for these raw materials have varied significantly and may vary significantly in
the future. Numerous factors, most of which are beyond our control, influence
prices of our raw material. These factors include general economic conditions,
industry capacity utilization, vendor backlogs and transportation delays and
other uncertainties.


25




We may
not be able to adjust our product prices, especially in the short-term, to
recover cost increases in these raw materials. Our future profitability may be
adversely affected to the extent we are unable to pass on higher raw material
costs to our customers.
 
 We
may engage in future acquisitions that could dilute the ownership interests of
our stockholders, cause us to incur debt and assume contingent
liabilities.
 
 As part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
augment our market coverage or enhance our technological capabilities, or
otherwise offer growth opportunities. From time to time we review investments in
new businesses and we expect to make investments in, and to acquire, businesses,
products, or technologies in the future. In the event of any future
acquisitions, we could:
 ·
              issue
      equity securities which would dilute current stockholders’ percentage
      ownership;
  ·
              incur substantial
      debt;
  ·
              assume contingent liabilities;
      or
  ·
              expend significant
      cash.
  These
actions could have a material adverse effect on our operating results or the
price of our common stock. Moreover, even if we do obtain benefits in the form
of increased sales and earnings, there may be a lag between the time when the
expenses associated with an acquisition are incurred and the time when we
recognize such benefits. Acquisitions and investment activities also entail
numerous risks, including:
  
 ·
              difficulties in the assimilation
      of acquired operations, technologies and/or
    products;
 
 ·
              unanticipated costs associated
      with the acquisition or investment
  transaction;
  ·
              the diversion of management’s
      attention from other business
concerns;
  ·
              adverse effects on existing
      business relationships with suppliers and
  customers;
  ·
              risks associated with entering
      markets in which we have no or limited prior
      experience;
  ·
              the potential loss of key
      employees of acquired organizations;
and
  ·
              substantial charges for the
      amortization of certain purchased intangible assets, deferred stock
      compensation or similar
items.
  We cannot
ensure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we might acquire in the future, and our failure
to do so could have a material adverse effect on our business, operating results
and financial condition.
  26
  We
may not be able to prevent others from unauthorized use of our patents, which
could harm our business and competitive position.
  Our
success depends, in part, on our ability to protect our proprietary
technologies. We own three patents in the PRC covering our waste water treatment
technology. We also have two international invention patents pending and have
applied for an additional international invention patent for our anti-oxidation
technology under the International Patent Cooperation Treaty. The process of
seeking patent protection can be lengthy and expensive and we cannot assure you
that our patent applications will result in patents being issued, or that our
existing or future issued patents will be sufficient to provide us with
meaningful protection or commercial advantages.
  We also
cannot assure you that our current or potential competitors do not have, and
will not obtain, patents that will prevent, limit or interfere with our ability
to make, use or sell our products in either the PRC or other
countries.
 
 The
implementation and enforcement of PRC intellectual property laws historically
has not been vigorous or consistent, primarily because of ambiguities in the PRC
laws and a relative lack of developed enforcement mechanisms. Accordingly,
intellectual property rights and confidentiality protections in the PRC are not
as effective as in the United States and other countries. Policing the
unauthorized use of proprietary technology is difficult and expensive, and we
might need to resort to litigation to enforce or defend patents issued to us or
to determine the enforceability, scope and validity of our proprietary rights or
those of others. Such litigation will require significant expenditures of cash
and management efforts and could harm our business, financial condition and
results of operations. An adverse determination in any such litigation will
impair our intellectual property rights and may harm our business, competitive
position, business prospects and reputation.
 
 We may need additional capital to
fund our future operations and, if it is not available when needed, we may need
to reduce our planned development and marketing efforts, which may reduce our
sales revenues.
  We
believe that our existing working capital and cash available from operations
will enable us to meet our working capital requirements for at least the next 12
months. However, if cash from future operations is insufficient, or if cash is
used for acquisitions or other currently unanticipated uses, we may need
additional capital. The development and marketing of new products and the
expansion of distribution channels and associated support personnel requires a
significant commitment of resources. In addition, if the markets for our
products develop more slowly than anticipated, or if we fail to establish
significant market share and achieve sufficient net revenues, we may continue to
consume significant amounts of capital. As a result, we could be required to
raise additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing stockholders.
If additional funds are raised through the issuance of debt securities, such
securities may provide the holders certain rights, preferences, and privileges
senior to those of common stockholders, and the terms of such debt could impose
restrictions on our operations. We cannot assure you that additional capital, if
required, will be available on acceptable terms, or at all. If we are unable to
obtain sufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.
  We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
 
 The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC.  For
instance, our former CFO resigned in September 2008.  Since then, one
of the founders of Dalian Rino and our Chairman of the Board, Qiu Jianping has
bee acting as our principal financial officer. Although we have searched
diligently for a qualified CFO, we have not been able to fill the position to
date.  As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
  27
  Our
recognition of revenue could prove inaccurate.
 
 We use
percentage completion to recognize revenue. The inherent difficulty of measuring
completed output in our projects prior to full completion requires us to
estimate percentage completion by measuring actual inputs in a given period
relative to total estimated inputs required for a project. An incorrect estimate
of total inputs required for a project, or an inaccurate accounting of actual
inputs in any given period could cause us to misstate revenues by a material
amount. If revenues were overestimated or underestimated, net income would also
be over- or underestimated, as would accounts receivable.
 
 Our
accounts receivable have historically been high.
 
 We record
our revenue based on percentage completion, but are paid according to contract
terms which only indirectly use percentage completion, causing leads and lags
between our recording of revenue and our customers’ repayment of receivables.
Moreover, we sell to large steel manufacturers which require time to fulfill
internal control procedures before effecting payment. Finally, performance
retainages of 10% of contract value are recorded at project commissioning and
remain in our accounts receivable until one year after project commissioning.
These factors all combine to raise our receivables as days sales outstanding.
While to date we have only recorded de minimis bad debt, we
cannot guarantee that all our accounts receivable will be collected or that they
will be collected in a timely manner.
 
 We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be adequate.
 
 We are
constantly striving to improve our internal accounting controls. We hope to
develop an adequate internal accounting control to budget, forecast, manage and
allocate our funds and account for them. There is no guarantee that such
improvements will be adequate or successful or that such improvements will be
carried out on a timely basis.  If we do not have adequate internal
accounting controls, we may not be able to appropriately budget, forecast and
manage our funds, we may also be unable to prepare accurate accounts on a timely
basis to meet our continuing financial reporting obligations and we may not be
able to satisfy our obligations under US securities laws.
 
 On May
30, 2008, management of the Company determined in consultation with the
Company’s prior independent accountants that there were material errors in the
presentation of current assets, concentration of risks related to the Company’s
largest customers and cash flows related to the payment of deposits for the
acquisition of property and equipment in the Company’s financial statements for
the fiscal years ended December 31, 2007 and 2006 and that such financial
statements should not be relied upon. As a result, the Company restated the
financial statements in Amendment No.2 to the Annual Report on 10-K for the
fiscal year ended December 31, 2007 (“2007 10-K”) which was filed with the SEC
on June 11, 2008. On July 24, 2008, management of the Company determined in
consultation with the Company’s current and prior independent accountants that
there were also errors in the restated financial statements filed with Amendment
No. 2 to the 2007 10-K as well as the Company’s unaudited financial statements
as of March 31, 2008 and for the three months then ended which were filed with
the SEC as part of the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008 (the “March 2008 10-Q”) causing redeemable stock to be
presented as permanent equity and that such financial statements should not be
relied upon. As a result, the Company restated the financial statements
contained in Amendment No.2 to the 2007 10-K by filing on August 4, 2008
Amendment No.3 to the 2007 10-K and also restated the financial statements
contained in the March 2008 10-Q by filing on August 5, 2008 Amendment No. 1 to
the March 2008 10-Q. The restatements had no effect on the income statement,
including net income and earnings per share for the periods covered by the
restated financial statements.
  28
  On
September 5, 2008, Bruce Richardson resigned from his positions as the Chief
Financial Officer and Secretary of the Company to pursue other interests. The
Company accepted Mr. Richardson’s resignation. Mr. Richardson’s duties were
assumed by Ms. Qiu Jianping and several managers pending the hiring of a
replacement. Although the Company does not believe that Mr. Richardson’s
departure will have an adverse impact on the Company’s operations, there is no
guarantee that prior to the hiring of a new CFO, the Company’s internal
accounting control will not be adversely affected. The Company has been
aggressively seeking replacement of the CFO through international recruiting
firms and is currently interviewing candidates. The Company expects to hire a
new CFO in the near future.
 
 Our internal controls over financial
reporting was ineffective as of December 31, 2008, and management’s report was
not subject to attestation by the Company’s independent auditor  as to
their effectiveness for the fiscal year ended December 31, 2008, which could
have a significant and adverse effect on our business.
 
 The
Company’s management, with the participation of our Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control—Integrated
Framework.  A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be prevented or
detected on a timely basis.  Management assessed and evaluated our
internal controls over financial reporting as of December 31, 2008 and has so
far identified the material weaknesses in our internal control in connection
with: 1. ineffective controls
over accounting for revenues and billing process, 2. ineffective controls over
financial statement closing process, 3.lack of controls over construction in
process and fixed assets management, 4. insufficient U.S. GAAP qualified
accounting and finance personnel, and 5.  lack of internal audit
function.As a result of the material weaknesses described above,
management has concluded that our internal control over financial reporting was
ineffective as of December 31, 2008 based on the “Internal Control— Integrated
Framework” set forth in COSO.
 Management
intends to implement the following measures to remediate the material weaknesses
that had a material impact on our internal control over financial
reporting:
  · Hire
finance personnel with experience with complex revenue recognition rules
including accounting for multiple element contracts.
  ·
                Institute
      a formal contract review process to establish and document the revenue
      recognition events and methodology at the inception of revenue generating
      contracts.
  ·
              Institute
      a new process for review of multiple element contracts with standardized
      documentation which allows for both allocation of revenue based on
      available objective evidence of fair value as well as the associated
      billing schedule.
  ·
              Deliver training
      on revenue recognition principles to sales and operational members of our
      divisions.
  · Enhance
reconciliations, analysis and related reviews for all accounts that give rise to
income tax effects in the financial statements.
  ·
                Hire
      more qualified and experienced accounting personnel to perform the month
      end review and closing processes as well as provide additional oversight
      and supervision within the accounting
  department.
  29
  Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our company's independent registered public
accountants. We believe that the annual assessment of our internal controls
requirement applies to our annual report for the 2008 fiscal year and the
attestation requirement of management's assessment by our independent registered
public accountants will first apply to our annual report for the 2009 fiscal
year. The standards that must be met for management to assess the internal
control over financial reporting as effective are new and complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards.  Even though we intend to adopt measures to remediate the
weaknesses that management has already identified as of December 31, 2008, there
is no guarantee that these remedial measures will be effective. Our lack of
familiarity with Section 404 may unduly divert management’s time and resources
in executing the business plan. If, in the future, management identifies one or
more material weaknesses, or our external auditors are unable to attest that our
management’s report is fairly stated or to express an opinion on the
effectiveness of our internal controls, this could result in a loss of investor
confidence in our financial reports, have an adverse effect on our stock price
and/or subject us to sanctions or investigation by regulatory
authorities.
 Potential
environmental liability could have a material adverse effect on our operations
and financial condition.
 
 To the
knowledge of our management team, neither the production nor the sale of our
products constitutes activities, or generates materials that create any
environmental hazards or requires our business operations to comply with PRC
environmental laws. Although it has not been alleged by PRC government officials
that we have violated any current environmental regulations, we cannot assure
you that the PRC government will not amend the current PRC environmental
protection laws and regulations. Our business and operating results may be
materially and adversely affected if we were to be held liable for violating
existing environmental regulations or if we were to increase expenditures to
comply with environmental regulations affecting our operations.
 
 We
rely on our Chairman and CEO, the founders of Dalian Rino for the management of
our business.
 
 We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Zou Dejun our CEO, and
Ms. Qiu Jianping, our Chairman of the Board. The loss of the services of Mr. Zou
or Ms. Qiu, for any reason, may have a material adverse effect on our business
and prospects. We cannot assure you that the services of Mr. Zou and Ms. Qiu
will continue to be available to us, or that we will be able to find a suitable
replacement for either of them. We carry key man life insurance of $5.0 million
each for Mr, Zou and Ms. Qiu but do not carry key man life insurance for any
other key personnel.
  We
may not be able to hire and retain qualified personnel to support our growth and
if we are unable to retain or hire such personnel in the future, our ability to
improve our products and implement our business objectives could be adversely
affected.
  If one or
more of our senior executives or other key personnel are unable or unwilling to
continue in their present positions, we may not be able to replace them easily
or at all, and our business may be disrupted and our financial condition and
results of operations may be materially and adversely affected. Competition for
senior management and senior technology personnel is intense, the pool of
qualified candidates is very limited, and we may not be able to retain the
services of our senior executives or senior technology personnel, or attract and
retain high-quality senior executives or senior technology personnel in the
future. On September 5, 2008, Bruce Richardson resigned from his positions as
our Chief Financial Officer and Secretary to pursue other interests. We accepted
Mr. Richardson’s resignation. Mr. Richardson’s duties will be assumed by Ms. Qiu
Jianping and several managers pending the hiring of a replacement. Although we
do not believe that Mr. Richardson’s departure will have an adverse impact on
our operations, there is no guarantee that prior to the hiring of a new CFO, our
internal accounting control will not be adversely affected. Although we have
been aggressively seeking replacement of the CFO through international
recruiting firms and is currently interviewing candidates, there is no guarantee
that we will be able to hire a qualified new CFO in the near future. Any failure
for us to attract or retain high-quality senior executives or senior technology
personnel could materially and adversely affect our future growth and financial
condition.
  30
  We
do not presently maintain product liability insurance, and our property and
equipment insurance does not cover the full value of our property and equipment,
which leaves us with exposure in the event of loss or damage to our properties
or claims filed against us.
 We
currently do not carry any product liability or other similar insurance. Unlike
in the U.S. and other countries, product liability claims and lawsuits are
relatively rare in the PRC. However, we cannot assure you that we would not face
liability in the event of the failure of any of our products. We cannot assure
you that, especially as China’s domestic consumer economy and industrial economy
continues to expand, product liability exposures and litigation will not become
more commonplace in the PRC, or that we will not face product liability exposure
or actual liability as we expand our sales into international markets, like the
United States, where product liability claims are more prevalent.
  Except
for property and automobile insurance, we do not have other insurance such as
business liability or disruption insurance coverage for our operations in the
PRC.
 
 Rapid
technological changes in our industry could render our products non-competitive
or obsolete and consequently affect our ability to generate
revenues.
 
 The
environmental protection and remediation industry is subject to rapid
technological change. Our future success will depend on our ability to respond
to rapidly changing technologies and improve the quality of our products. Our
failure to adapt to these changes could harm our business. Our future plans to
market our products require them to be innovative. If we are slow to develop new
products and technologies that are attractive to and useful solutions for the
PRC iron and steel industry, we may not be successful in capturing an
increasingly significant share of this market.
  Risks
Related to Doing Business in the PRC.
 
 We
face the risk that changes in the policies of the PRC government could have a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.
 
 The PRC’s
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on economic conditions in China. The PRC government has
confirmed that economic development will follow the model of a market economy,
such as the United States. Under this direction, we believe that the PRC will
continue to strengthen its economic and trading relationships with foreign
countries and business development in the PRC will follow market forces. While
we believe that this trend will continue, we cannot assure you that this will be
the case. Our interests may be adversely affected by changes in policies by the
PRC government, including:
 
 ·
              changes in laws, regulations or
      their interpretation
 
 ·
              confiscatory
      taxation
 
 ·
              restrictions on currency
      conversion, imports or sources of
  supplies
 
 ·
              expropriation or nationalization
      of private enterprises.
 
 Although
the PRC government has been pursuing economic reform policies for more than two
decades, we cannot assure you that the government will continue to pursue such
policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption, or other
circumstances affecting the PRC's political, economic and social
life.
  31
  The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may harm our
business.
 
 There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing our business, and the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We and any future subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are sometimes vague and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our businesses.
 
 The
restructuring of Dalian Rino may affect Dalian Rino’s existing customer
relationships and result in additional transactional costs that may adversely
impact our profitability.
 
 We are
conducting our business out of Dalian Innomind after we completed the asset
purchases and leases as contemplated in the Restructuring Agreements. The
restructuring of Dalian Rino’s business through assets transfers and leases to
Dalian Innomind may affect Dalian Rino’s existing customer relationships. To the
extent the existing customers do not want to assign their purchase orders to a
newly formed entity (i.e., Dalian Innomind) the Restructuring Agreements provide
a mechanism to allow Dalian Rino to continue its operations under Dalian
Innomind’s control. However, we cannot assure you that the customers will
continue their business relationships with us or Dalian Rino after this
complicated restructuring. Any loss of Dalian Rino’s existing customers will
have an adverse impact on our revenues and net profits.
  Our
Restructuring Agreements with Dalian Rino and its shareholders may not be as
effective in providing control over these entities as direct ownership and
potential conflicts of interest may occur in the performance and enforcement of
the Restructuring Agreements in the future.
 
 We
operate our business through Dalian Innomind, our indirect wholly-owned
subsidiary in the PRC, and rely on the Restructuring Agreements with Dalian Rino
and its shareholders to control the operations of Dalian Rino. While we own
and/or lease substantially all of Dalian Rino’s manufacturing assets through
Dalian Innomind, and to the extent that any aspect of Dalian Rino’s business
needs to be conducted through Dalian Rino in the future, the Restructuring
Agreements provide Dalian Innomind with the legal right and power to control
Dalian Rino and any of its remaining assets and operations, the Restructuring
Agreements may not be as effective in providing control over Dalian Rino as
direct ownership.  as we depend on the shareholders of Dalian Rino to
perform their obligations under the Restructuring Agreements and the effective
enforcement of these agreements when necessary.
 
 Consequently,
if Dalian Rino or any of its shareholders fails to perform its or his respective
obligations under the Restructuring Agreements, we may have to incur substantial
costs and resources to enforce those agreements, and rely on legal remedies
under PRC law, including seeking specific performance or injunctive relief, and
claiming damages, which may not be effective. For example, if the shareholders
of Dalian Rino refuse to transfer their equity interest in Dalian Rino to us or
our designee if we exercise the equity purchase option under the Restructuring
Agreements, then we will have to pursue available remedies under PRC law for
them to fulfill their contractual obligations.
  32
  The terms
of the Restructuring Agreements were negotiated between Dalian Rino and the
investors in the private placement that we completed on October 5, 2007 on
behalf of the Company at an arms-length, the approval of which by the Company
was a condition precedent to closing of the private placement. However, there
may be potential conflicts of interest in the performance and enforcement of the
Restructuring Agreements because our CEO and director, Mr. Zou, who, together
with his wife, are the sole beneficiaries of The Innomind Trust which holds
71.60% of all of our outstanding common stock also hold 100% of Daliano Rino’s
equity interest. As such, we can not assure you that Mr. Zou, in his capacity as
our CEO and director, will act in the best interest of the Company when a
conflict between us and Dalian Rino arises because of his ownership interest in
Dalian Rino. For example, if Dalian Rino violates the Restructuring Agreement
because of its failure to pay any management fee to Dalian Innomind, the fact
that Mr. Zou has a 90% ownership interest in Dalian Rino may affect his decision
as to whether and/or how vigorously the Company will seek to enforce its rights
under the Restructuring Agreements.
  The
Restructuring Agreements are governed by PRC law and provide for the resolution
of disputes through arbitration in the PRC. Accordingly, these agreements would
be interpreted in accordance with PRC law and any disputes would be resolved in
accordance with PRC legal procedures. The legal environment in the PRC is not as
developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce the
Restructuring Agreements. If we are unable to enforce the Restructuring
Agreements, we may not be able to exert effective control over our operating
entities, and our ability to conduct our business may be negatively
affected.
 
 A
slowdown or other adverse developments in the PRC economy may harm our customers
and the demand for our services and our products.
 
 All of
our operations are conducted in the PRC and all of our revenues are generated
from sales in the PRC. Although the PRC economy has grown significantly in
recent years, we cannot assure you that this growth will continue. Pollution
control for China’s iron and steel sector is a relatively immature and growing
sector, but we do not know how sensitive we might be to a slowdown in economic
growth or other adverse changes in the PRC economy which might affect demand for
iron and steel pollution control equipment. A slowdown in overall economic
growth, an economic downturn, a recession or other adverse economic developments
in the PRC could significantly reduce the demand for our products and harm our
business. Please refer to the
Risk Factor entitled “The recentglobal financial crisiscould negatively affect our
business, results of operations, and financial condition”under this section for more
information regarding the recent economic development and the impact on our
business.”
  Inflation in the
PRC could negatively affect our profitability and growth.
 
 While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth could lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may harm our
profitability.
 
 In order
to control inflation in the past, the PRC government has imposed controls on
bank credit, limits on loans for fixed assets and restrictions on state bank
lending. Such an austere policy can lead to a slowing of economic growth. In
October 2004, the People's Bank of China, the PRC's central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products.
  33
  Dalian
Innomind and RINO are subject to restrictions on paying dividends and making
other payments to us; therefore we might in turn be unable to pay dividends to
you.
 
 We are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investments in our
subsidiaries and affiliates, Innomind, Dalian Innomind, Dalian Rino and the
subsidiaries of Dalian Rino. As a result of our holding company structure, we
rely entirely on dividend payments from Dalian Innomind, our subsidiary in
China. PRC regulations currently permit payment of dividends only out of
accumulated profits, as determined in accordance with PRC accounting standards
and regulations. Our subsidiary and affiliated entity in the PRC also are
required to set aside a portion of their after-tax profits according to PRC
accounting standards and regulations to fund certain reserve funds. The PRC
government also imposes controls on the conversion of RMB into foreign
currencies and the remittance of currencies out of the PRC. We may experience
difficulties in completing the administrative procedures necessary to obtain and
remit foreign currency. Furthermore, if Dalian Innomind or Dalian Rino incurs
debt on its own in the future, the instruments governing the debt may restrict
its ability to pay dividends or make other payments. If we or Innomind Group are
unable to receive all of the revenues from Dalian
Innominds’s  operations, we may be unable to pay dividends on our
common stock.
 
 Governmental
control of currency conversion may affect the value of your
investment.
 
 The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenues in Renminbi, which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
 
 The PRC
government may also in the future restrict access to foreign currencies for
current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay certain of our expenses as they come due.
  The
fluctuation of the Renminbi may harm your investment.
 
 The value
of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in the PRC's political and economic
conditions. As we rely entirely on revenues earned in the PRC, any significant
revaluation of the RMB may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into RMB for
our operations, appreciation of the RMB against the U.S. dollar would diminish
the value of the proceeds of the offering and this could harm our business,
financial condition and results of operations. Conversely, if we decide to
convert our RMB into U.S. dollars for the purpose of making payments for
dividends on our common shares or for other business purposes and the U.S.
dollar appreciates against the RMB, the U.S. dollar equivalent of the RMB we
convert would be reduced. In addition, the depreciation of significant U.S.
dollar denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.
 
 On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in significant appreciation of
the RMB against the U.S. dollar. There remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the RMB
against the U.S. dollar.
  34
  If
the PRC were to eliminate the “grandfathered” preferential tax benefits
currently enjoyed by Dalian Innomind, we would have to pay more taxes in the
PRC, which could have a material and adverse effect on our financial condition
and results of operations.
  Recent
changes in the PRC’s tax laws have, effective January 1, 2008, made wholly
foreign-owned enterprises (“WFOEs”) subject to standard enterprise income tax
rates, which as of January 1, 2008, will be 25%. Prior to these changes, WFOEs
enjoyed tax preferences consisting of multi-year exemptions followed by a period
of reduced rate taxation and ending with the application of standard tax
rates.
  Because
Dalian Innomind was incorporated before the effective date of these recent tax
law changes, it has been “grandfathered” into the pre-change scheme. As a
consequence, as a WFOE, Dalian Innomind is entitled to: (i) a two-year exemption
from enterprise income taxation beginning in its first year of operations; (ii)
a 12% enterprise income tax rate for the next three years; and (iii) application
of the standard enterprise income tax rate (which will be 25% as of January 1,
2008) thereafter.
 
 If the
PRC were to eliminate these “grandfathered” tax preferences, Dalian Innomind
would immediately be subject to the standard statutory tax rate. The loss of
these preferential tax treatments and the resulting acceleration of the
application of standard PRC tax rates to our business, could have a material and
adverse effect on our financial condition and results of
operations.
 
 The Restructuring Agreements we have
entered into among our subsidiaries and affiliated entities or persons may be
subject to scrutiny by the PRC tax authorities and a finding that we owe
additional taxes or are ineligible for our tax exemption, or both, could
substantially increase our taxes owed, and reduce our net income and the value
of your investment.
 
 Dalian
Innomind has purchased assets from Dalian Rino, our affiliated company, at their
book value and leased the remaining assets from Dalian Rino at nominal amount.
Under PRC law, arrangements and transactions among related parties may be
subject to audit or challenge by the PRC tax authorities. If any of the
transactions we have entered into between Dalian Innomind and Dalian RINO are
found not to be on an arm’s-length basis, or to result in an unreasonable
reduction in tax under PRC law, the PRC tax authorities have the authority to
disallow our tax savings, adjust the profits and losses of Dalian Innomind and
Dalian Rino, and assess late payment interest and penalties. A finding by the
PRC tax authorities that we are ineligible for the tax savings achieved in the
past, or that Dalian Rino or Dalian Innomind are ineligible for preferential tax
benefits, would substantially increase our taxes owed and reduce our net income
and the value of your investment.
  PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents, if applied to us, may subject the PRC resident shareholders of
us or our parent company to personal liability and limit our ability to acquire
PRC companies or to inject capital into our PRC subsidiary, limit our PRC
subsidiary's ability to distribute profits to us or otherwise materially
adversely affect us.
 
 In
October 2005, the PRC State Administration of Foreign Exchange (“SAFE”) issued a
public notice, the Notice on Relevant Issues in the Foreign Exchange Control
over Financing and Return Investment Through Special Purpose Companies by
Residents Inside China (the “SAFE Notice”), which requires PRC residents,
including both legal persons and natural persons, to register with the competent
local SAFE branch before establishing or controlling any company outside of
China, referred to as an “offshore special purpose company,” for the purpose of
overseas equity financing involving onshore assets or equity interests held by
them. In addition, any PRC resident that is the shareholder of an offshore
special purpose company is required to amend its SAFE registration with the
local SAFE branch with respect to that offshore special purpose company in
connection with any increase or decrease of capital, transfer of shares, merger,
division, equity investment or creation of any security interest over any assets
located in China. Moreover, if the offshore special purpose company was
established and owned the onshore assets or equity interests before the
implementation date of the SAFE notice, a retroactive SAFE registration is
required to have been completed before March 31, 2006. If any PRC shareholder of
any offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore special
purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. After the SAFE notice, an implementation rules on the SAFE notice
was issued on May 29, 2007 which provides for implementation guidance and
supplements the procedures as provided in the SAFE notice. For an offshore
special purpose company which was established and owned the onshore assets or
equity interests before the implementation date of the SAFE notice, a
retroactive SAFE registration requirement is repeated.
  35
  Due to
lack of official interpretation, some of the terms and provisions of the SAFE
Notice and its implementation rules remain unclear, and the implementation of
the SAFE Notice by central SAFE and local SAFE branches has been inconsistent
since its adoption. Based on the advice of our PRC counsel, Global Law Offices,
located in Beijing, and after consultation with relevant SAFE officials, we
believe that the PRC resident shareholders of our parent company, RINO
International Corporation, were required to complete their respective SAFE
registrations pursuant to the SAFE Notice.
 Moreover,
because of uncertainty over how the SAFE Notice will be interpreted and
implemented, and how or whether the SAFE Notice and implementation rules will
apply to us, we cannot predict how SAFE will affect our business operations or
future strategies. For example, our present and prospective PRC subsidiaries’
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE Notice by our or our parent company’s PRC resident
shareholders. In addition, such PRC residents may not always be able to complete
registration procedures required by the SAFE Notice. We also have little control
over either our present or prospective direct or indirect shareholders or the
outcome of such registration procedures. A failure by our or our parent
company’s PRC resident shareholders or future PRC resident shareholders to
comply with the SAFE Notice, if SAFE requires it, could subject us to fines or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary’s ability to make distributions or pay dividends or affect
our ownership structure, which could adversely affect our business and
prospects.
 
 Ambiguities
in the merger and acquisition regulations implemented on September 8, 2006
relating to acquisitions of assets and equity interests of Chinese companies by
foreign persons may present risks in our compliance status under the
regulations.
 
 On
September 8, 2006, the Ministry of Commerce (“MOFCOM”), together with several
other government agencies, promulgated a comprehensive set of regulations
governing the approval process by which a Chinese company may participate in an
acquisition of its assets or its equity interests and by which a Chinese company
may obtain public trading of its securities on a securities exchange outside the
PRC. Although there was a complex series of regulations in place prior to
September 8, 2006 for approval of Chinese enterprises that were administered by
a combination of provincial and centralized agencies, the new regulations have
largely centralized and expanded the approval process to the MOFCOM, the State
Administration of Industry and Commerce, the SAFE or its branch offices, the
State Asset Supervision and Administration Commission, and the China Securities
Regulatory Commission. Depending on the structure of the transaction as
determined once a definitive agreement is executed, these regulations will
require the Chinese parties to make a series of applications and supplemental
applications to the aforementioned agencies. The merger and acquisition
regulations set forth many specific requirements that have to be followed, but
there are still many ambiguities in the meaning of many material
provisions.
 
 The
transactions contemplated under the Restructuring Agreements are structured in a
manner such that consummation of such transactions would not bring these
transactions within the regulatory scope of the September 8, 2006 regulations.
However, due to the ambiguities in the meaning of many provisions, until there
has been clarification either by pronouncements, regulation or practice, there
is some uncertainty in the scope of the regulations. Moreover, the ambiguities
give the regulators wide latitude in the enforcement of the regulations and the
transactions to which they may or may not apply. Therefore, it is not
inconceivable that future issuance of new regulations and pronouncement for the
purposes of clarifying the application of September 30, 2006 regulations may
retroactively make it apparent that the consummation of the transactions
contemplated under the Restructuring Agreements are subject to September 8, 2006
regulations and failure to obtain approval required under the September 8, 2006
regulations may cause the PRC government to take actions that adversely affect
the Restructuring Agreements including requiring us to unwind the Restructuring
Agreements. If this occurs, and if we do not mitigate the adverse effect to the
investors’ reasonable satisfaction within 60 days of such PRC government
actions, then we are required, within 30 days from the date of a written demand
from the investor, to pay liquidated damages in an amount equal to the initial
investment without interest and the shareholder must return the shares acquired
under the agreement. If we are obligated to pay liquidated damages of the entire
investment amount, we would be forced to raise more capital or incur additional
debt to satisfy such obligations and our liquidity will be materially and
adversely affected. If we do not have sufficient liquidity to satisfy our short
working capital requirements and long-term capital expenditure requirements, our
operating results would be materially adversely affected which will likely
adversely affect the value of our common stock.
  36
  However,
according to the legal opinion issued by the Company’s PRC counsel, the
Restructuring Agreements and the organizational structure resulted thereunder
are legal and enforceable under current PRC law and that changes to current law
would need to be enacted in order for the PRC government or any of its entities
to challenge the structure of the Company. Therefore, the Company believes that
the chances of the restructuring structure being successfully challenged are
remote.
 
 Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.
 
 A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of our revenue is derived, could have an adverse effect on our operations.
Our operations may be impacted by a number of health-related factors, including
quarantines or closures of some of our offices that would adversely disrupt our
operations.
  Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
 
 Because
our principal assets are located outside of the United States and some of our
directors and all our officers reside outside of the United States, it may be
difficult for you to use the United States Federal securities laws to enforce
your rights against us and our officers and some directors in the United States
or to enforce judgments of United States courts against us or them in the
PRC.
 
 All of
our present officers and some of our directors reside outside of the United
States. In addition, our operating subsidiary, Dalian Innomind and controlled
affiliate Dalian Rino and its subsidiaries, are located in the PRC and
substantially all of their assets are located outside of the United States. It
may therefore be difficult for investors in the United States to enforce their
legal rights based on the civil liability provisions of the United States
Federal securities laws against us in the courts of either the United States or
the PRC and, even if civil judgments are obtained in courts of the United
States, to enforce such judgments in PRC courts. Further, it is unclear if
extradition treaties now in effect between the United States and the PRC would
permit effective enforcement against us or our officers and directors of
criminal penalties, under the United States Federal securities laws or
otherwise.
 
 The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors
 
 The PRC
legal and judicial system may negatively impact foreign investors. In 1982, the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist, or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.
  37
  The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that a
change in leadership, social or political disruption, or unforeseen
circumstances affecting the PRC's political, economic or social life, will not
affect the PRC government's ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business and
prospects.
  The
practical effect of the PRC legal system on our business operations in the PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly, the
PRC accounting laws mandate accounting practices, which are not consistent with
U.S. generally accepted accounting principles. PRC’s accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. While the enforcement of substantive rights may appear less
clear than United States procedures, the Foreign Invested Enterprises and Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same
status as other Chinese registered companies in business-to-business dispute
resolution. Any award rendered by an arbitration tribunal is enforceable in
accordance with the United Nations Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no
assurances can be given, the Chinese legal infrastructure, while different in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.
 
 We
may face obstacles from the communist system in the PRC.
 
 Foreign
companies conducting operations in PRC face significant political, economic and
legal risks. The Communist regime in the PRC, which includes a cumbersome
bureaucracy, may hinder Western investment.
 
 We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
 
 The PRC
historically has not adopted a Western style of management and financial
reporting concepts and practices, as in modern banking, computer and other
control systems. We may have difficulty in hiring and retaining a sufficient
number of qualified employees to work in the PRC. As a result of these factors,
we may experience difficulty in establishing management, legal and financial
controls, collecting financial data and preparing financial statements, books of
account and corporate records and instituting business practices that meet
Western standards. Therefore, we may, in turn, experience difficulties in
implementing and maintaining adequate internal controls as will be required
under Section 404 of the Sarbanes Oxley Act of 2002. Please refer to the risk factors
entitled“We may not
have adequate internal accounting controls. While we have certain internal
procedures in our budgeting, forecasting and in the management and allocation of
funds, our internal controls may not be adequate,” and “Our internal controls
over financial reporting was ineffective as of December 31, 2008, and
management’s report was
not subject to attestation by the Company’s independent auditor  as to
their effectiveness for the fiscal year ended December 31, 2008, which could
have a significant and adverse effect on our business” for more information
regarding our financial controls and management.
  38
  The relative lack of public company
experience of our management team may put us at a competitive
disadvantage.
 
 Ourmanagement team lacks
public company experience, which could impair our ability to comply with legal
and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002.
The individuals who now constitute our senior management have never had
responsibility for managing a publicly traded company. Such responsibilities
include complying with federal securities laws and making required disclosures
on a timely basis. Our senior management may not be able to implement programs
and policies in an effective and timely manner that adequately responds to such
increased legal, regulatory compliance and reporting requirements. Our failure
to comply with all applicable requirements could lead to the imposition of fines
and penalties and distract our management from attending to the growth of our
business.
  Risks
Related to Our Common Stock.
 
 Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other stockholders.
 Our
officers and directors beneficially own approximately 71.6% of our Common Stock.
As a result, they are able to control the outcome of stockholder votes on
various matters, including the election of directors and extraordinary corporate
transactions, including business combinations. The interests of our directors
and officers may differ from other stockholders. Furthermore, the current ratios
of ownership of our common stock reduce the public float and liquidity of our
common stock which can, in turn, affect the market price of our common
stock.
 
 We
are not likely to pay cash dividends in the foreseeable future.
 
 We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary. In addition, our operating
subsidiary, Dalian Innomind, from time to time, may be subject to restrictions
on its ability to make distributions to us, including as a result of
restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions.
 
 The
5,464,357 shares issued in the October 5, 2007 private placement may be
redeemable under the Securities Purchase Agreement
 
 The
Securities Purchase Agreement contained a transferable provision such that if
any governmental agency in the PRC takes action that adversely affects the
Restructuring Agreements or the Share Exchange Agreement and the company doesn’t
mitigate the adverse effect to the investors’ reasonable satisfaction within 60
days of the PRC action, then the company is required to pay liquidated damages
in an amount equal to the initial investment without interest and the
shareholder must return the shares acquired under the agreement. Consequently,
the total amount of the gross proceeds has been excluded from permanent equity
and recorded as redeemable common stock in accordance with Rule 5-02.28 of
Regulation S-X and Section 211 of the Codification of Financial Reporting
Policies. Although there is no fixed redemption requirement in any of the next
five years, the entire amount of $24,480,319 could become redeemable in any of
the next five years, in which case we would be forced to raise more capital or
incur additional debt to satisfy the redemption obligations and our liquidity
will be materially and adversely affected. If we do not have sufficient
liquidity to satisfy our short-term working capital requirements and long-term
capital expenditure requirements, our operating results would be
materially and adversely affected which will likely adversely affect the
value of our common stock.
  39
  Our common stock is thinly traded, so
you may be unable to sell at or near ask prices or at all if you need to sell
your shares to raise money or otherwise desire to liquidate your
shares.
 
 Prior to
the October 5, 2007, Share Exchange our shares were not publicly traded. Through
the Share Exchange we have essentially become public without the typical initial
public offering procedures which usually include a large selling group of
broker-dealers who may provide market support after going public. Thus, we have
undertaken efforts to develop market recognition for our stock. Our common stock
was added to the OTC Bulletin Board (the “OTC-BB”) daily list on July 3, 2007.
As a result, there is limited market activity in our stock and we are too small
to attract the interest of many brokerage firms and analysts. We cannot give you
any assurance that a broader or more active public trading market for our common
stock will develop or be sustained. Currently our common stock is quoted in the
OTC Bulletin Board market and the trading volume we will develop may be limited
by the fact that many major institutional investment funds, including mutual
funds, as well as individual investors follow a policy of not investing in
Bulletin Board stocks and certain major brokerage firms restrict their brokers
from recommending Bulletin Board stocks because they are considered speculative,
volatile and thinly traded. The OTC Bulletin Board market is an inter-dealer
market much less regulated than the major exchanges and our common stock is
subject to abuses and volatilities and shorting. Thus there is currently no
broadly followed and established trading market for our common stock. An
established trading market may never develop or be maintained. Active trading
markets generally result in lower price volatility and more efficient execution
of buy and sell orders. Absence of an active trading market reduces the
liquidity of the shares traded there.
  The
trading volume of our common stock has been and may continue to be limited and
sporadic. As a result of such trading activity, the quoted price for our common
stock on the OTC Bulletin Board may not necessarily be a reliable indicator of
its fair market value. Further, if we cease to be quoted, holders would find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of our common stock and as a result, the market value of our common stock
likely would decline.
 
 Our
common stock is currently subject to the "penny stock" rules which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale.
  Our
common stock is currently subject to regulations prescribed by the SEC relating
to “penny stocks.” The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in such
regulations) of less than $5.00 per share, subject to certain exceptions. On
March 26, 2009, the last sale price of our common stock was $2.60 per share.
These regulations impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 and individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 (individually) or $300,000 (jointly with their
spouse)). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of these securities and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the common stock and may affect
the ability of investors to sell their common stock in the secondary
market.
 
 Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
 
 The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
  40
  A
large number of shares will be eligible for future sale and may depress our
stock price.
  We have
registered for resale 5,962,857 shares of our common stock to be offered by
certain selling stockholders, all of which have become freely tradeable. Sales
of substantial amounts of common stock, or a perception that such sales could
occur, and the existence of warrants to purchase shares of common stock at
prices that may be below the then current market price of the common stock,
could adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of our equity securities.
 
 We
are authorized to issue "blank check" preferred stock, which, if issued without
stockholder approval, may adversely affect the rights of holders of our common
stock.
 We are
authorized to issue 50,000,000 shares of preferred stock, none of which have
been issued. Our Board of Directors is authorized under our Articles of
Incorporation to provide for the issuance of shares of preferred stock by
resolution, and by filing a certificate of designations under Nevada law, to fix
the designation, powers, preferences and rights of the shares of each such
series of preferred stock and the qualifications, limitations or restrictions
thereof without any further vote or action by the stockholders. Any shares of
preferred stock so issued are likely to have priority over our common stock with
respect to dividend or liquidation rights. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control, which could have the
effect of discouraging bids for the Company and thereby prevent stockholders
from receiving the maximum value for their shares. We have no present intention
to issue any shares of our preferred stock in order to discourage or delay a
change of control or for any other reason. However, there can be no assurance
that preferred stock will not be issued at some time in the future.
 
 We are responsible for the
indemnification of our officers and directors.
 
 Our
Bylaws provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against costs and expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on our behalf. Consequently, we may be required
to expend substantial funds to satisfy these indemnity obligations.
 
 ITEM 1B.
UNRESOLVED STAFF COMMENTS.
  None.
 
 ITEM
2. PROPERTIES
 
 Principal
Office and Manufacturing Facilities
 
 The
Company’s principal office and its manufacturing facilities are located in the
Jinzhou Industry Cooperation Zone of Dalian, PRC. In 2003, Dalian Rino acquired
from the government the right to use 287,117 square feet of land in the Jinzhou
Industry Cooperation Zone for a 50 year period that expires in 2053 (the “Land
Use Rights”). Instead of periodic rent, Dalian Rino paid a one-time fee of
$580,203 for the Land Use Rights.
 
 Of the
area leased by us, our factory occupies 91,570 square feet, and office space,
warehouse facilities and living quarters comprise 90,148 square
feet.
  41
  Dalian
Facilities
 
 Our
Dalian facilities have a full-time staff of 360 managerial, technical, clerical
and manufacturing employees, who cover the Company’s national operations,
generally. If necessary, we also hire temporary local workers for our
engineering projects for miscellaneous work.
 
 We raised
funds in October 2007 in part to fund expansion of our Dalian factory. Delays in
the fundraising, however, imposed a disproportionate effect on our plant
expansion as weather conditions in Dalian basically prohibit outdoor
construction in the late fourth and early first quarters of each
year.
 
 In
addition to weather delays, we have experienced additional delays in removing
the original tenants from the land we contracted to use for the factory
expansion. The original tenants engage in small-scale agriculture, an activity
which still enjoys protection under Chinese law. We recently applied
successfully to rezone the property for industrial use but are still in
negotiations with the original tenants. We cannot state with certainty when the
original tenants will leave, nor can we estimate what amounts we might need to
pay them as an incentive to leave the property.
 
 Branch
Offices
 
 In
addition to the head office in Dalian, the Company leases branch offices in
Beijing and Shanghai. Each branch office covers and is responsible for the
Company’s operations in a specific territory in China. Total 2008 annual rentals
for all our branch offices are approximately $76,111.
 
 ITEM
3. LEGAL PROCEEDINGS
 
 Neither
we nor any of our subsidiaries is a party to any pending legal proceedings
(other than ordinary routine litigation incidental to our business), nor are we
aware of any such proceedings threatened against us or our
subsidiaries.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
 
 We did
not submit any matters to a vote of our shareholders in the fourth quarter of
the fiscal year ended December 31, 2008.
 
 PART
II
 
 ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 
 Market
Information
 
 Our
common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol "JDMC". There has never been any established public market for shares
of our common stock. On March 26, 2009, we had 25,040,000 shares of common
stock, par value $0.0001 per share issued and outstanding. 382,500 warrants
(subject to adjustment) to purchase our common stock were outstanding at an
exercise price of $5.376 per share.
 
 The
following table sets forth the high and low bid prices, in the over-the-counter
market, as reported and summarized by Yahoo Finance (http://finance.yahoo.com),
for each fiscal quarter during each of the fiscal years ended December 31, 2007
and December 31, 2008. These prices are based on inter-dealer prices, without
retail markup, markdown or omissions and may not represent actual transactions.
These prices have been adjusted to give effect to the August 31, 2007,
100-for-one forward stock split of all issued and outstanding shares of our
common stock.
  42
  On May
14, 2002, the Company filed a Form 15 with the SEC and ceased being a reporting
company under the Exchange Act. On April 4, 2007, the Company filed a Form 10SB
registration statement with the SEC and again became a reporting company, and on
July 3, 2007, the common stock was listed for quotation on the OTCBB.
Consequently, from May 14, 2002, until July 3, 2007, our common stock was not
traded. The following table reflects this absence of trading and the prices on
recorded on low trading volumes.
 
 Quarter Ended
                  
                  High
                  
                  
                  Low03/31/2007
                  
                  
                  
                  (1)
                  
                  
                  
                  (1)06/30/2007
                  
                  
                  
                  (1)
                  
                  
                  
                  (1)09/30/2007
                  
                  $
                  56.00
                  (2
      )
                  
                  $
                  0.5112/31/2007
                  
                  $
                  12.25
                  
                  
                  $
                  2.4003/31/2008
                  
                  $
                  12.25
                  
                  
                  $
                  7.106/30/2008
                  
                  $
                  11.5
                  
                  
                  $
                  7.7509/30/2008
                  
                  $
                  11.5
                  
                  
                  $
                  8.0012/31/2008
                  
                  $
                  8.25
                  
                  
                  $
                  2.00
  
 (1)
common stock not listed, quoted or traded.
 (2) The high bid is an arbitrarily
assigned figure giving effect to the Reverse Split and the Forward
Split.
  Since the
completion of the share exchange and private placement, our common stock has
traded sporadically and with high volatility. Consequently, our historical
prices may not be an accurate indication of the future prices of our common
stock.
 
 Penny
Stock Regulations
 
 The SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. Although the
market price of our common stock has risen above $5.00, our stock price has
fluctuated to prices below $5.00 per share and we are subject to rules that
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000, or annual incomes
exceeding $200,000 or $300,000, together with their spouse).
 
 For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the common stock and may affect the ability of investors to sell their
common stock in the secondary market.
  Holders
 
 As of
March 26, 2009, there were 25,040,000 shares of our common stock issued and
outstanding (including the 3,906,000 Make Good shares now held in escrow, which
are to be released to the founders in accordance with the Make Good Escrow upon
the filing of this report), and there were approximately 122 holders of record
of our outstanding shares of common stock. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms.
  43
  Dividends
 
 We have
not declared or paid any cash dividends on our common stock during either of our
last two fiscal years. The payment of dividends, if any, is at the discretion of
the Board of Directors and is contingent on the Company's revenues and earnings,
capital requirements, financial conditions and the ability of our operating
subsidiary, Dalian Innomind, to obtain approval to send monies out of the PRC.
We currently intend to retain all earnings, if any, for use in business
operations. Accordingly, we do not anticipate declaring any dividends in the
near future.
 
 The PRC's national currency, the Yuan,
is not a freely convertible currency.Please refer to the
risk factors "Governmental control of currency conversion may affect the value
of your investment," "The fluctuation of the Renminbi may harm your investment,"
and "Recent PRC State Administration of Foreign Exchange ("SAFE") Regulations
regarding offshore financing activities by PRC residents have undergone a number
of changes which may increase the administrative burden we face.”
 
 Securities
Authorized for Issuance Under Equity Compensation Plans
  As of
December 31, 2008, we did not have any compensation plans under which our equity
securities are authorized for issuance.
 
 Previously
we entered into an employment agreement with our former CFO and Secretary, Bruce
Richardson, pursuant to which Mr. Richard was to be granted 250,000 options to
purchase common stock at an exercise price of $5.38 per share, vesting in 3
equal annual installments beginning on January 1, 2009. Mr. Richardson resigned
from his positions at the Company on September 5, 2008. Consequently, Mr.
Richardson’s employment agreement was terminated immediately and no option was
vested under the agreement as of September 12, 2008.
 
 Recent
Sales of Unregistered Securities
 
 Issuance
of Common Stock in Acquisition of Innomind
 
 Under the
Share Exchange Agreement, on October 5, 2007, we issued 17,899,643 shares of our
common stock to Zhang Ze, an individual, in exchange for all of the outstanding
shares of the common stock of Innomind Group held by Zhang Ze. At the completion
of that share exchange, Innomind Group became the Company’s wholly owned
subsidiary. The Share Exchange was accomplished in reliance upon Section 4(2) of
the Securities Act. Immediately after this Share Exchange, Zhang Ze placed such
shares of our common stock he received into a Trust. The sole beneficiaries of
this Trust are Zou Dejun and Qiu Jianping, the founders of Dalian
Rino.
  Issuance
of Common Stock in Private Placement
 
 On August
16, 2007 the Company issued 125 (12,500 post-forward split) common shares in a
private placement for cash of $5,532. The Company relied on the exemption from
registration provided under Section 4(2) of the Securities Act.
 
 On
October 5, 2007, in a private placement through Douglas Financial, LLC, an NASD
and SEC registered broker-dealer (“Douglas Financial”), we sold 5,464,357 shares
of our common stock for $24,480,319 gross proceeds (or $21,250,109 net proceeds
after deducting the offering expenses) under a Securities Purchase Agreement by
and among the Company and a group of accredited investors (as defined under Rule
501(a) of Regulation D promulgated under the Securities Act) named therein dated
as of September 27, 2007. In the private placement, we sold the common stock in
reliance upon the exemption from registration provided by Rule 506 of Regulation
D promulgated under the Securities Act of 1933 and Section 4(2) of the
Securities Act.
  44
  Under the
Securities Purchase Agreement, we are required to register for resale each share
of common stock sold therein as well as the shares of common stock underlying
the above, placement agent warrants.
 
 In
connection with the private placement, 250,000 shares of common stock were
issued to Chief Capital, Ltd., for advisory services. We relied on the exemption
from registration provided by Regulation S of the Securities Act for such
issuance.
 
 In
connection with the private placement and pursuant to the Engagement Agreement
Providing for Investment Banking Services, dated January 19, 2007 by and between
Dalian Rino and Douglas Financial, Douglas Financial, acting as placement agent,
received the following compensation: (i) $80,000 cash as an engagement and
documentation fee; (ii) $1,750,000 as a placement commission; (iii) 875,000
shares of our common stock, and (iv) warrants to purchase 382,500 shares of our
common stock at an exercise price of $5.376 per share, exercisable within 6
years of the date of issue. The exercise price of the warrant is subject to
adjustments under certain circumstances and the warrants permit cashless
exercise by the holders. We relied on the exemption from registration provided
by Section 4(2) of the Securities Act for the issuance of our common stock and
warrants to Douglas Financials.
 
 Issuance
of Common Stock to Former Majority Shareholder
 
 On August
8, 2007, the Company issued 2,950 (295,000 post-forward split) common shares to
Glenn A. Little for cash of $14,750. The Company relied on the exemption from
registration provided under Section 4(2) of the Securities Act.
  On
September 11, 2007, the Company issued 928 pre- Forward Split shares (or 92,800
shares post-Forward Split) of its common stock to Glenn A. Little (the “Little
Shares”) for an aggregate of $4,168. At that time and immediately prior to the
consummation of the Share Exchange, Mr. Little was the Company’s majority
shareholder and its sole director and executive officer. The Company relied on
the exemption from registration provided under Section 4(2) of the Securities
Act.
  Issuance
of Common Stock to Former Chief Financial Officer of RINO
 
 At the
closing of the Share Exchange and the private placement, the Company issued
20,000 shares of common stock to Eric Gan (“Gan”), RINO’s former chief financial
officer, in full satisfaction of RINO’s obligations to Gan under a Compensation
Agreement dated July 30, 2007. The Company relied on the exemption from
registration provided under Section 4(2) of the Securities
Act.
 Issuance
of Common Stock pursuant to the Investor Relations Consulting Agreement dated
October 1, 2007
 
 On March
12, 2009, pursuant to the Investor Relations Consulting Agreement between Dalian
Rino and Hayden Communications International, Inc., a Florida Corporation
(“HCI”), engaging HCI as an investor relations consultant of the Company, the
Company issued an aggregate of 40,000 shares of our common stock to HCI and its
designees as follows: 38,000 shares to HCI, 1,000 shares to Peng Feng and 1,000
shares to Rongrong Jiang. The Company relied on the exemption from registration
provided under Section 4(2) of the Securities Act.
 
 ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
 
 Disclaimer
Regarding Forward-looking Statements
  45
  Certain
statements made in this report, and other written or oral statements made by or
on behalf of RINO International Corporation, may constitute
“forward-looking statements” under the Private Securities Litigation
Reform Act of 1995, which represent the expectations or beliefs of,
including, but not limited to, statements concerning the operations,
performance, financial condition and growth of RINO International Corporation,
together with its direct and indirect subsidiaries and controlled affiliates.
For this purpose, any statements contained in this report that are not
statements of historical fact may be deemed forward-looking statements.
Without limiting the generality of the foregoing, when used in this report,
the word “believes,” “expects,” “estimates,” “intends,” “will,” “may,”
“anticipate,” “could,” “should,” “can,” or “continue” or the negative or other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Examples of such statements in this report include
descriptions of our plans and strategies with respect to developing certain
market opportunities, our overall business plan, our plans to develop additional
strategic partnerships, our intention to develop our products and
platform technologies, our continuing growth and our ability to contain our
operating expenses. All forward-looking statements are subject to certain risks
and uncertainties that could cause actual events to differ materially from those
projected, including those described under the caption “Risk Factors” in our
Annual Report on Form 10-K, the risk factors described under Item 1A. Risk
Factors of Part II of this report, and matters described in this report
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this filing will in fact occur.
You should not place undue reliance on these forward-looking
statements.
 
 The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes and the other financial information appearing in Part IV,
Item 15 and elsewhere in this report.
 
 Except
as otherwise specifically stated or unless the context otherwise requires, the
"Company", "we," "us," and  "our" refer to (i) RINO International
Corporation (formerly Jade Mountain Corporation), (ii) Innomind Group Limited
(“Innomind Group”), a wholly-owned subsidiary of RINO International Corporation
organized under the laws of the British Virgin Islands, (iii) Dalian Innomind
Environment Engineering Co., Ltd. (“Dalian Innomind”), a wholly-owned subsidiary
of Innomind organized under the laws of the People’s Republic of China (the
“PRC” or China), (iv) Dalian Rino Environment Engineering Science and Technology
Co., Ltd., a contractually controlled affiliate of Dalian Innomind organized
under the laws of the PRC (“Dalian Rino”) and, (v) Dalian Rino’s wholly
owned subsidiaries, Dalian Rino Environmental Engineering Project Design Co.,
Ltd. (“Dalian Rino Design”) and Dalian Rino Environmental Construction &
Installation Project Co., Ltd. (“Dalian Rino Installation”).
 
 Company
Overview
 
 The
Company is engaged in designing, developing, manufacturing, and installing
environmental protection and energy saving equipment for the Chinese iron and
steel industry. Our customers are large, state-owned iron and steel companies.
Our business operations are conducted throughout China.
 
 China’s
iron and steel companies have experienced robust growth during the last twenty
years, following the expansion of China’s economy and industrial base,
generally. Along with this growth, the iron and steel industry has produced
large amounts of waterborne and airborne industrial waste and pollution, and as
a consequence it faces increasingly stringent governmental mandates to reduce or
eliminate sulphur dioxide emissions and untreated wastewater discharges. Failure
to meet mandated emission and discharge standards can result in financial
penalties. Consequently, despite the recent global financial crisis, our
revenues, gross profit, income from operations and net income continued to grow
across our product lines.  During the year ended December 31, 2008,
our revenues reached $139.3 million, representing an increase of 119.8%
from the total revenues of $63.4 for the year ended December 31, 2007. Our gross
profit increased from $30.5 million for the year ended December 31, 2007 to
$54.3 million for the year ended December 31, 2008, representing an increase of
78.3%.  Our income from operations reached $21.6 million for the year
ended December 31, 2008 from $15.8 million for the year ended December 31, 2007,
representing an increase of 36.9%.  Our net income for the year ended
December 31, 2008 grew to $21.3 million from $10.2 million for the year ended
December 31, 2007, representing an increase of 108.3%.
  46
  Traditionally,
we have three principal products and product lines:
 
 ·
              Lamella
      Inclined Tube Settler Waste Water Treatment System, a highly efficient
      wastewater treatment system that incorporates our proprietary and patented
      ‘Lamella Inclined Tube Settler’
  technology.
 ·
              Circulating,
      Fluidized Bed, Flue Gas Desulphurization System, a highly effective system
      that removes particulate sulphur from flue gas emissions generated by the
      sintering process in the production of iron and steel (a process in which
      sulphur and other impurities are removed from iron ore by heating, without
      melting, pulverized iron ore) with the resulting discharge meeting all
      relevant PRC air pollution standards,
and
 ·
              High
      Temperature Anti-Oxidation System for Hot Rolled Steel, a set of products
      and a mechanized system that substantially reduce oxidation-related output
      losses in the production of continuous cast, hot rolled
    steel.
 
 In
addition to the environmental remediation and protection systems above, since
late 2005 we have also being using our over capacity during “down time” to
perform contract machining services for third-party industrial
enterprises.
 
 We have
also been active in developing new products and technologies to expand the scope
of our produce offering.  In the first quarter of 2008, we
commercialized and received initial purchase orders for a new integrated dust
catching system which removes up to 99% of the dust from sintering iron during
the production process and complements our current desulphurization equipment.
The revenue generated from the integrated dust catching system in 2008 amounted
to $1,942,920.  In November 2007, we developed a new sludge treatment
system which we expect to generate sales in 2009.
 
 Demand
for our Lamella Wastewater System, increased 107.3% to $14.4 million for the
year ended December 31, 2008, as compared with $7.0 million for the year ended
December 31, 2007.
 
 Our
Desulphurization System, which we introduced in late 2006, utilizes proprietary
technology we jointly developed with the Research Institute of the Chinese
Academy of Sciences, and can reduce flue gas sulphur dioxide levels by over 90%.
We anticipate strong demand from the iron and steel industry for the solutions
that our Desulphurization System offers for airborne sulphur dioxide emissions.
For the year ended December 31, 2008, we recorded revenues of $105.3 million, as
compared to revenues of $33.1 million for the year ended December 31, 2007,
representing an increase of 217.7%.
 
 Starting
in January 2007, we launched another new product, our Anti-Oxidation System that
materially reduces oxidation loss in the production of hot rolled steel plates.
Anti-oxidation is a long-sought solution in the iron and steel industry. We
believe our Anti-Oxidation System, including coatings and spraying equipment, is
the only online system that prevents or reduces oxidation without needing to
first cool down the steel slab. We anticipate that our Anti-Oxidation System
will be an important driver of revenue growth. For the year ended December 31,
2008, we recorded revenues of $5.7 million anti-oxidation equipment and related
coatings sales, as compared to revenues of $2.0 million for the year ended
December 31, 2007, representing an increase of 192.3%. The increase in revenues
largely reflects our increased pricing and demand as the value of the
anti-oxidation technology has been proven in commercial practice.
 
 In
addition to the foregoing, we provide machining services to third parties,
utilizing our heavy machine tools’ idle time to generate contract manufacturing
revenue. The revenue generated from our machining services fluctuates based on
the level of our using our heavy machining equipment to produce more of our own
products rather than for third-party contract work. For the year ended December
31, 2008, revenues accounted for 9.9% of the total revenue as compared to 18.7%
for the corresponding period in 2007, reflecting a higher level of our own
production and reduced level of contractual work.
  47
  We also
receive grants from the local government in Dalian, China, with amounts varying
from year to year as rewards for our continued investment in new technologies.
While being selected for these grants signals important government support for
our technology development efforts, we believe the amounts of these grants are
immaterial to our business. In the twelve months ended December 31, 2007, we
received government grants of $228,430 or 0.4% of our total equipment and
services sales revenue for the period. In the twelve months ended December 31,
2008, we received government grants of $474,830, totaling 0.3% of respective
revenues for the twelve months ended December 31, 2008.
 
 All of
our products are custom-built to our customers’ specific requirements. We enter
into fixed price equipment sales contracts with our customers that are performed
in engineering, manufacturing, construction and installation phases. Equipment
and components are engineered and manufactured primarily at our Dalian
facilities. Generally, we fulfill our contractual obligations within twelve
months.
 
 Our
project-based revenue is affected directly by our customers’ capital budgets and
their need to build new plants. Because our customers are
state-owned-enterprises, their budgeting decisions are influenced by the Chinese
central government’s environmental protection and pollution control policies,
which presently are favorable to our business and products. We believe that such
policy emphasis will continue for the foreseeable future.
 
 The cost
of revenue for our products includes direct materials, direct labor, and
manufacturing overhead, with a significant portion allocated to materials costs,
which are subject to fluctuation.
 
 Recent
Developments
 
 Departure of a Certain
Officer
 
 On
September 5, 2008, Bruce Richardson resigned from his positions as the Chief
Financial Officer and Secretary of the Company to pursue other interests. The
Company accepted Mr. Richardson’s resignation. Thereafter, Mr. Richardson’s
duties have been assumed by Ms. Qiu Jianping and several managers pending the
hiring of a replacement.  The Company does not believe that Mr.
Richardson’s departure will have an adverse impact on the Company’s operations
over the short-medium term. The Company has been actively searching for a
qualified CFO candidate through international recruiting firms and expects to
hire a CFO in the near future.
 
 New
Products
 
 Integrated
Dust Catching System
 
 In the
first quarter of 2008, the Company commercialized and received initial purchase
orders for a new integrated dust catching system which removes up to 99% of the
dust from sintering iron during the production process and which complements its
current desulphurization equipment.
 
 The
integrated dust catching system uses electric preceptors to remove part of the
dust load from flue gases, followed by a bag filtration system, which together
achieve dust removal rates of up to 99%. The integrated dust catching system
completes the treatment of sintering flue gases begun by the Company’s
desulphurization equipment. Adoption of the integrated dust catching system is
being driven in part by China’s regulatory pressure to reduce particulate
emissions to as low as 30mg/cubic meter of flue gas, down from levels usually
above 80mg/cubic meter. New Chinese regulations for dust content of flue gases
in major cities will be comparable to those in place in the European Union. To
date, the Company’s integrated dust catchers have been installed in the flues of
several steelmakers in China. The Company anticipates the average selling price
will be around US$2.0 million and the time from contract signing to final
installation will equate to approximately two to three
months.
  48
  Sludge
Treatment System
 
 In
November 2008, we successfully developed a new sludge treatment system through
cooperation with the Dalian University of Technology. The new sludge treatment
system can be used to treat sludge generated by municipal wastewater treatment
process, industrial sludge generated by chemical industry and oil sludge
generated by oil industry. We estimate that there is a market of approximately
$28.8 billion for the treatment of sludge generated by various municipal
wastewater and industrial processing systems in the PRC market.  To
treat the sludge, the first and most critical step is to remove water from the
sludge through a dehydration process, which will reduce the quantity of the
sludge and make it easier to be incinerated. Depending on the heavy metal
content of the desiccated sludge, the final product can be used as agricultural
fertilizer if the heavy metal content is low, or, after further processing, as a
component in various construction materials if the heavy metal content is
high.
 
 The
current best sludge treatment technology available in the PRC market (provided
by a Korean company) allows for a 30% reduction of water in the sludge while our
technology, using superheated steam to dehydrate sludge, provides an improvement
of 10% in water reduction.  In addition, our new sludge treatment
system costs approximately 50% less than imported products and the costs of
daily operation are approximately 45% less. The Chinese government recently
promulgated a new regulation requiring at least 60% of municipal wastewater be
treated by 2010, the implementation of which is expected to significantly
increase the amount of sludge generated by the wastewater treatment process in
China in the next several years. We estimate the profit to process one ton of
sludge generated by municipal wastewater treatment process varies between $12
and $19 depending on the steam source. Currently approximately 27.8 million
metric tons of sludge is being generated by wastewater treatment process
annually with a water content of approximately 80%.
 
 Northeastern
China, where Dalian RINO is located, is the oil industry center and this region
generates approximately 2 million tons of oil sludge annually. The profit to
process one ton of oil sludge ranges between $39 and $44.
 
 Dalian
University of Technology has made a patent application for this technology in
China (Application number: 200710011115.0).  Based our agreement with
Dalian University of Technology, Dalian Rino will pay an ongoing royalty of
approximately 5% of sales to the university.
 
 Formation
of Subsidiaries
 
 On
September 24, 2008, Dalian Rino formed a wholly-owned subsidiary, Dalian Rino
Environmental Engineering Project Design Co., Ltd. (“Dalian Rino Design”), to
focus on research, development and the technical design aspects of our business.
Pursuant to the business permits, Dalian Rino Design’s right of operation
expires on September 23, 2018 and its business permit is renewable upon
expiration.
 
 On
October 14, 2008, Dalian Rino formed Dalian Rino Environmental Construction
& Installation Project Co., Ltd. (“Dalian Rino Installation”), also a
wholly-owned subsidiary of Dalian Rino under the laws of PRC.  Pursuant to
its business license, Dalian Rino Installation is permitted and will focus
primarily on installation of environmental protection and energy saving
equipment. Dalian Rino Installation’s right of operation expires on October 13,
2018 and its business permit is renewable upon expiration.
 
 Under the
PRC tax law, in addition to income taxes, there are indirect taxes applied to
businesses in China.  A value-added tax of 17 percent applies to sales
of tangible goods.  However, some exemptions and reduced-rate
concessions exist.  For example, there is no value-added tax on
basic foods and necessities.  A business tax of 3% applies to
telecommunications, construction and transportation.  A business tax
of 5% rate applies to general services, banking and finance, hotels, restaurant,
leasing, and advertising.  The formation of Dalian Rino Design and
Dalian Rino Installation enables us to potentially take advantage of this
preferential tax treatment based on the nature of the business.  The
revenue of Dalian Rino Design and Dalian Rino Installation are currently
subjected to a business tax of 5%.
 
 Results
of Operations
 
 Twelve
Months Ended December 31, 2008 And December 31, 2007.
  49
  Net
Sales
 
 Net sales
increased by $76.0 million to $139.3 million or an increase of 119.8% for the
twelve months ended December 31, 2008, as compared to the net sales of $63.4
million for the twelve months ended December 31, 2007. Such increase was due to
continued growth in demand across our entire product lines in 2008, the main
reason for the increase of demand was because after June 2008, the Chinese
government tightened gas emission control and is now requiring all coal-fired
sinters to have desulphurization equipment installed. For the year ended
December 31, 2008, we had 6 wastewater treatment equipment contracts and sales
amounted to $14.4 million compared with 3 contracts and $7.0 million sales for
the year ended December 31, 2007. For the year ended December 31, 2008, the
Company had 25 flue gas desulphurization contracts and sales amounted to $105.3
million compared with 5 contracts and $33.1 million sales for the year ended
December 31, 2007.  The breakdown of the revenue growth is as
follows:
 
 For the twelve months ended December 31,2008
                  
                  
                  2007Net Sales
                    (in
                    thousand)
                  
                  
                  % to
                    TotalSales
                  
                  
                  Net Sales
                    (in
                    thousand)
                  
                  
                  % to
                    TotalSales
                  
                  
                  %
                    IncreaseWastewater
      treatment equipment
                  
                  $
                  14,444
                  
                  
                  
                  10.4
                  %
                  
                  $
                  6,968
                  
                  
                  
                  11.0
                  %
                  
                  
                  107.3
                  %Flue
      gas desulphurization
                  
                  
                  105,288
                  
                  
                  
                  75.6
                  %
                  
                  
                  33,140
                  
                  
                  
                  52.3
                  %
                  
                  
                  217.7
                  %Anti-oxidation
      equipment and coatings
                  
                  
                  5,747
                  
                  
                  
                  4.1
                  %
                  
                  
                  1,966
                  
                  
                  
                  3.1
                  %
                  
                  
                  192.3
                  %Machining
      services
                  
                  
                  13,864
                  
                  
                  
                  9.9
                  %
                  
                  
                  11,859
                  
                  
                  
                  18.7
                  %
                  
                  
                  16.9
                  %Other
      services
                  
                  
                  -
                  
                  
                  
                  -
                  %
                  
                  
                  9,454
                  
                  
                  
                  14.9
                  %
                  
                  
                  -100.0
                  %Total
      Net Sales
                  
                  $
                  139,343
                  
                  
                  
                  100.0
                  %
                  
                  $
                  63,387
                  
                  
                  
                  100.0
                  %
                  
                  
                  119.8
                  %
 
 Cost
of Sales
 
 The cost
of sales for the twelve months ended December 31, 2008 increased by $52.1
million to $85.0 million from $32.9 million for the twelve months ended December
31, 2007, representing an increase of 158.2%.  The increase was
largely due to increased sales. As a percentage of sales, the cost of sales rose
to 61.0% for the twelve months ended December 31, 2008 compared to 51.9% for the
same period of 2007.  The breakdown of the cost of sales is as follows
(with Cost of Sales for Services shown below including Cost of Sales for both
machining services and other services):
 
 For the twelve months ended December 31,2008
                  
                  
                  2007Total (in thousands)
                  
                  
                  % of sales
                  
                  
                  Total (in thousands)
                  
                  
                  % of salesRevenuesContracts
                  
                  
                  119,921
                  
                  
                  
                  
                  
                  
                  42,073Services
                  
                  
                  19,423
                  
                  
                  
                  
                  
                  
                  21,314Cost
      of SalesContracts
                  
                  
                  74,247
                  
                  
                  
                  61.9
                  %
                  
                  
                  24,171
                  
                  
                  
                  57.5
                  %Services
                  
                  
                  10,100
                  
                  
                  
                  52.0
                  %
                  
                  
                  8,179
                  
                  
                  
                  38.4
                  %
 
 The
increase of cost of sales as percentage of sales was mainly due to the increased
cost related to our service revenue.  In 2007, we used in-house
service team and costs were closely monitored.  In 2008, in order for
us to meet the increasing demand in our contract revenue sector, we decided to
hire outside contractors to provide machining services, the cost of which can
not be fully controlled and monitored.  This reflected in the higher
cost related to service revenue, from 38.4% in 2007 to 52.0% in
2008.  The cost related to our contract revenue remained relatively
stable, from 57.5% in 2007 to 61.9% in 2008.
  50




Operating
Expense





Operating
expenses for the twelve months ended December 31, 2008 increased to $32.7
million from $14.6 million for the same period ended December 31, 2007,
representing an increase of 123.1%. The $18.0 million increase in our operating
expenses was largely consisted of (1) a $10.0 million increase in charge for
stock compensation expense related to the 2008 Make Good shares as described
below in this section of the Report; (2) the increase of selling, general &
administrative expenses of approximately $6.8 million in Dalian Innomind
from $0.6 million for the twelve month period ended December 31, 2007 to $7.4
million for the same period in 2008, after Dalian Innomind was incorporated on
July 9, 2007; and (3) the reserve of liquidated damage expense of $1.6 million
in 2008 as a result of: (a) our delay in causing the registration statement that
we filed with the SEC to be declared effective for the resale of the shares
purchased by the investors in the private financing that we closed in October
2007, and (b) our delay in appointing independent directors as required by the
investors in connection with the same private financing that we closed in
October 2007.





In the
twelve month period ended December 31, 2008 and 2007, we incurred a charge for
stock compensation expense related to the 2007 Make Good Shares in the amount of
$17.5 million and $7.5 million, respectively. Without taking into account of
such make good escrow related stock compensation expenses, our operating
expenses for the twelve months ended December 31, 2008 and 2007 were
$15.2 million and $7.1 million, respectively, indicating an increase of
112.5%.





Stock
Compensation Expenses - Make Good Shares





Pursuant
to the Securities Purchase Agreement, 5,580,000 shares of our common stock
beneficially owned by our founders Zou Dejun and Qiu Jianping - who, through The
Innomind Trust, together control 71.5% of the Company’s outstanding common stock
as of the date of this Report, were required to be subject to escrow in order to
secure our obligation under the Securities Purchase Agreement to deliver
additional common stock to the private placement investors in the event we fail
to achieve certain after-tax net income targets for fiscal years 2007 and
2008.  The shares held in escrow as Make Good Escrow Shares will not
be accounted for on our books until such shares became releasable from escrow
pursuant to the terms of the Securities Purchase Agreement. If any Make Good
Escrow Shares are released to the company management or employees, the value of
such shares at the time of release will be recorded as compensation expense with
a corresponding offset to additional paid-in capital in accordance with SFAS
123(R) paragraph 11.





As a
result of us achieving the 2007 earnings targets, presently, there are 3,906,000
shares remaining in escrow.  For fiscal year 2008, the earnings
targets are $28.0 million in after-tax net income and $1.12 in earnings per
share on a fully diluted basis.  We met these earnings targets for
fiscal year 2008, and as a result, the 3,906,000 shares currently in escrow will
be released to the Innomind Trust with Mr. Zou and Ms. Qiu as the sole
beneficiaries.   Under U.S. generally accepted accounting
principles, the release of any of such escrow shares to any of our employees
based on our fulfillment of stated performance thresholds constitutes a
compensatory plan to such employees, which requires us to record a corresponding
compensation expense in our financial statements.  The key provisions
of SFAS-123R require that share-based compensation awards to employees be
measured at the grant-date fair value and the cost recognized over the period
during which the employee is required to provide service in exchange for the
award. The grant date of the escrowed share agreement is October 5, 2007 and the
grant date fair value is $4.48 per share. The 3,515,400 shares of our common
stock to released to the Innomind Trust to be beneficially owned by Mr. Zou were
recognized as a stock award to him in 2008 with a value of $15,748,992. The
390,600 shares of our common stock to be released to the Innomind Trust to be
beneficially held by Ms. Qiu were recognized as a stock award to her in 2008
with a value of $1,749,888. We accrued $17.5 and $7.5 million of compensation
expense for the year ended December 31, 2008 and 2007, respectively, to Mr. Zou
and Ms. Qiu.




51




Liquidated
Damage Expenses




Pursuant
to the Securities Purchase Agreement entered into between the Company and a
group of accredited investors (the “Securities Purchase Agreement”) on October
5, 2007, we are required to register for resale shares of our common stock
issued to the investors and cause the registration statement to be declared
effective by the SEC on or before March 3, 2008. In addition, we are required to
appoint a 5 member board and a majority of the board members must be
“independent directors” as defined in NASDAQ Marketplace Rule 4200(a) (15) not
later than 120 days after the date of the agreement.  The Securities
Purchase Agreement requires us to pay liquidated damages to the investors if we
do not timely comply with these requirements. We were late in complying with
both requirements. As a result, we accrued liquidated damages on both accounts
in the aggregate amount of $2.6 million, with $1 million and $1.6 million of
liquidated damages accrued for the year ended December 31, 2007 and 2008,
respectively. We are in the process of negotiating with the investors for
potential waiver and reduction of such liquidated damages.





Other
Expense, net




Other
Expense, net, for twelve months ended December 31, 2008 decreased by $0.2
million to $0.4 million from other expenses, net, of $0.6 million in 2007, a
decrease of 36.1%. The decrease in other expense, net, was mainly due to
increase in interest income and decrease in interest expenses. Interest
income rose sharply to $130,181 from a low base as our cash balances increased
after raising equity capital in October 2007, but the absolute amount of
interest income remains immaterial. Interest expense fell to $513,830 for the
twelve months ended December 31, 2008 from $564,353 for the same period
ended December 31, 2007, a decrease of 9.0% due to the decrease of interest
rates and a reduced amount of bank debt financing related to early collections
of notes receivable. We borrowed approximately $7.3 million from one commercial
bank in China in late January 2008 with an effective interest rate of 7.47% due
January 28, 2009. The loan was repaid in December 2008.  We obtained
another loan from Shanghai Pudong Development Bank in the amount of $8.8 million
in December 2008 with an effective interest rate of 5.31% due December
2009.





Income
Tax





According
to the new Enterprise Income Tax laws that went effective January 1, 2008 and
the approval by the local tax bureau, Dalian Innomind and Dalian Rino are
entitled to a three-year income tax exemption and a 50% income tax reduction for
the following three years. No provision for income tax was made for
2008.





In 2007,
Dalian Innomind was entitled to tax exemption granted to entities qualified as a
Foreign Invested Enterprise (“FIE”) so no provision for income tax was
made.





Before
July 2007, Dalian Rino was also qualified as a FIE. On July 12, 2007, Dalian
Rino changed its license status from FIE to a domestic entity and was subject to
an income tax rate of 33% for the period entitled to tax exemption. For the year
ended December 31, 2007, provision of income tax amounted to
$5,024,774.





Liquidity
and Capital Resources





We have
historically funded our working capital needs from operations, advance payments
from customers, bank borrowings, and capital from shareholders. Our working
capital requirements are influenced by the level of our operations, the
numerical and dollar volume of our project contracts, the progress of our
contract execution, and the timing of accounts receivable
collections.





As of
December 31, 2008, and December 31, 2007, the Company had firm purchase
commitments of $10.6 million and $0.8 million, respectively. As compared to
December 31, 2007, our firm purchase commitments at December 31, 2008 increased
by $9.8 million for acquisition of equipments to be used for our expansion in
production capacity.


52


In
connection with our Securities Purchase Agreement with the investors entered
into in October, 2007, we agreed to a provision which provides that in the event
that the legal structure of our Company is challenged by Chinese authorities and
we do not mitigate the adverse effect to the investors’ reasonable satisfaction
within 60 days of the Chinese government’s action, then we are required to
redeem the investors’ common stock for $24.5 million. Consequently, this amount
has been excluded from permanent equity and recorded as redeemable common stock
in accordance with Rule 5-02.28 of Regulation S-X and Section 211 of the
Codification of Financial Reporting Policies. While we believe that the
possibility of such redemption is remote, we do not currently have adequate cash
on hand for such redemption and the requirement to pay this amount would result
in our having to borrow funds or raise additional capital. There can be no
assurance that loans or additional capital would be available, if necessary, or
that they would be available on terms acceptable to us.





Without
the redemption, we believe that we have sufficient cash, along with projected
cash to be generated by our business to support operations for at least the next
12 months.





Cash
and Cash Equivalents





Our
liquidity position remains strong, supported by approximately $19.7 million cash
and cash equivalents as of December 31, 2008, representing an increase of 167.1%
as compared to $7.4 million as of December 31, 2007. Cash generated from
operations and financing activities fully supported the needs of our working
capital, and capital investments in 2008. We believe that our cash position is
adequate to meet future short-term and mid-term liquidity
requirements.





Cash
provided by operations totaled $6.0 million in 2008, representing an increase of
220.2% as compared with $5.0 million cash used in operation in 2007. The major
components of cash provided by operations are net earnings from operations
adjusted for non-cash income and expense items and changes in working capital.
Cash provided by operations increased by $10.9 million in 2008 as compared to
2007.





The
following tables present our net cash flows for the twelve months ended December
31, 2008 and for the same period ended December 31, 2007.




Forthetwelvemonthsended
                    December31,(amount in thousands)
                  
                  2008
                  
                  
                  2007Cash
      provided by (used in) operating activities
                  
                  $
                  5,975
                  
                  
                  $
                  (4,971
                  )Cash
      used in investing activities
                  
                  $
                  (3,459
                  )
                  
                  $
                  (4,676
                  )Cash
      provided by financing activities
                  
                  $
                  8,845
                  
                  
                  $
                  13,017




Cash
flow from operating activities





Net cash
provided by operating activities was nearly $6.0 million for the twelve
months ended December 31, 2008 as compared to net cash used in operations
of approximately $5.0 million in the same period ended December 31, 2007.
Increased net income, higher non-cash expenses, decrease in costs and estimated
earnings in excess of billings on uncompleted contracts, and an increase in
customers’ deposits contributed to increased cash flows from operations. These
increases to cash flow from operations were offset by increases in accounts
receivable, advances for inventory purchases, notes receivable and a
decrease in income tax payable.




Accounts
Receivable




Our
accounts receivable at December 31, 2008 rose to $51.5 million from $20.8
million at December 31, 2007, representing an increase of 147.1%. As a
percentage of total sales, our accounts receivable rose to 43.4% at December 31,
2008, as compared to that of 33.5% at December 31, 2007.  The growth
in our receivables reflects the combined effect of our growing revenues and
increase in our 10% retainage receivable.   The retained accounts
receivable represents 10% of the total contract price for our equipment sales,
which the customers are allowed to pay one year from the date of
purchase.


53





As we are
selective in our customers based on their established credit history,
historically, we have not experienced collection issues; therefore, we generally
do not need to record a reserve for doubtful accounts. However, in fiscal
year 2008, we significantly expanded our customer base. No single customer
generated more than 10% of our revenues and sales to our top six customers
accounted for 34.7% of our total revenues.




Cost
and estimated earnings in excess of billings





During
the twelve months ended December 31, 2008 and 2007, costs and estimated earnings
in excess of billings were decreased to $0 at December 31, 2008 from $2.8
million at December 31, 2007, as the Company became more current with its
contract billing.




Advances
for inventory purchase





Advances
for inventory purchase are required to ensure timely delivery of raw materials
needed to execute existing production contracts as well as to expand the
business. Our advances for inventory purchase increased to $22.0 million at
December 31, 2008, an increase of $9.9 million or 81.8%, from the $12.1 million
recorded at December 31, 2007 as more orders of raw materials were placed for
production.





Cash
used in investing activities





For the
twelve months ended December 31, 2008, net cash used in investing activities
decreased to $3.5 million as compared to $4.7 million for the same period ended
December 31, 2007, representing a decrease of 26.0%. This decrease primarily
resulted from decrease in the advances for equipment and construction material
purchase.





Cash
provided by financing activities





Our
operations historically have been financed by capital contributions and loans
from Dalian Rino’s founders and capital raising through issuance of our shares.
For the twelve months ended December 31, 2008, net cash provided by financing
activities decreased to $8.8 million as compared to cash provided by financing
of $13.0 million for the same period ended December 31, 2007, representing a
decrease of 32.1%.  The decrease was primarily due to the fact that we
did not conduct any equity financing in 2008; instead we received net proceeds
from bank loans in the amount of $8.4 million. In 2007, we received $22.3
million net proceeds from a private equity financing.





Related
Party Transactions





The
Company owed $596,023 and $106,963 to a stockholder as of December 31, 2008 and
December 31, 2007, respectively, for advances made on an unsecured basis,
payable on demand and interest free. Imputed interest is charged per annum on
the amount due at 8% and 7% for the periods ended December 31, 2008 and December
31, 2007, respectively.  Total imputed interest recorded as additional
paid-in capital amounted to $24,268 and $33,019 for the years ended December 31,
2008 and 2007, respectively.





Contractual
Obligations





As of
December 31, 2008 and December 31, 2007, the Company had firm purchase
commitments of $10.6 million and $0.8 million, respectively. As compared to
December 31, 2007, our firm purchase commitments at December 31, 2008 increased
by $9.8 million for acquisition of equipment to be used for our expansion in
production capacity.





Off-Balance
Sheet Arrangements





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




54




CRITICAL
ACCOUNTING POLICIES




We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method used to apply the accounting
principle.





Accounts
Receivable





Accounts
receivable represents amounts due from customers for products sales and
services. The Company grants credit to customers without collateral. Accounts
receivable balance are considered past due if payment has not been received
within the payment terms established on the sales contract or granted by the
Company, typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. When the Company has
exhausted all collection efforts, the receivable and any specific allowance is
written off.





Revenue
Recognition





Contracts.The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1 “Accounting
for Performance of Construction-Type and Certain Production-Type Contracts”.
Under the percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred to date as a percentage of
the total estimated costs to the customer. When total cost estimates exceed
revenues, the Company accrues for the estimated losses immediately. The use of
the percentage-of-completion method requires significant judgment relative to
estimating total contract revenues and costs, including assumptions concerning
the length of time to complete the project, the nature and complexity of the
work to be performed, and anticipated changes in estimated costs. Estimates of
total contract revenues and costs are continuously monitored during the term of
the contract, and recorded revenues and costs are subject to revision as the
contract progresses. When revisions in estimated contract revenues and costs are
determined, such adjustments are recorded in the period in which they are first
identified.





Services.In
addition to our specialty equipment sales, the Company uses heavy machining
equipment to perform machining services for third parties. These engagements,
numbering several hundred per year, are essentially piecework and are completed
in usually less than one month. Accordingly, these heavy machinery contracts do
not fall within the scope of SOP 81-1. Each machining engagement is governed by
a separate contract, indicating existence of an arrangement.  Revenue
is recognized when service is performed, which is usually concurrent with
delivery to the customer, the contract price is set by contract, and
collectability is reasonably assured. Accordingly, these revenues are recognized
under Staff Accounting Bulletin No. 104.





The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.





Fair Value of Financial
Instruments





On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157, defines fair value, establishes a three-level valuation hierarchy
for disclosures of fair value measurement and enhances disclosures requirements
for fair value measures. The carrying amounts reported in the balance sheets for
current assets and current liabilities qualify as financial instruments and are
a reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization, and if
applicable, the stated interest rates are equivalent to rates currently
available. The three levels are defined as follows:


55





·
            Level
      1 — inputs to the valuation methodology are quoted prices
      (unadjusted) for identical assets or liabilities in active
      markets.





·
            Level
      2 — inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.





·
            Level
      3 — inputs to the valuation methodology are unobservable and significant
      to the fair value.





The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS No.
157.





Stock-based
Compensation





Stock-based
compensation is accounted for at fair value in accordance with SFAS 123(R)
“Accounting for Stock-Based Compensation”. SFAS 123R requires that compensation
cost relating to stock-based payment transactions be recognized in financial
statements. That cost is measured based on the fair value of the equity or the
liability instrument issued on the grant date, and is recognized over the period
during which a party is required to provide service in exchange for the award
(typically the vesting period).





Foreign Currency
Translation





RINO and
Innomind maintain their accounting records in their functional currency, United
States dollars and Hong Kong Dollars, respectively, whereas the Company’s PRC
subsidiaries maintain their accounting records in their functional currency,
Chinese Renminbi (“RMB”).The reporting currency of the Company is the United
States dollar.





The
financial statements of PRC subsidiaries are translated into United States
dollars using period-end exchange rates ($0.14670 and $0.13710 at December 31,
2008 and December 31, 2007, respectively) as to assets and liabilities and
weighted average exchange rates for the periods ($0.14415 and $0.13167 for the
years ended December 31, 2008 and 2007, respectively) as to revenue and
expenses.  Capital accounts are translated at their historical
exchange rates when the capital transaction occurred. Resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income (loss) within shareholders’ equity. The resulting translation gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency are included in the results of
operations as incurred. Items in the cash flow statement are translated at the
average exchange rate for the period. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.





Recent Accounting
Pronouncements





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The SFAS 159
became effective for us on January 1, 2008. The Company chose not to elect the
option to measure the fair value of eligible financial assets and
liabilities.


56


In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that are used or rendered
for research and development activities should be expensed when the advance
payment is made or when the research and development activity has been
performed.  The Company adopted FSP EITF 07-3 and expensed the
research and development costs as incurred.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51”  (“SFAS 160”), which establishes accounting and reporting
standards for ownership interestsin subsidiaries held by
parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained non-controlling equity
investments when a subsidiary is deconsolidated. The Statement also establishes
reporting requirements that provide sufficient disclosures that clearlyidentify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective forfiscal years beginning
after December 15, 2008. The Company believes that the application of SFAS 160
willnot have an
impact on its consolidated financial statements.





In
December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
to all transactions or other events in which an entity obtains control of one or
more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
consideration. This statement replaces FASB Statement No. 141 and applies to all
business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for some business combinations. The
adoption of SFAS No. 141R will have an impact on the Company’s accounting for
business combination, but the effect is dependent upon any acquisition at that
time.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement will not have an impact
on the Company’s financial statements.





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative, but is both (a) indexed to the Company’s own
stock, and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
Management is currently evaluating the impact of adoption of EITF No.
07-5.





In June
2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
is to provide transition guidance for conforming changes made to EITF No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity”. This Issue is effective for financial statements issued
for fiscal years ending after December 15, 2008. Early application is
permitted. Management is currently evaluating the impact of adoption of
EITF No. 08-4.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on our financial position or results for the year ended December
31, 2008.


57




In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. The adoption of FSP FAS 140-4
and FIN 46(R)-8 will not have a material impact on our consolidated financial
statements because all of our investments in debt securities are classified as
trading securities.





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1 did not have a material impact on our consolidated financial
statements because all of our investments in debt securities are classified as
trading securities.




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The
Company's Consolidated Financial Statements, together with the independent
registered public accounting firm reports thereon appear at pages starting
from F-1of this Form 10-K.





ITEM 9. CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING AND FINANCIAL
DISCLOSURE





Previous
Independent Accountants




We have
previously reported our changes in and disagreements with independent
accountants on accounting and financial disclosure during fiscal years 2007 and
2008 a Current Report on Form 8-K on October 12, 2007 and a Current Report on
Form 8-K on July 7, 2008.




58




ITEM
9A. CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures




The
Company’s management, with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this
report.





The term
“disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e)
means controls and other procedures of the Company that are designed to ensure
that information required to be disclosed by a company in reports, such as this
reports, that it files, or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
U.S. Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, management concluded that because of the material
weakness in internal control over financial reporting described below, our
disclosure controls and procedures were not effective as of December 31, 2008,
to satisfy the objectives for which they are intended.




Management
Report on Internal Control Over Financial Reporting




Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. The Company’s internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.




The
Company’s internal control over financial reporting includes those policies and
procedures that:




·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;




·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that the receipts and expenditures of the
      Company are being made only in accordance with authorizations of its
      management and directors of the Company;
and




·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on its financial
  statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness of internal control over financial reporting to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may
deteriorate.




The
Company’s management, with the participation of our Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control—Integrated
Framework.


59




A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.





Management
assessed and evaluated our internal controls over financial reporting and
concluded that the Company’s disclosure controls and procedures over financial
reporting were not effective because of the following identified material
weaknesses in our internal control:





1.
Ineffective controls over accounting for revenues and billing
process





We did
not design and maintain effective controls over the accounting for revenues.
Specifically, the controls over our billing system were not designed and
operating effectively to ensure the completeness and accuracy of related
revenues.





Further
more, during its evaluation, management determined that a material weakness
existed with respect to our process of estimating the allowance for
uncollectible accounts at December 31, 2008. The Company’s process for
determining its allowance for uncollectible accounts focused primarily on
evaluating the appropriate percentage of gross revenues to record during a
particular period. However, as of December 31, 2008, the Company did not have
processes or controls in place that would enable management to appropriately
evaluate, document and review the adequacy of the allowance for uncollectible
accounts as of a particular period-end.





2.
Ineffective controls over financial statement closing process





We did
not maintain effective controls over accounting for non-routine transactions or
accounting estimates, and our controls over the financial statement close
process related to account reconciliations and analyses, including bank
accounts, deferred project costs, certain long-lived assets and accrued
liabilities, were not effective. Furthermore, we did not have effective controls
over the completeness, accuracy, validity and restricted access over complex
spreadsheets used by us for the transformation of statutory accounts into U.S.
GAAP. As a result, a large volume of adjustments were necessary to completely
and accurately present the financial statements in accordance with generally
accepted accounting principles. Due to the significance of the adjustments
identified and the significance of the financial statement close process to the
preparation of reliable financial statements, there is reasonable possibility
that a material misstatement of the interim and annual financial statements
would not have been prevented or detected on a timely basis resulting in
restatement of our financial statements in the past.





On May
30, 2008, subsequent to the filing of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 (the “2007 10-K”) which contained our the
audited financial statements for the fiscal years ended December 31, 2007 and
2006, management determined in consultation with our prior independent
accountants that there were material errors in the presentation of current
assets, concentration of risks related to the Company’s largest customers and
cash flows related to the payment of deposits for the acquisition of property
and equipment in the Company’s financial statements for the fiscal years ended
December 31, 2007 and 2006 and that such financial statements should not be
relied upon. As a result, the Company restated the financial statements in
Amendment No.2 to the 2007 10-K which was filed with the Securities and Exchange
Commission on June 11, 2008.





On July
24, 2008, management determined in consultation with our current and prior
independent accountants that there were also errors in the restated financial
statements filed with Amendment No. 2 to the 2007 10-K as well as our unaudited
financial statements as of March 31, 2008 and for the three months then ended
which were filed with the SEC as part of the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2008 (the “March 2008 10-Q”) causing
redeemable stock to be presented as permanent equity and that such financial
statements should not be relied upon. As a result, we restated the financial
statements contained in Amendment No.2 to the 2007 10-K by filing on August 4,
2008 Amendment No.3 to the 2007 10-K and also restated the financial statements
contained in the March 2008 10-Q by filing on August 5, 2008 Amendment No. 1 to
the March 2008 10-Q. The restatements had no effect on the income statement,
including net income and earnings per share for the periods covered by the
restated financial statements.


60




3.
Lack of controls over construction in process and fixed assets
management





We did
not maintain effective controls over recording of requisitions of equipment and
spare parts from warehouses to construction. We also did not have systems and
controls in place to track existence of construction in process, and
construction costs by project to ensure timely commissioning and start of
depreciation of fixed assets already placed in service. The lack of timely
reconciliation procedures and deficient recordkeeping controls result in
material weakness in this area such that there is a reasonable possibility that
due to these control deficiencies a material misstatement will not be prevented
or detected on a timely basis.





4.
Insufficient U.S. GAAP qualified accounting and finance personnel





Given the
manual US GAAP closing process as it relates to non-routine transactions and
estimates, we did not have sufficient and skilled accounting and finance
personnel necessary to close our books under U.S. GAAP. This material weakness
resulted in adjustments to several significant accounts and disclosures and
contributed to other material weaknesses described above.





5. Lack
of Internal Audit Function





We lack
of qualified resources to perform the internal audit functions properly. In
addition, the scope and effectiveness of the internal audit function are yet to
be developed.





As a
result of the material weaknesses described above, management has concluded that
our internal control over financial reporting was ineffective as of December 31,
2008 based on the “Internal Control— Integrated Framework” set forth in
COSO.





Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.




Changes
in internal control over financial reporting




There
have been no changes to the Company’s internal control over financial reporting
during the quarter ended December 31, 2008 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.




Remediation
activities and Changes in Internal Control over Financial Reporting


Remediation
Activities





Management
intends to implement the following measures to remediate the material weaknesses
that had a material impact on our internal control over financial
reporting:




·
              Hire
      finance personnel with experience with complex revenue recognition rules
      including accounting for multiple element
  contracts.




·
              Institute
      formal contract review process to establish and document the revenue
      recognition events and methodology at the inception of revenue generating
      contracts.


61




·
              Institute
      a new process for review of multiple element contracts with standardized
      documentation which allows for both allocation of revenue based on
      available objective evidence of fair value as well as the associated
      billing schedule.




·
              Deliver
      training on revenue recognition principles to sales and operational
      members of our divisions.




·
                Enhance
      reconciliations, analysis and related reviews for all accounts that give
      rise to income tax effects in the financial
  statements.




·
              Hire
      more qualified and experienced accounting personnel to perform the month
      end review and closing processes as well as provide additional oversight
      and supervision within the accounting
  department.




PART
III





Item
10. Directors, Executive Officers and Corporate Governance





The
directors and executive officers of RINO International Corporation as of the
date of this report are as follows:




Name
            
            Position
            
            AgeZou
      Dejun
            
            Director
      and CEO
            
            48Qiu
      Jianping
            
            Director
      and Chairman of the Board,
              Acting
      CFO
            
            42Quan
      Xie
            
            Director
            
            47Zhang
      Weiguo
            
            Director
            
            51Kennith
      C. Johnson, CPA
            
            Director
            
            55





Mr. Zou Dejun has been a
Director and the Chief Executive Officer of the Company since October 2007. Mr.
Zou is the founder of Dalian Rino and has been a Director and its Chief
Executive Officer since 2003. He has also been a Director and the Chief
Executive Officer of Dalian Innomind since July 2007. Prior to founding Dalian
Rino, from 1993 until 1996 Mr. Zou served as Vice President of Yingkou Special
Valve Manufacturing Co., and from 1996 until 2003 he served as the chief
executive officer of Dalian Yingkun Energy and Environmental Engineering, Ltd.
Mr. Zou graduated from Liaoning Broadcast University, majoring in Electronic
Automation.





Ms. Qiu Jianping has been the
Chairman of the Board of the Company since March 2008. Ms.Qiu has been acting as
our CFO since the resignation of our former CFO in September 2008. Ms. Qiu has
been a Director and Chairman of the Board of Dalian Rino since 2003. Ms. Qiu is
also a Director and Chairman of the Board of Dalian Innomind since July 2007.
From 1988 to 1994, Ms. Qiu was the Director of the Finance Department of the
Water & Electricity No. 5 Engineering Bureau. From 1994 through 1996 Ms. Qiu
was engaged in studies at the Dalian University of Foreign Languages, and from
1996 to 2003, she served as the Chairman of the Board of Dalian Yingkun Energy
and Environmental Engineering, Ltd. Ms. Qiu has won the prestigious
‘Entrepreneur of the Year’ award in the Jinzhou District of Dalian and is the
holder of three patents. She currently chairs the Association of Industry and
Commerce in Dalian.





Professor Quan Xie has been a
Director of the Company since March 2008. Prof. Quan is the Director of the
Institute for Environmental and Life Sciences of Dalian University of Technology
(DUT). Prof, Quan began lecturing at DUT in 1986 and has participated in
visiting scholar programs at major universities and research centers in Germany,
Austria, and England. He is a Senior Fellow of the China Society of
Environmental Science and has authored and co-authored over 200 papers in his
career. Prof. Quan earned his doctorate in chemistry from Karl-Franzens
University in Graz, Austria.


62




Mr. Kennith Johnson, CPA, has
been a Director of the Company since March 2008. Mr. Johnson’s career in public
and corporate accounting stretches back to the mid-1970’s when he worked for
Arthur Andersen’s New York audit practice. Since 2005, Mr. Johnson has served as
Senior Vice President - CFO of Fairfax/MFX, an insurance and financial
conglomerate. From 2001 to 2005 he served as Principal - Management Consultant
at Johnson & Scanlon Associates. Beginning in 2004 through the present, Mr.
Johnson has served as Chairman of the Audit and Compensation Committee of
Interpharm Holdings, an AMEX listed company. Mr. Johnson holds an MBA in
International Corporate Finance from the Stern School of
Management.





Mr. Zhang Weiguo has been a
Director of the Company since March 2008. In 2001 Mr. Weiguo Zhang joined
Synutra, Inc. as President to oversee its U.S. operations. In June 2005, he was
appointed President and Chief Operating Officer of Synutra, to help develop the
company's growth strategy and take the company public. In addition to Synutra's
U.S. business operations, Mr. Weiguo Zhang is responsible for the company's
financial market operations, including investor relations, corporate
development, and international strategic development. Mr. Zhang holds an M.A. in
American Foreign Policy and International Economics from the School of Advanced
International Studies at John Hopkins University.




The
directors will serve until our next annual meeting, or until their successors
are duly elected and qualified. The officers serve at the pleasure of the
Board.





To our
knowledge, during the last five years, none of our directors and executive
officers (including those of our subsidiaries) has:





·
            Had a bankruptcy petition filed
      by or against any business of which such person was a general partner or
      executive officer either at the time of the bankruptcy or within two years
      prior to that time.





·
            Been convicted in a criminal
      proceeding or been subject to a pending criminal proceeding, excluding
      traffic violations and other minor
  offenses.





·
            Been subject to any order,
      judgment or decree, not subsequently reversed, suspended or vacated, of
      any court of competent jurisdiction, permanently or temporarily enjoining,
      barring, suspending or otherwise limiting his involvement in any type of
      business, securities or banking
  activities.





·
            Been found by a court of
      competent jurisdiction (in a civil action), the SEC, or the Commodities
      Futures Trading Commission to have violated a federal or state securities
      or commodities law, and the judgment has not been reversed, suspended or
      vacated.





Family Relationship





There are
no family relationships among our directors or executive officers except that
Mr. Zou Dejun and Ms. Qiu Jianping are married to each other.





Nomination
of Directors by Security Holders





We do not
currently have procedures by which our security holders may recommend nominees
to our Board of Directors except that in connection with the private placement
that we completed on October 5, 2007, Hare & Co., an investor in the private
placement, has the right to designate one member of the Company’s (or at their
election, Dalian Innomind’s or Dalian Rino’s) Board of Directors. As of the date
of this Report, Hare & Co. has not designated a member of the
board.


63


Section 16(a) Beneficial Ownership Reporting Compliance
 
 Section 16(a)
of the Exchange Act requires the Company’s directors, executive officers and
persons who own more than 10% of the Company’s Common Stock to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Directors,
executive officers and greater than 10% stockholders are required by SEC rules
to furnish the Company with copies of Section 16(a) forms they
file.
 
 The
Company believes that all of its directors, executive officers and greater than
10% beneficial owners complied with all filing requirements applicable to them
in 2008.




Code
of Ethics





The
Company does not permit activities that give rise to conflicts of interest by
directors, executive officers or employees. In this regard, the Company adopted
a Code of Ethics in March 2008, a copy of which was previously filed as Exhibit
14.1 to our Annual Report on Form 10-K for the fiscal year ended December 31,
2007.  The Code of Ethics is also available at our website: www.rinogroup.com.





Our Code
of Ethics applies to Directors, our Chief Executive Officer, Chief Financial
Officer and all of the other employees. Our Code of Ethics include standards
that are reasonably designed to deter wrongdoing and to promote (i) honest and
ethical conduct, (ii) full, fair, accurate, timely, and understandable
disclosure in reports and documents that we file or submit to the SEC and in our
other public communications, (iii) compliance with applicable governmental laws,
rules and regulations, (iv) the prompt internal reporting of violation of the
code to an appropriate person or person identified in the code, and (v)
accountability for adherence to the code.




Meetings
and Committees of the Board of Directors





The Board
of Directors met three times through teleconferencing during fiscal year 2008.
In addition to meetings of the full Board, directors attended meetings of Board
committees on which they served. The Board’s standing committees are the Audit,
Compensation and Nominating Committees.





Committee
Membership





The
following table shows the current membership on the standing
committees:





Name
              
              Audit
      Committee
              
              Compensation
      Committee
              
              Nominating
      CommitteeKennith
      Johnson
              
              Chair
              
              Member
              
              MemberQuan
      Xie
              
              Member
              
              Chair
              
              MemberZhang
      Weiguo
              
              Member
              
              Member
              
              Chair





Audit
Committee





Our board
of directors established an Audit Committee on April 4, 2008 and appointed
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo as our audit committee
members. Mr. Johnson was appointed as the Chairman of our audit committee. Each
of our audit committee members is determined by our Board of Directors to be
“independent” under the Rules of NASDAQ, Marketplace Rule
4200(a)(15).


Audit
Committee Financial Expert





Our board
of directors had determined that our Chairman of the Audit Committee, Mr.
Kennith Johnson, qualifies as an “audit committee financial expert” as defined
in Item 407(d) of Regulation S-K and is “independent” as the term is used in
Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange
Act.





The
committee assists the Board in fulfilling its oversight responsibilities
relating to:





· our
auditing, accounting and reporting practices;


· the
adequacy of our systems of internal controls;


· and the
quality and integrity of publicly reported financial disclosures.





In this
role, the committee appoints the independent auditors and reviews and approves
the scope of the audit, the financial statements and the independent auditors’
fees.


64





The Audit
Committee exercises the powers of the Board of Directors in connection with our
accounting and financial reporting practices, and provides a channel of
communication between the Board of Directors and independent registered public
accountants.




Nominating
Committee of the Board of Directors




Our board
of directors established a Nominating Committee on July 15, 2008 and appointed
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo as our Nominating Committee
members. Mr. Zhang Weiguo was appointed as the Chairman of our Nominating
Committee. Each of our nominating committee members is determined by our Board
of Directors to be “independent” under the Rules of NASDAQ, Marketplace Rule
4200(a)(15).





Our
Nominating Committee adopted a charter on July 15, 2008. A copy of the
Nominating Committee charter is available to our securities holders on the
Company’s website at: www.rinogroup.com. The Nominating Committee identifies and
considers candidates for board membership. The Nominating Committee has the
power and authority to review candidates proposed by our stockholders for
nomination to the Board of Directors, and to conduct appropriate inquiries into
the background and qualifications of any such candidates. In connection with the
private placement that we completed on October 5, 2007, Hare & Co., an
investor in the private placement, has the right to designate one member of the
board of directors of the Company (or at their election, the board of directors
of Dalian Innomind or Dalian Rino). As of the date of this Report, Hare &
Co. has not designated a member of the board.





Compensation
Committee of the Board of Directors





Our board
of directors established a Compensation Committee on July 15, 2008 and appointed
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo as our Compensation Committee
members. Mr. Quan Xie was appointed as the Chairman of our Compensation
Committee. Each of our Compensation Committee members is determined by our Board
of Directors to be “independent” under the Rules of NASDAQ, Marketplace Rule
4200(a)(15).





Our
Compensation Committee oversees and administers our executive compensation
programs. The Compensation Committee seeks to ensure that the total compensation
paid to our named executive officers is fair, reasonable and competitive. The
Compensation Committee’s complete roles and responsibilities are set forth in
the written charter adopted by the Board of Directors on July 15, 2008. A copy
of the Compensation Committee charter is available to our securities holders on
the Company’s website at: www.rinogroup.com.





Compensation
Committee Interlocks and Insider Participation





None of
the Compensation Committee members is, or was ever, an officer or employee of
the Company or any of its subsidiaries, nor did any of the Compensation
Committee members have any relationship requiring disclosure by the Company
under any subsection of Item 404 of Regulation S-K promulgated by the
SEC. During the last fiscal year, none of the executive officers of the Company
served on the board of directors or on the compensation committee of any other
entity, any of whose executive officers served on the Board.


65







Item
11. Executive Compensation





The
Company’s executive officers each hold the same position with Dalian Rino and
Dalian Innomind. None of the Company’s executive officers receive any
compensation for serving as executive officers of the Company, but are
compensated by and through Dalian Rino. The following table sets forth
information concerning the compensation of the named executive officers for each
of fiscal years 2007 and 2008:





Name
      and
                          principal
                          position
                        Year
                        
                        Salary
                          ($)
                        
                        Bonus
                          ($)
                        
                        Stock
                          awards
                          ($)
                        
                        Option
                          awards
      ($)
                        Non-equity
                          incentive
      plan compensation
                          ($)
                        Change
      in pension
                          value
      and
                          nonqualified
                          compensation
                          earnings
      ($)
                        All
      other
                          compensation
                          (4)Zou
      Dejun (1)
                        2007
                        
                        
                        65,100
                        
                        
                        
                        
                        1,506,6002008
                        
                        
                        69,192
                        
                        
                        
                        
                        15,748,992Qiu
      Jianping (1)(2)
                        2007
                        
                        
                        65,100
                        
                        
                        
                        
                        167,4002008
                        
                        
                        69,192
                        
                        
                        
                        
                        1,749,888Bruce
      Richardson (3)
                        2007
                        
                        
                        35,200
                        
                        
                        
                        
                        38,2042008
                        
                        
                        155,682
                        
                        
                        
                        
                        0





Notes to
“Summary Compensation
Table”





(1)
Escrowed Share Arrangement




Pursuant
to the Securities Purchase Agreement, 5,580,000 shares of our common stock
beneficially owned by our founders Zou Dejun and Qiu Jianping - who, through The
Innomind Trust, together control 71.5% of the Company’s outstanding common stock
as of the date of this report, were required to be subject to escrow in order to
secure our obligation under the Securities Purchase Agreement to deliver
additional common stock to the private placement investors in the event we fail
to achieve certain after-tax net income targets for fiscal years 2007 and
2008.  The shares held in escrow as Make Good Escrow Shares will not
be accounted for on our books until such shares became releasable from escrow
pursuant to the terms of the Securities Purchase Agreement. If any Make Good
Escrow Shares are released to the company management or employees, the value of
such shares at the time of release will be recorded as compensation expense with
a corresponding offset to additional paid-in capital in accordance with SFAS
123(R) paragraph 11.


66


As a
result of us achieving the 2007 earnings targets, presently, there are 3,906,000
shares remaining in escrow.  For fiscal year 2008, the earnings
targets are $28.0 million in after-tax net income and $1.12 in earnings per
share on a fully diluted basis.  We met these earnings targets for
fiscal year 2008, and as a result, the 3,906,000 shares currently in escrow will
be released to the Innomind Trust with Mr. Zou and Ms. Qiu as the sole
beneficiaries.   Under U.S. generally accepted accounting
principles, the release of any of such escrow shares to any of our employees
based on our fulfillment of stated performance thresholds constitutes a
compensatory plan to such employees, which requires us to record a corresponding
compensation expense in our financial statements.  The key provisions
of SFAS-123R require that share-based compensation awards to employees be
measured at the grant-date fair value and the cost recognized over the period
during which the employee is required to provide service in exchange for the
award. The grant date of the escrowed share agreement is October 5, 2007 and the
grant date fair value is $4.48 per share. The 3,515,400 shares of our common
stock to be released to the Innomind Trust to be beneficially owned by Mr. Zou
were recognized as a stock award to him in 2008 with a value of $15,748,992. The
390,600 shares of our common stock to be released to the Innomind Trust to be
beneficially held by Ms. Qiu were recognized as a stock award to her in 2008
with a value of $1,749,888. Accordingly, we accrued $7.5 and $17.5 million of
compensation expense for fiscal years 2007 and 2008,
respectively.


(2)
Chairman of the Board is an executive office in Dalian Rino and Dalian
Innomind.





(3)
Option Awards to the Chief Financial Officer





As part
of the employment agreement dated September 27, 2007, by and between the Company
and Bruce Richardson, pursuant to which Mr. Richardson has been employed by the
Company as the Company’s Chief Financial Officer for a term of 3 years at a
monthly salary of $11,667, the Company granted to Mr. Richardson, a
non-qualified stock option to purchase 250,000 shares of its Common Stock at an
exercise price of $5.38 per share, vesting in 3 equal annual installments
beginning on January 1, 2009.





On
September 5, 2008, Bruce Richardson resigned from his positions as the Chief
Financial Officer and Secretary of the company to pursue other interests. The
Company accepted Mr. Richardson’s resignation. As a result of Mr. Richardson’s
departure, the employment agreement is terminated. No options granted to Mr.
Richardson were vested at the termination of the employment agreement and all
options granted under the employment agreement were forfeited.





Employment
Agreements





We have
employment agreements with each of our executive officers, which are summarized
below.





·
            Zou
      Dejun.Pursuant to
      an employment agreement dated August 1, 2007, Zou Dejun is employed by
      Dalian Innomind as its Manager at a monthly salary of 40,000 RMB (approx.
      $5,230). The employment agreement expires on December 31, 2010. Under the
      agreement, Mr. Zou’s salary is subject to adjustment commensurate with
      Dalian Innomind’s revenues, but in no event less than the lowest standard
      salary prescribed by the Dalian city government. In addition, Mr. Zou is
      entitled to annual vacation in compliance with PRC rules pertaining to the
      same. The agreement is terminable by Dalian Innomind for cause, on 30 days
      notice.





Mr. Zou
has also signed a non-competition/non-disclosure agreement with the
Company.





·
            Qiu
      Jianping.Pursuant
      to an employment agreement dated August 1, 2007, Qiu Jianping is employed
      by Dalian Innomind as its Chairman of the Board at a monthly salary of
      40,000 RMB (approx. $5,230). In the PRC, this position is an executive
      officer position, instead of directorship. The employment agreement
      expires on December 31, 2010. Under the agreement, Ms. Qiu’s salary is
      subject to adjustment commensurate with Dalian Innomind’s revenues, but in
      no event less than the lowest standard salary prescribed by the Dalian
      city government. In addition, Ms. Qiu is entitled to annual vacation in
      compliance with PRC rules pertaining to the same. The agreement is
      terminable by Dalian Innomind for cause, on 30 days
      notice.




67




Ms. Qiu
has also signed a non-competition/non-disclosure agreement with the
Company.




·
            Bruce
      Richardson.Pursuant to an employment agreement dated September 27,
      2007, Bruce Richardson is employed by RINO International Corporation as
      the Company’s Chief Financial Officer for a term of 3 years at a monthly
      salary of $11,667. In addition, Mr. Richardson will be granted 250,000
      options to purchase common stock at an exercise price of $5.38 per share,
      vesting in 3 equal annual installments beginning on January 1, 2009. The
      options will be issued as soon as practical after January 2, 2009. Under
      the agreement, Mr. Richardson is entitled to 20 days of paid vacation per
      year. The agreement is terminable on 30 days notice, and contains
      non-competition and non-disclosure
covenants.





On
September 5, 2008, Bruce Richardson resigned from his positions as the Chief
Financial Officer and Secretary of the company to pursue other interests. The
Company accepted Mr. Richardson’s resignation. As a result of Mr. Richardson’s
departure, Mr. Richardson’s employment agreement was terminated and no option
has been vested under the employment agreement.





Director
Compensation





The
Company’s directors did not receive compensation for their service on the Board
of Directors for the fiscal years ended December 31, 2006 and 2007.





Commencing
in 2008, each of our independent directors is paid a $2,000 cash retainer per
quarter and $500 for each board meeting or committee meeting attended. We also
reimburse our directors for actual, reasonable and customary expenses incurred
in connection with the performance of their duties as board members. Set forth
below is information concerning the compensation of the directors for fiscal
year 2008.




Name
                  
                  Fees
                    earned
      or
                    paid
      in
                    cash
      ($)
                  
                  Stock
                    awards
      ($)
                  Option
                    awards
      ($)
                  Non-equity
                    incentive
      plan
                    compensation
                    ($)
                  Nonqualified
                    deferred
                    compensation
                    earnings
      ($)
                  All
      other
                    compensation
                    ($)
                  
                  Total
      ($)Zou
      Dejun
                  
                  
                  0
                  
                  
                  
                  
                  
                  
                  
                  
                  0Qiu
      Jianpine
                  
                  
                  0
                  
                  
                  
                  
                  
                  
                  
                  
                  0Zhang
      Weiguo
                  
                  
                  6,000
                  
                  
                  
                  
                  
                  
                  
                  
                  6,000Quan
      Xie
                  
                  
                  6,000
                  
                  
                  
                  
                  
                  
                  
                  
                  6,000Kennith
      Johnson
                  
                  
                  24,076
                  
                  
                  
                  
                  
                  
                  
                  
                  24,076




68





Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





Securities
ownership of certain beneficial owners and management





The
following table sets forth certain information with respect to the beneficial
ownership of our common stock as of March 26, 2009 by (i) any person or group
with more than 5% of our voting securities, (ii) each director, (iii) each
executive officer and (iv) all executive officers and directors as a
group.





As of
March 26, 2009, we had 25,040,000 shares of common stock outstanding. In
determining the percent of common stock owned by a stockholder on March 26,
2009, (a) the numerator is the number of shares of common stock beneficially
owned by such stockholder, including shares the beneficial ownership of which
may be acquired, within 60 days upon the conversion of convertible securities or
the exercise of warrants held by such stockholder, and (b) the denominator is
the sum of (i) 25,040,000, the number of shares outstanding on March 26, 2009,
and (ii) the total number of shares underlying the convertible securities and
warrants, which such stockholder has the right to acquire within 60 days
following March 26, 2009.





Unless
otherwise stated, each beneficial owner has sole power to vote and dispose of
the shares and the address of such person is c/o the Company, at 11 Youquan
Road, Zhanqian Street, Jinzhou District, Dalian, People’s Republic of China
116100.





Title
      of Class
                              
                              Name and Address of
                                Beneficial Owner
                              
                              Amount and
                                Nature of
                                Beneficial
                                Ownership
                              
                              
                              Percent of
                                ClassCommon
      Stock
                              
                              Zou
      Dejun, Director and CEO
                              
                              
                              16,109,679
                              (1)(2
      )
                              
                              
                              64.33
                              %Common
      Stock
                              
                              Qiu
      Jianping, Director and Chairman
                                of
      the Board, and CFO
                              
                              
                              1,789,964
                              (1)(2
      )
                              
                              
                              7.15
                              %Common
      Stock
                              
                              Quan
      Xie, Director
                              
                              
                              0
                              
                              
                              
                              0
                              %Common
      Stock
                              
                              Kennith
      C. Johnson, Director
                              
                              
                              0
                              
                              
                              
                              0
                              %Common
      Stock
                              
                              Zhang
      Weiguo, Director
                              
                              
                              0
                              
                              
                              
                              0
                              %Common
      Stock
                              
                              Hare
      & Co.c/o Blue Ridge
                                Investments,
      LLC214 North Tryon
                                Street
      Charlotte, N.C. 28255
                              
                              
                              1,785,714
                              
                              
                              
                              7.13
                              %Common
      Stock
                              
                              All
      Directors and Officers of the
                                Company
      as a group (3 people )
                              
                              
                              17,899,643
                              
                              
                              
                              71.5
                              %





(1)
17,899,643 shares of our common stock are owned of record by The Innomind Trust,
a British Virgin Islands trust, of which Zou Dejun, the Company’s Chief
Executive Officer, is the beneficiary of 16,109,679 shares (the “Zou Shares”), and Qiu Jianping, the
Company’s Chairman of the Board, is the beneficiary of 1,789,964 shares (the
“Qiu Shares”). Each retains voting and investment power over his/her respective
shares. Mr. Zou and Ms. Qiu are married. Mr. Zou disclaims beneficial ownership
of the Qiu Shares, and Ms. Qiu disclaims beneficial ownership of the Zou
Shares.


69





(2) As a
closing condition to the private placement completed on October 5, 2007, Zou
Dejun and Qiu Jianping agreed to place in escrow for the benefit of the private
placement investors 5,580,000 shares of common stock, some or all of which is
distributable to the investors in the event the Company fails to attain
specified financial performance milestones.  As of the date of this
Report, 3,906,000 shares remain in escrow and will be released to the founders
because the Company has achieved the earnings threshold for 2008 required under
the Securities Purchase Agreement.




Changes
in Control




We do not
currently have any arrangements which if consummated may result in a change of
control of our Company.




Securities
Authorized for Issuance under Equity Compensation Plans





We do not
currently have any equity compensation plan.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Certain
Relationships and Related Transactions





Loans
from Directors




Pursuant
to resolutions of the Board of Directors of Dalian Innomind dated July 8, 2007,
our CEO and Director Zou Dejun, his wife, Qiu Jianping, and their nephew Zhang
Ze, each board members of Dalian Innomind, agreed to permit Dalian Innomind to
borrow funds from directors of Dalian Innomind from time to time for working
capital and general corporate purposes. Zou Dejun actually extended the loan to
Dalian Innomind. Zou Dejun and Qiu Jianping, together hold 100% of RINO’s equity
interest, and are the sole beneficiaries of The Innomind Trust which holds 71.5%
of our total outstanding common stock. Pursuant to the board resolutions, as of
December 31, 2008, the Company owed Zou Dejun an aggregate of $596,023 for
advances made on an unsecured basis and free of interest payment and repayable
on demand.  Imputed interest expense of 7% per annum was credited to
additional paid-in capital in the amount of $24,269 for the year ended December
31, 2008. There was no written loan agreement entered into by the parties
regarding the foregoing.





Restructuring
Agreements with Dalian Rino





At the
present time, PRC law does not provide for a direct share exchange between a PRC
entity and an offshore company. To obtain the same result as a direct share
exchange, Dalian Rino (whose ownership interest is 100% owned by our CEO and
director, Mr. Zou Dejun together with his wife, Ms. Qiu Jianping, our Chairman
of the Board) and our indirect subsidiary, Dalian Innomind, entered into the
Restructuring Agreements on October 3, 2007. Under the Restructuring Agreements,
Dalian Innomind agreed to: (i) purchase and lease from RINO substantially all of
RINO’s assets and properties, including, among other things, the purchase of
RINO’s manufacturing equipment, patent and trademark for an aggregate of
$298,173 (or RMB 2,260,343) and the lease of RINO’s manufacturing plants and
land at an annual rent of $82,778 (or RMB 610,000); and (ii) fully conduct and
manage RINO’s business in exchange for Dalian Rino’s payment to Dalian Innomind
of a management fee equal to the Business’s monthly net profits. To the extent
that any aspect of the Business needs to be conducted directly through
Dalian Rino in the future, the Restructuring Agreements provide Dalian Innomind
with the legal right and power to control Dalian Rino and any of its remaining
assets and operations. The purchase price of the Dalian Rino assets was the
basis to Dalian Rino less accumulated depreciation, this principle is set by PRC
law. The Entrusted Management Agreement makes Dalian Rino a contractually
controlled affiliate under EITF 97-2, allowing the Company to consolidate Dalian
Rino’s operations.


70





For a
description of the Restructuring Agreements, see the section of this prospectus
entitled “Business - Restructuring Agreements to Acquire Dalian Rino’s Operating
Business.”




Issuance
of Common Stock to Former Majority Shareholder and Sole Director and Executive
Officer




On August
8, 2007, the Company issued 2,950 (295,000 post-forward split) common shares to
Glenn A. Little for cash of $14,750. The Company relied on the exemption from
registration provided under Section 4(2) of the Securities Act.





On
September 11, 2007, the Company issued 92,800 shares of its common stock to
Glenn A. Little (the “Little Shares”) at prices that exceeded the then-current
bid. At that time and immediately prior to the consummation of the Share
Exchange, Mr. Little was the Company’s majority shareholder and its sole
director and executive officer.




The
investors in the private placement netted the number of shares of common stock
purchasable therein and the aggregate purchase price for those shares against
the issuance of the Little Shares, resulting in gross private placement proceeds
of $24,480,319 and the issuance of 5,464,357 shares of common stock to those
investors.





Employment
Agreement





The
Company entered into an employment agreement dated September 27, 2007, with
Bruce Richardson, pursuant to which Mr. Richardson was to be employed by the
Company as the Company’s Chief Financial Officer for a term of 3 years at a
monthly salary of $11,667. In addition, Mr. Richardson was issued options to
purchase 250,000 shares of common stock at an exercise price of $5.38 per share,
vesting in 3 equal annual installments beginning on January 1, 2009. Under the
agreement, Mr. Richardson was entitled to 20 days of paid vacation per year. The
agreement was terminable on 30 days notice, and contains non-competition and
non-disclosure covenants.
 
 As a
result of Mr. Richardson’s resignation from his positions as the CFO and
Secretary of the Company in September 2008, his employment agreement with the
Company was terminated. None of his options was vested at the time of the
termination of the employment agreement.


Director
Independence





Each of
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo is an “independent director”
under the Rules of NASDAQ, Marketplace Rule 4200(a)(15).





Under the
terms of the Securities Purchase Agreement entered into as of September 27,
2007, with certain of the selling stockholders, we were required, prior to
February 2, 2008, to increase our Board of Directors to not less than 5 members,
a majority of whom must be “independent directors” as defined in NASDAQ
Marketplace Rule 4200(a)(15). Until this covenant is complied with, we are
required to hold $1,000,000 in escrow. If for any reason or no reason the escrow
agent does not receive requisite written notice from the investor
representatives as to releasing this sum from escrow within 65 days after the
private placement closing, we are required to pay liquidated damages of $244,353
per month (or partial month) until the default is cured. We appointed each of
the independent directors on March 20, 2008. Because of our delayed appointment
of independent directors, we have accrued liquidated damages in the amount of
$627,172 in this regard.




71




ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





Independent
Public Accountants




S.W.
Hatfield, CPA, independent certified public accountants, located at 9002 Green
Oaks Circle, 2nd Floor,
Dallas, Texas 75243-7212, served as independent public accountant and audited
the financial statements of RINO International for the fiscal years ended
December 2006 and 2005. On October 5, 2007, in connection with the Company’s
acquisition of RINO’s assets and business and the related change in control of
the Company, our Board of Directors elected to discontinue our relationship with
S.W. Hatfield, CPA as our independent accountant and appointed Jimmy C.H. Cheung
& Co., independent public accountants located at 1607 Dominion Center, 43
Queen’s Road, East, Wanchai, Hong Kong, to be the independent public accountant
of the Company. On April 29,
2008, our board of directors approved our termination of Jimmy c.H. Cheung &
Co. CPAs as our independent auditors. At the same time, Moore, Stephens Wurth
Frazer and Torbet, LLP, located at 1199, Fairway Drive, 2ndFloor, Walnut, CA 91789 was approved
by our audit committee and board of directors to be our new independent
accountant.


Fees
and Services of Independent Public Accountants





1. Jimmy C.H. Cheung &
Co.





Fiscal Year Ended
                              
                              
                              Fiscal Year EndedDecember 31, 2007
                              
                              
                              December 31, 2008Audit
      Fees*
                              
                              $
                              70,000
                              
                              
                              $
                              1,200Audit
      Related FeesTax
      FeesAll
      Other FeesTotal
                              
                              $
                              70,000
                              
                              
                              $
                              1,200
 
 The
$1,200 audit fee was incurred in connection with the issuance of the audit
report by Jimmy C. H. Cheung & Co. on the Company’s annual financial
statements for fiscal year 2007.


2.Moore Stephens Wurth Frazer and
Torbet, LLP


Fiscal
      Year
                                Ended
                              
                              Fiscal
      Year EndedDecember
      31,
                                2007
                              
                              December
      31, 2008Audit
      Fees**
                              $
                              
                              
                              190,000Audit
      Related FeesTax
      FeesAll
      Other Fees
                              $Total
                              $
                              
                              
                              190,000
 
 ** The
$190,000 audit fee was incurred in connection with the audit of the Company’s
annual financial statements and review of the financial statements included in
the Company’s Form 10-Qs for fiscal year 2008.
 
 In the event that we should require substantial
non-audit services, the Audit Committee of the Board of Directors would approve
such services and the fees therefore.





Part
IV





Item
15. Exhibits and Financial Statement Schedules.


3.1
                  Certificate
      of Incorporation (Incorporated herein by reference to Exhibits 3.1.1 and
      3.1.2 to the Registration Statement on Form 10-SB filed with the SEC on
      April 5, 2007, as amended by Exhibit 3.1 to the Current Report on Form 8-K
      filed with the SEC on May 15, 2008)3.2
                  Bylaws
      (Incorporated herein by reference to Exhibit 3.2.1 to the Registration
      Statement on Form 10-SB filed with the SEC on April 5,
    2007)4.1
                  Securities
      Purchase Agreement, dated as of September 27, 2007 by and among the
      Company and the named investors (Incorporated herein by reference to
      Exhibit 4.1 to the Registration Statement on Form SB-2 filed with the SEC
      on November 19, 2007)4.1.2
                  Common
      Stock Specimen (Incorporated herein by reference to Exhibit 4.1 to the
      Registration Statement on Form SB-2 filed with the SEC on November 19,
      2007)
  
  
 4.2
                Form
      of Warrant ( (Incorporated herein by reference to Exhibit 4.2 to the
      Registration Statement on Form SB-2 filed with the SEC on November 19,
      2007)10.1
                Share
      Exchange Agreement dated October 5, 2007 by and among the Company, Zhang
      Ze and Innomind Group Limited (Incorporated herein by reference to Exhibit
      10.1 to the Registration Statement on Form SB-2 filed with the SEC on
      November 19, 2007)10.2
                Translation
      of Purchase Agreement, dated as of October 3, 2007, by and among Dalian
      Rino Engineering Science and Technology Co., Ltd., and Dalian Innomind
      Environment Engineering Co., Ltd. (Incorporated herein by reference to
      Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on
      October 12, 2007)10.3.1
                Translation
      of Entrusted Management Agreement, dated as of October 3, 2007, by and
      among Dalian Innomund Environment Engineering Co., Ltd., Dalian Rino
      Engineering Science and Technology Co., Ltd., Zou Dejun and Qiu Jianping
      (Incorporated herein by reference to Exhibit 10.3 to the Current Report on
      Form 8-K filed with the SEC on October 12, 2007)10.4
                Translation
      of Patent Transfer Contract, dated as of October 3, 2007, by and among
      Dalian Rino Engineering Science and Technology Co., Ltd., and Dalian
      Innomind Environment Engineering Co., Ltd. (Incorporated herein by
      reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the
      SEC on October 12, 2007)10.5
                Translation
      of Shareholders’ Voting Proxy Agreement, dated as of October 3, 2007, by
      and among Dalian Innomind Environment Engineering Co., Ltd., Zou Dejun and
      Qiu Jianping (Incorporated herein by reference to Exhibit 10.5 to the
      Current Report on Form 8-K filed with the SEC on October 12,
      2007)
  10.6
                Translation
      of Exclusive Option Agreement, dated as of October 3, 2007, by and among
      Dalian Innomind Environment Engineering Co., Ltd., Zou Dejun and Qiu
      Jianping (Incorporated herein by reference to Exhibit 10.6 to the Current
      Report on Form 8-K filed with the SEC on October 12,
  2007)10.7
                Translation
      of Pledge of Equity Agreement, dated as of October 3, 2007, by and among
      Dalian Innomind Environment Engineering Co., Ltd., Zou Dejun and Qiu
      Jianping (Incorporated herein by reference to Exhibit 10.7 to the Current
      Report on Form 8-K filed with the SEC on October 12,
  2007)10.9
                Lock-Up
      Agreement, dated September 27, 2007, by and among Jade Mountain
      Corporation and Zou Dejun and Qiu Jianping  (Incorporated herein
      by reference to Exhibit 10.9 to the Registration Statement on Form SB-2
      filed with the SEC on November 19, 2007)10.9.1
                Lock-Up
      Agreement, dated September 27, 2007, by and among Jade Mountain
      Corporation and The Innomind Trust  (Incorporated herein by reference
      to Exhibit 10.9.1 to the Registration Statement on Form SB-2 filed with
      the SEC on November 19, 2007)10.9.2
                Lock-Up
      Agreement, dated September 27, 2007, by and among Jade Mountain
      Corporation and Bruce Richardson  (Incorporated herein by
      reference to Exhibit 10.9.2 to the Registration Statement on Form SB-2
      filed with the SEC on November 19, 2007)10.10
                Registration
      Rights Agreement, dated as of September 27, 2007, by and among Jade
      Mountain Corporation and the investors signatory - thereto
      (Incorporated herein by reference to Exhibit 10.10 to the Registration
      Statement on Form SB-2 filed with the SEC on November 19,
      2007)10.11
                Engagement
      Agreement Providing for Investment Banking Services, dated January 19,
      2007 by and between RINO and Douglas Financial (Incorporated herein by
      reference to Exhibit 10.11 to the Registration Statement on Form S-1/A
      filed with the SEC on March 11, 200810.12
                Side
      Letter Agreement dated July 27, 2007 by and between Douglas Financial LLC
      and Dalian RINO Environmental Engineering Science and Technology Co., Ltd.
      (Incorporated herein by reference to Exhibit 10.12 to the Registration
      Statement on Form S-1/A filed with the SEC on March 11,
    2008.
 
 10.13
                Employment Agreement dated September 27, 2007, by and between Jade
      Mountain Corporation and Bruce Richardson (Incorporated herein by
      reference to Exhibit 10.13 to the Registration Statement on Form S-1/A
      filed with the SEC on March 11, 2008.14.1
                Code
      of Ethics (Incorporated herein by reference to Exhibit 14.1 to the Annual
      Report on Form 10-K for the fiscal year ended December 31,
      2007)21.1
                List
      of subsidiaries *
  
  
 31.1
                    Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*31.2
                    Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*32.1
                    Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002*
  * Filed
herewith







74


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on March 30, 2009
on its behalf by the undersigned, thereunto duly authorized.




RINO
      INTERNATIONAL CORPORATIONBy
                      /s/
      Zou DejunZou
      DejunChief
      Executive Officer
                        (Principal
      Executive Officer)By
                      /s/
      Qiu JianpingQiu
      JianpingActing
      Chief Financial Officer
                        (Principal
      Financial
Oficer)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




SIGNATURE
                              
                              TITLE
                              
                              DATE/s/
      Zou Dejun
                              
                              Director
                              
                              March
      30, 2009Zou
      Dejun/s/
      Qiu Jianping
                              
                              Chairman
      of the Board
                              
                              March
      30, 2009Qiu
      Jianping/s/
      Zhang Weiguo
                              
                              Director
                              
                              March
      30, 2009Zhang
      Weiguo/s/
      Quan Xie
                              
                              Director
                              
                              March
      30, 2009Quan
      Xie/s/
      Kennith Johnson
                              
                              Director
                              
                              March
      30, 2009Kennith
      Johnson




75




Jimmy C.H. Cheung &
      Co
                          Certified Public
      Accountants
                            (A member of Kreston
      International)
                        
                        Registered with the Public
      Company
                          Accounting Oversight
      Board




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors of:
 Rino
International Corporation (formerly known as Jade Mountain
Corporation)
 
 We have
audited the accompanying consolidated balance sheets ofRino
International Corporation and subsidiaries, as of December 31, 2007 and the
related consolidated statements of operations and comprehensive income,
stockholders’ equity and cash flows for the year ended December 31, 2007. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits of the financial
statements provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Rino International
Corporation, as of December 31, 2007, and the results of its operations and its
cash flows for the year ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
 
 
 
 /s/JIMMY C.H. CHEUNG &
CO
 Certified
Public Accountants
 
 
 Hong
Kong
 January
23, 2008
    1607
      Dominion Centre, 43 Queen’s Road East, Wanchai, Hong
  KongTelephone:  (852)
      2529 5500   Fax:  (852) 2127
  7660Email       :  jimmy.cheung@jchcheungco.hkWebsite    :  http://www.jchcheungco.hk
  76




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and
 Stockholders
of Rino International Corporation and Subsidiaries
  We have
audited the accompanying consolidated balance sheet of Rino International
Corporation and subsidiaries as of December 31, 2008, and the related
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of Rino
International Corporation and subsidiaries as of December 31, 2007 in the
accompanying consolidated financial statements were audited by other auditors
whose report dated January 23, 2008 expressed an unqualified opinion on those
statements, except for Notes 4 and 19 which were restated on June 6, 2008 and
Notes 15 and 21 which were restated on July 21, 2008.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Rino International
Corporation and subsidiaries as of December 31, 2008 and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.
 
 /S/ Moore
Stephens Wurth Frazer and Torbet, LLP
  Walnut,
California
 March 30,
2009








77






RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


CONSOLIDATED
BALANCE SHEETS


AS OF
DECEMBER 31, 2008 AND 2007





2008
                            
                            
                            2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            19,741,982
                            
                            
                            $
                            7,390,631Restricted
      cash
                            
                            
                            1,030,317
                            
                            
                            
                            1,000,000Notes
      receivable
                            
                            
                            2,157,957
                            
                            
                            
                            202,670Accounts
      receivable
                            
                            
                            51,503,245
                            
                            
                            
                            19,222,133Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                            
                            
                            -
                            
                            
                            
                            2,818,122Inventories
                            
                            
                            1,203,448
                            
                            
                            
                            178,480Advances
      for inventory purchase
                            
                            
                            21,981,669
                            
                            
                            
                            12,092,202Other
      current assets and prepaid expenses
                            
                            
                            517,847
                            
                            
                            
                            1,174,464Total
      current assets
                            
                            
                            98,136,465
                            
                            
                            
                            44,078,702PROPERTY,
      PLANT AND EQUIPMENT, NET
                            
                            
                            13,197,119
                            
                            
                            
                            11,000,581OTHER
      ASSETSAccounts
      receivable (non-current)
                            
                            
                            -
                            
                            
                            
                            1,618,203Prepaid
      expenses (non-current)
                            
                            
                            73,350
                            
                            
                            
                            95,706Advances
      for equipment and construction material purchase
                            
                            
                            5,550,966
                            
                            
                            
                            3,751,343Prepayment
      for land use right
                            
                            
                            458,292
                            
                            
                            
                            428,301Intangible
      assets, net
                            
                            
                            1,211,608
                            
                            
                            
                            1,190,289Total
      other assets
                            
                            
                            7,294,216
                            
                            
                            
                            7,083,842Total
      assets
                            
                            $
                            118,627,800
                            
                            
                            $
                            62,163,125LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                            
                            $
                            5,816,714
                            
                            
                            $
                            2,534,858Short-term
      loan
                            
                            
                            8,802,000
                            
                            
                            
                            -Customer
      deposits
                            
                            
                            3,609,407
                            
                            
                            
                            116,214Liquidated
      damages payable
                            
                            
                            2,598,289
                            
                            
                            
                            1,000,000Other
      payables and accrued liabilities
                            
                            
                            746,267
                            
                            
                            
                            686,031Due
      to a stockholder
                            
                            
                            596,023
                            
                            
                            
                            106,963Taxes
      payable
                            
                            
                            5,062,901
                            
                            
                            
                            9,541,603Total
      current liabilities
                            
                            
                            27,231,601
                            
                            
                            
                            13,985,669REDEEMABLE
      COMMON STOCK ($0.0001 par value, 5,464,357 shares issued with conditions
      for redemption outside the control of the company)
                            
                            
                            24,480,319
                            
                            
                            
                            24,480,319COMMITMENTS
      AND CONTINGENCIES
                            
                            
                            -
                            
                            
                            
                            -SHAREHOLDERS'
      EQUITYPreferred
      Stock ($0.0001 par value, 50,000,000 shares authorized,  none
      issued and outstanding)
                            
                            
                            -
                            
                            
                            
                            -Common
      Stock ($0.0001 par value, 10,000,000,000 shares authorized, 25,040,000 and
      25,000,000 shares issued and outstanding as of  December 31,
      2008 and 2007, respectively)
                            
                            
                            2,504
                            
                            
                            
                            2,500Additional
      paid-in capital
                            
                            
                            25,924,007
                            
                            
                            
                            8,221,663Retained
      earnings
                            
                            
                            28,570,948
                            
                            
                            
                            11,376,163Statutory
      reserves
                            
                            
                            6,196,478
                            
                            
                            
                            2,109,539Accumulated
      other comprehensive income
                            
                            
                            6,221,943
                            
                            
                            
                            1,987,272Total
      shareholders' equity
                            
                            
                            66,915,880
                            
                            
                            
                            23,697,137Total
      liabilities and shareholders' equity
                            
                            $
                            118,627,800
                            
                            
                            $
                            62,163,125





See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated
statements.


F-1





RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007





2008
                        
                        
                        2007REVENUES:Contracts
                        
                        $
                        119,920,874
                        
                        
                        $
                        42,073,308Services
                        
                        
                        19,422,523
                        
                        
                        
                        21,313,500139,343,397
                        
                        
                        
                        63,386,808COST
      OF SALESCost
      of contracts
                        
                        
                        74,247,181
                        
                        
                        
                        24,170,825Cost
      of services
                        
                        
                        10,099,616
                        
                        
                        
                        8,178,852Depreciation
                        
                        
                        662,436
                        
                        
                        
                        571,26785,009,233
                        
                        
                        
                        32,920,944GROSS
      PROFIT
                        
                        
                        54,334,164
                        
                        
                        
                        30,465,864OPERATING
      EXPENSESSelling,
      general and administrative expenses
                        
                        
                        14,760,562
                        
                        
                        
                        6,565,640Research
      and development
                        
                        
                        245,920
                        
                        
                        
                        581,846Stock
      compensation expense
                        
                        
                        17,678,080
                        
                        
                        
                        7,499,520TOTAL
      OPERATING EXPENSES
                        
                        
                        32,684,562
                        
                        
                        
                        14,647,006INCOME
      FROM OPERATIONS
                        
                        
                        21,649,602
                        
                        
                        
                        15,818,858OTHER
      INCOME (EXPENSE), NETOther
      income
                        
                        
                        75,914
                        
                        
                        
                        12,926Interest
      income
                        
                        
                        130,181
                        
                        
                        
                        32,065Interest
      expense
                        
                        
                        (513,830
                        )
                        
                        
                        (564,353
                        )Other
      expenses
                        
                        
                        (60,143
                        )
                        
                        
                        (55,917
                        )TOTAL
      OTHER EXPENSES, NET
                        
                        
                        (367,878
                        )
                        
                        
                        (575,279
                        )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                        
                        
                        21,281,724
                        
                        
                        
                        15,243,579PROVISION
      FOR INCOME TAXES
                        
                        
                        -
                        
                        
                        
                        5,024,774NET
      INCOME
                        
                        
                        21,281,724
                        
                        
                        
                        10,218,805OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                        
                        
                        4,234,671
                        
                        
                        
                        1,789,994COMPREHENSIVE
      INCOME
                        
                        $
                        25,516,395
                        
                        
                        $
                        12,008,799WEIGHTED
      AVERAGE NUMBER OF SHARES:Basic
                        
                        
                        25,040,000
                        
                        
                        
                        19,611,510Diluted
                        
                        
                        25,148,178
                        
                        
                        
                        19,694,481EARNINGS
      PER SHARE:Basic
                        
                        $
                        0.85
                        
                        
                        $
                        0.52Diluted
                        
                        $
                        0.85
                        
                        
                        $
                        0.52





See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated
statements.


F-2





RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007





Common
      StockPar
      Value $0.0001
                    
                    
                    Additional
                    
                    
                    Retained
      Earnings
                    
                    
                    Accumulated
      otherNumber
                    
                    
                    Common
                    
                    
                    Paid-in
                    
                    
                    Unrestricted
                    
                    
                    Statutory
                    
                    
                    comprehensiveof
      shares
                    
                    
                    stock
                    
                    
                    capital
                    
                    
                    earnings
                    
                    
                    reserve
                    
                    
                    income
                    
                    
                    TotalsBALANCE,
      December 31, 2006
                    
                    
                    17,899,643
                    
                    
                    $
                    1,790
                    
                    
                    $
                    3,827,447
                    
                    
                    $
                    2,940,341
                    
                    
                    $
                    326,556
                    
                    
                    $
                    197,278
                    
                    
                    $
                    7,293,412Recapitalization
                    
                    
                    491,000
                    
                    
                    
                    49
                    
                    
                    
                    (49
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Shares
      issued in private placement less costs of issuance
                    
                    
                    5,464,357
                    
                    
                    
                    546
                    
                    
                    
                    (2,227,143
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,226,597
                    )Shares
      issued in cost of private placement
                    
                    
                    1,125,000
                    
                    
                    
                    113
                    
                    
                    
                    (113
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Stock
      compensation expense-shares issued
                    
                    
                    20,000
                    
                    
                    
                    2
                    
                    
                    
                    48,998
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    49,000Stock
      compensation expense-shares issued
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    38,204
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    38,204Stock
      compensation expense-escrow shares
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,499,520
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,499,520Provision
      for liquidated damages
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,000,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,000,000
                    )Contribution
      by stockholder
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,780
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,780Imputed
      interest on advances from a shareholder
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    33,019
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    33,019Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,218,805
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,218,805Allocation
      to statutory reserve
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,782,983
                    )
                    
                    
                    1,782,983
                    
                    
                    
                    
                    
                    
                    
                    -Foreign
      currency translation gain
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,789,994
                    
                    
                    
                    1,789,994BALANCE,
      December 31, 2007
                    
                    
                    25,000,000
                    
                    
                    $
                    2,500
                    
                    
                    $
                    8,221,663
                    
                    
                    $
                    11,376,163
                    
                    
                    $
                    2,109,539
                    
                    
                    $
                    1,987,272
                    
                    
                    $
                    23,697,137Stock
      compensation expense-shares placed in escrow
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    17,498,880
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    17,498,880Imputed
      interest on advances from a shareholder
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    24,268
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    24,268Shares
      issued for services
                    
                    
                    40,000
                    
                    
                    
                    4
                    
                    
                    
                    179,196
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    179,200Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    21,281,724
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    21,281,724Allocation
      to statutory reserve
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,086,939
                    )
                    
                    
                    4,086,939
                    
                    
                    
                    
                    
                    
                    
                    -Foreign
      currency translation gain
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,234,671
                    
                    
                    
                    4,234,671BALANCE,
      December 31, 2008
                    
                    
                    25,040,000
                    
                    
                    $
                    2,504
                    
                    
                    $
                    25,924,007
                    
                    
                    $
                    28,570,948
                    
                    
                    $
                    6,196,478
                    
                    
                    $
                    6,221,943
                    
                    
                    $
                    66,915,880





See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated
statements.


F-3





RINO INTERNATIONAL CORPORATION AND
SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007





2008
                            
                            
                            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                            
                            $
                            21,281,724
                            
                            
                            $
                            10,218,805Adjusted
      to reconcile net income to cash provided by (used in) operating
      activities:Depreciation
                            
                            
                            806,625
                            
                            
                            
                            658,937Amortization
                            
                            
                            65,651
                            
                            
                            
                            11,654Imputed
      interest
                            
                            
                            24,268
                            
                            
                            
                            33,019Amortization
      of  long term prepaid expense
                            
                            
                            28,830
                            
                            
                            
                            42,667Stock
      compensation expense
                            
                            
                            17,678,080
                            
                            
                            
                            7,586,724Liquidated
      damage expense
                            
                            
                            1,598,289
                            
                            
                            
                            -Changes
      in operating assets and liabilitiesNotes
      receivable
                            
                            
                            (1,906,766
                            )
                            
                            
                            -Accounts
      receivable
                            
                            
                            (28,635,455
                            )
                            
                            
                            (14,435,613
                            )Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                            
                            
                            2,971,223
                            
                            
                            
                            (2,705,985
                            )Inventories
                            
                            
                            (994,352
                            )
                            
                            
                            (57,130
                            )Advances
      for inventory purchase
                            
                            
                            (8,850,435
                            )
                            
                            
                            (11,337,385
                            )Other
      current assets and prepaid expenses
                            
                            
                            512,905
                            
                            
                            
                            (1,043,339
                            )Accounts
      payable
                            
                            
                            3,043,036
                            
                            
                            
                            (1,525,537
                            )Customer
      deposits
                            
                            
                            3,424,139
                            
                            
                            
                            -Other
      payables and accrued liabilities
                            
                            
                            12,662
                            
                            
                            
                            (138,641
                            )Taxes
      payable
                            
                            
                            (5,085,079
                            )
                            
                            
                            8,393,777Deferred
      tax liabilities
                            
                            
                            -
                            
                            
                            
                            (672,947
                            )Net
      cash provided by (used in) operating activities
                            
                            
                            5,975,345
                            
                            
                            
                            (4,970,994
                            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                            
                            
                            (2,176,132
                            )
                            
                            
                            (831,886
                            )Advances
      for construction material and equipment purchase
                            
                            
                            (1,283,107
                            )
                            
                            
                            (3,053,405
                            )Prepayment
      for land use right
                            
                            
                            -
                            
                            
                            
                            (410,125
                            )Purchase
      of intangible assets
                            
                            
                            -
                            
                            
                            
                            (380,717
                            )Net
      cash used in investing activities
                            
                            
                            (3,459,239
                            )
                            
                            
                            (4,676,133
                            )CASH
      FLOWS FROM FINANCING ACTIVITIESContribution
      by stockholders
                            
                            
                            -
                            
                            
                            
                            1,780Net
      proceeds from redeemable preferred stock issuance in private
      placement
                            
                            
                            -
                            
                            
                            
                            22,253,722Payment
      on due to shareholder
                            
                            
                            -
                            
                            
                            
                            (361,098
                            )Proceeds
      from shareholder advances
                            
                            
                            472,979
                            
                            
                            
                            -Increase
      of restricted cash
                            
                            
                            (30,317
                            )
                            
                            
                            (1,000,000
                            )Proceeds
      from short-term bank loan
                            
                            
                            15,712,000
                            
                            
                            
                            -Repayment
      of short-term bank loan
                            
                            
                            (7,310,000
                            )
                            
                            
                            (7,876,910
                            )Net
      cash provided by financing activities
                            
                            
                            8,844,662
                            
                            
                            
                            13,017,494EFFECT
      OF EXCHANGE RATE ON CASH
                            
                            
                            990,583
                            
                            
                            
                            415,914INCREASE
      IN CASH AND CASH EQUIVALENTS
                            
                            
                            12,351,351
                            
                            
                            
                            3,786,281CASH
      AND CASH EQUIVALENTS, beginning
                            
                            
                            7,390,631
                            
                            
                            
                            3,604,350CASH
      AND CASH EQUIVALENTS, ending
                            
                            $
                            19,741,982
                            
                            
                            $
                            7,390,631Cash
      paid during the period for:Interest
                            
                            $
                            480,902
                            
                            
                            $
                            531,334Income
      taxes
                            
                            $
                            5,434,122
                            
                            
                            $
                            519,258





See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated
statements.


F-4


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008










NOTE
1 – ORGANIZATION AND BUSINESS




RINO
International Corporation (formerly known as “Jade Mountain Corporation” or
“JMC”), (the “Company) was originally incorporated in 1984 as Applied
Biometrics, Inc. in accordance with the laws of the State of Minnesota. The
Company is engaged in designing, developing, manufacturing, and installing
environmental protection and energy saving equipment for customers throughout
China.





On
December 27, 2006, the shareholders of JMC approved a proposal to re-domicile
JMC from the State of Minnesota to the State of Nevada. JMC effected the
re-domicile through a merger with a new Nevada corporation which was formed by
JMC on September 12, 2006 solely and specifically for the purpose of effecting
the re-domicile of JMC. At this time, JMC changed its name to Jade Mountain
Corporation. During the first six months ended June 30, 2007, JMC ceased all
business operations and disposed of all its assets, liabilities and operating
activities. JMC has had no operations or significant assets since the year ended
December 31, 2006.





Innomind
Group Limited (“Innomind”) was incorporated in the British Virgin Islands
(“BVI”) on November 17, 2006 as an investment holding company. Through its
wholly owned subsidiary, Dalian Innomind Environment Engineering Co., Ltd.
(“Dalian Innomind”) incorporated in the People’s Republic of China (“PRC”) as a
wholly owned foreign limited liability company on July 9, 2007. Dalian Innomind
through its variable interest entity (VIE), Dalian Rino Environment Engineering
Science And Technology Co., Ltd. (“Dalian Rino”) mainly engages in design,
development, manufacture and installation of industrial equipment used mainly
for environmental protection purposes in the PRC. In accordance with the
business permit, Dalian Innomind’s right of operation expires on July 8, 2022
and is renewable on expiry.





Dalian
Rino Environment Engineering Science And Technology Co., Ltd. (“Dalian Rino”)
was incorporated in the PRC on March 5, 2003 as a limited liability company. On
September 24, 2008, Dalian Rino formed Dalian Rino Environmental Engineering
Project Design Co., Ltd. (“Dalian Rino Design”) as a wholly owned limited
liability company.  On October 14, 2008, Dalian Rino formed Dalian
Rino Environmental Construction & Installation Project Co., Ltd. (Dalian
Rino Installation”) as a wholly owned limited liability company.  The
business activities of Dalian Rino Design and Dalian Rino Installation focus
primarily on research and development, technical design and installation aspect
of the business. In accordance with the business permit, Dalian Rino Design’s
right of operation expires on March 4, 2021 and is renewable. Dalian Rino
Design’s right of operation expires on September 23, 2018 and is
renewable.  Dalian Rino Installation’s right of operation expires on
October 13, 2018 and is renewable.


F-5


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







On
October 5, 2007, JMC consummated a Share Exchange Agreement (“the Agreement”)
with the shareholders of Innomind pursuant to which JMC issued 17,899,643 shares
of Common Stock, par value $0.0001 per share to the shareholders of Innomind for
100% equity interest in Innomind. Prior to the Share Exchange: (i) on July 16,
2007, the Company consummated a one (1) share for two hundred thousand (200,000)
shares reverse split of its Common Stock, with fractional shares rounded up to
the nearest whole number (the “Reverse Split”); and (ii) on August 31, 2007, the
Company’s Board of Directors authorized a one hundred (100) shares for one (1)
share forward split of the issued and outstanding shares of its Common Stock
(the “Forward Split”). All share and per share amounts set forth in this Current
Report as of dates on or after July 16, 2007, give effect to the Reverse Split
and all share and per share amounts set forth in this Current Report as of dates
after August 31, 2007, give effect to the Forward Split.





The
merger of JMC and Innomind is being treated for accounting purposes as a capital
transaction and recapitalization by Innomind (the “accounting acquirer”) and
re-organization by JMC (the “accounting acquiree”).  As a result,
Innomind acquired the net assets of Jade Mountain at book value.





The
financial statements have been prepared as if the re-organization had occurred
retroactively. Accordingly, these financial statements include:





1)
            The
      balance sheet consisting of the net assets of the accounting acquirer at
      historical cost and the net assets of the accounting acquiree at
      historical cost.





2)
            The
      statement of operations including the operations of the accounting
      acquirer for the periods presented and the operations of the accounting
      acquiree from the date of the
transaction.





On
October 3, 2007, Dalian Innomind entered into a series of agreements
(collectively known as the Restructuring Agreements) with Dalian Rino and the
shareholders of Dalian Rino in which Dalian Innomind assumed the management of
the business activities of Dalian Rino, making Dalian Rino a contractually
controlled affiliate under EITF 97-2. As both companies were under common
control before and after the consummation of the Restructuring Agreements on
October 5, 2007, this was accounted for as a reorganization of entities under
common control and consolidated financial statements were prepared as if the
reorganization occurred at the beginning of the first period
presented.





Effective
May 9, 2008, Jade Mountain Corporation changed its name to “RINO International
Corporation.” The board approved the changed name and deemed it better reflect
the direction and business of the Company.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





The
accompanying consolidated financial statements of RINO International Corporation
reflect the activities of the following subsidiaries and variable interest
entities (“VIE”):


F-6


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







Place
                    incorporated
                  
                  Ownership
                    percentageInnomind
      Group Limited
                  BVI
                  
                  
                  100
                  %Dalian
      Innomind Environment Engineering Co., Ltd.
                  Dalian,
      China
                  
                  
                  100
                  %Dalian
      Rino Environment Engineering Science and Technology Co.,
    Ltd.
                  Dalian,
      China
                  
                  VIEDalian
      Rino Environmental Engineering Project Design Co., Ltd.
                  Dalian,
      China
                  
                  VIEDalian
      Rino Environmental Construction & Installation Project Co.,
      Ltd.
                  Dalian,
      China
                  
                  VIE





Financial
Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46 (revised
December 2003), “Consolidation of Variable Interest Entities, and Interpretation
of ARB No. 51” (“FIN 46R”), addresses whether certain types of entities referred
to as variable interest entities (“VIEs”), should be consolidated in a company’s
consolidated financial statements.  In accordance with the provisions
of FIN 46R, the Company has determined that Dalian Rino, Dalian Rino Design and
Dalian Rino Construction are VIE and that the Company is the primary
beneficiary, and accordingly, the financial statements of Dalian Rino, Dalian
Rino Design and Dalian Rino Construction are consolidated into the financial
statements of the Company.





The
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America and are
expressed in US dollars. All material intercompany transactions and
balances have been eliminated in the consolidation.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Management believes that the estimates used in
preparing its financial statements are reasonable and prudent. Actual results
could differ from those estimates.





Cash and Cash
Equivalents





For
purposes of the financial statements, cash and cash equivalents include cash on
hand, demand deposits with a banks, and all highly-liquid investments with an
original maturity of 3 months or less.





The
Company maintains cash in financial institutions within the PRC and Hong Kong.
Balances at financial institutions or state-owned banks within the PRC are not
covered by insurance.  Non-performance by these institutions could
expose the Company to losses for amounts in excess of insured
balances.   As of December 31, 2008 and 2007, the Company’s cash
balances, totaling $19,744,139 and $7,344,223, respectively at those dates, were
not covered by insurance.


F-7


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







The cash
held in escrow pursuant to the Board Escrow Holdback as described in Note 20 is
accounted for as other current assets and is not shown as cash or cash
equivalents on the balance sheet until such funds have been released from escrow
pursuant to the terms of the Securities Purchase Agreement.





Restricted
Cash





The
Company records cash deposits in banks or other institutions subject to
restrictions on the withdrawal or use of the fund as restricted
cash.





Accounts
Receivable





Accounts
receivable represents amounts due from customers for products sales and
services. The Company grants credit to customers without collateral. Accounts
receivable balance are considered past due if payment has not been received
within the payment terms established on the sales contract or granted by the
Company, typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. When the Company has
exhausted all collection efforts, the receivable and any specific allowance is
written off.  The Company’s current accounts receivables are
outstanding for less than one year and the Company has not experienced any loss
from uncollected accounts receivable. The Company believes all receivables are
fully collectible and therefore did not reserve an allowance for doubtful
account as of December 31, 2008.





Inventories





Inventory
is consisted of raw materials and low cost consumption supplies used in
manufacturing process and work in process. Inventory is valued at the lower of
cost or market value using weighted average cost method. Management reviews its
inventories periodically to determine if any reserves are necessary for
potential obsolescence or if a write down is necessary because the carrying
value exceeds net realizable value.





Property, Plant and
Equipment





Property
and equipment are stated at cost, less accumulated
depreciation.  Expenditures for additions, major renewals and
betterments are capitalized while expenditures for maintenance and repairs are
charged to expense as incurred.





Construction
in progress represents direct costs of construction as well as acquisition and
design fees and interest expense incurred. Capitalization of these costs ceases
and the construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided until construction is
completed and the asset is ready for its intended use.


F-8


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







Depreciation
is provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives.  The estimated useful lives are as
follows:





Buildings
                30
      YearsPlant
      and machinery
                15
      YearsMotor
      vehicles
                10
      YearsFurniture,
      fixtures and equipment
                5
      Years





Intangible
Assets





Intangible
assets are stated at cost, less accumulated amortization and impairments. Land
use rights are stated at cost, less accumulated amortization and are amortized
over the term of the relevant rights of 50 years from the date of
acquisition.





Other Long-Lived
Assets





Long-lived
assets and certain identifiable intangible assets are reviewed for impairment at
least annually, more often whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows related to the long- lived assets.
As of December 31, 2008, the Company expected these assets to be fully
recoverable.





Fair Value of Financial
Instruments





On
January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements,” which
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
current assets and current liabilities qualify as financial instruments and are
a reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization, and if
applicable, the stated interest rates are equivalent to rates currently
available.  The three levels are defined as follow:





·
            Level
      1 — inputs to the valuation methodology are quoted prices
      (unadjusted) for identical assets or liabilities in active
      markets.


·
            Level
      2 — inputs to the valuation methodology include quoted prices for
      similar assets and liabilities in active markets, and inputs that are
      observable for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.


·
            Level
      3 — inputs to the valuation methodology are unobservable and
      significant to the fair value.


F-9


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.





Revenue Recognition





Contracts.The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1 “Accounting
for Performance of Construction-Type and Certain Production-Type Contracts”.
Under the percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred to date as a percentage of
the total estimated costs to the customer. When total cost estimates exceed
revenues, the Company accrues for the estimated losses immediately. The use of
the percentage-of- completion method requires significant judgment relative to
estimating total contract revenues and costs, including assumptions relative
concerning the length of time to complete the project, the nature and complexity
of the work to be performed, and anticipated changes in estimated costs.
Estimates of total contract revenues and costs are continuously monitored during
the term of the contract, and recorded revenues and costs are subject to
revision as the contract progresses. When revisions in estimated contract
revenues and costs are determined, such adjustments are recorded in the period
in which they are first identified.





Services.In
addition to our specialty equipment sales, the Company uses heavy machining
equipment to perform machining services for third parties. These engagements,
numbering several hundred per year, are essentially piecework and are completed
in usually less than one month. Accordingly, these heavy machinery contracts do
not fall within the scope of SOP 81-1. Each machining engagement is governed by
a separate contract, indicating existence of an arrangement.  Revenue
is recognized when service is performed, which is usually concurrent with
delivery to the customer, the contract price is set by contract, and
collectability is reasonably assured. Accordingly, these revenues are recognized
under Staff Accounting Bulletin No. 104.





The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.





Government
Grant





The
Dalian municipal government approved grants to the Company to encourage
high-technology industry research and development. The grants are netted with
the research and development expenses upon receipt from the local
government.


F-10


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







Shipping and
Handling





Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling cost incurred for shipping of finished products to
customers are included in selling expenses. Shipping and handling expenses
included in selling expense for the years ended December 31, 2008 and 2007
amounted to $990,256 and $331,641, respectively.





Research and Development
Costs





Research
and development (or “R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs. Under the guidance of
SFAS 2, “Accounting for Research and Development Costs”, the Company expenses
the costs associated with the R&D activities when incurred.





Stock-based
Compensation





Stock-based
compensation is accounted for at fair value in accordance with SFAS 123(R)
“Accounting for Stock-Based Compensation”. SFAS 123R requires that compensation
cost relating to stock-based payment transactions be recognized in financial
statements. That cost is measured based on the fair value of the equity or
liability instruments issued on the grant date, and is recognized over the
period during which a party is required to provide service in exchange for the
award (typically the vesting period). Stock compensation for stock granted
to non-employees is determined in accordance with SFAS 123R and the EITF 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services", as the fair value
of the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.





Income
Taxes





The
Company accounts for income taxes pursuant to SFAS 109, “Accounting for Income
Taxes”.  Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period included the enactment
date.





The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
effect on the Company’s financial statements.


F-11


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







China Income
Taxes





The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).


The key
changes are:





a.
            The
      new standard EIT rate of 25% replaces the 33% rate applicable to both DES
      and FIEs, except for High Tech companies that pay a reduced rate of
      15%;





b.
            Companies
      established before March 16, 2007 continue to enjoy tax holiday treatment
      approved by local government for a grace period of either for the next 5
      years or until the tax holiday term is completed, whichever is
      sooner.





In
addition, the new EIT also grants tax holidays to entities operating in certain
beneficial industries, such as the agriculture, fishing, and environmental
protection. Entities in beneficial industries enjoy a three-year period tax
exempt and a three-year period with 50% reduction in the income tax
rates.





Dalian
Innomind and Rino are entities in the environmental protection industry, which
is qualified for the tax exemption for three years and a 50% reduction for the
following three years. As a result, Dalian Innomind and Rino enjoy a 100% tax
exemption for the years 2008 through 2010 and a 50% income tax reduction for the
years 2011 through 2013.





Foreign Currency
Translation





JMC and
Innomind maintain their accounting records in their functional currency in the
United States dollars and Hong Kong Dollars, respectively, whereas the Company’s
PRC subsidiaries maintain their accounting records in their functional currency,
Chinese Renminbi (“RMB”).The reporting currency of the Company is the United
States dollar.





The
financial statements of PRC subsidiaries are translated into United States
dollars using year-end exchange rates ($0.14670 and $0.13710 at
December 31, 2008 and December 31, 2007, respectively) as to assets and
liabilities and weighted average exchange rates for the periods ($0.14415 and
$0.13167 for the years ended December 31, 2008 and 2007, respectively) as to
revenue and expenses.  Capital accounts are translated at their
historical exchange rates when the capital transaction
occurred.   Resulting translation adjustments are recorded as a
component of accumulated other comprehensive income (loss) within
shareholders’ equity. The resulting translation gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as
incurred.


F-12


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008












Items in
the cash flow statement are translated at the average exchange rate for the
period. As a result, amounts related to assets and liabilities reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.





Earnings Per
Share





The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share." SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method.





Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the calculation
date.





Segments





The
Company designs and manufactures pollution control equipment and other equipment
designed to reduce the resource intensity of steel production, effectively
serving one segment.  Accordingly, segment disclosure is not
presented.   Additional detail on the composition of revenues is
presented in Note 18, Concentrations and Risks, below.





Reclassifications





Certain
prior year amounts have been reclassified to conform to the current year
presentation. Land use right included as part of intangible assets in the amount
of $428,301 was reclassified to Prepayment for land use right due to the Company
had not received the legal title to the land use right as of December 31, 2007.
Government grant in the amount of $228,430 included as part of revenues was
reclassified to be netted with research and development expenses for the year
ended December 31, 2007.


F-13


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008












Recent Accounting
Pronouncements





In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS 159 became effective for
us on January 1, 2008. The Company chose not to elect the option to measure the
fair value of eligible financial assets and liabilities.





In June
2007, the FASB issued FASB Staff Position (“FSP”) EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities”, which addresses whether nonrefundable
advance payments for goods or services that used or rendered for research and
development activities should be expensed when the advance payment is made or
when the research and development activity has been performed.  The
Company adopted FSP EITF 07-3 and expensed the research and development as
incurred.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51”, which establishes accounting and reporting standards for ownership
interestsin
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearlyidentify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective forfiscal years beginning
after December 15, 2008. The Company believes that the application of SFAS 160
willnot have an
impact on its consolidated financial statements.





In
December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
to all transactions or other events in which an entity obtains control of one or
more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
consideration. This statement replaces FASB Statement No. 141 and applies to all
business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for some business combinations. The
adoption of SFAS No. 141R will have an impact on the Company’s accounting for
business combination, but the effect is dependent upon acquisition at that
time.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement will not have an impact
on the Company’s financial statements.


F-14


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







In
June 2008, the FASB issued EITF 07-5 “Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity’s Own Stock”. This Issue is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS 133 “Accounting for Derivatives and Hedging
Activities” specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company’s own stock and
(b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5
mandates among other things, that all options and warrants exercisable in any
currency other than the primary functional currency of the company be
reclassified out of equity and carried as a liability at fair value, and marked
to market each reporting period with the change in fair value recorded as a gain
or loss.  Management expects the impact of this standard to materially
effect the balance sheet and statement of operations.





In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5”. The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5
to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. This standard has no impact
on the Company’s financial statements.





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on the Company’s financial position or results for the year
ended December 31, 2008.





In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. The adoption of FSP FAS
140-4 and FIN 46(R)-8 will not have a material impact on the Company’s
consolidated financial statements because all of the Company’s investments in
debt securities are classified as trading securities.


F-15


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1 did not have a material impact on the Company’s consolidated
financial statements because all of the Company’s investments in debt securities
are classified as trading securities.





NOTE
3 – RESTRICTED CASH





Restricted
cash consisted of cash deposited in an escrow account and amounted to $1,030,317
and $1,000,000 as of December 31, 2008 and 2007, respectively.





NOTE
4 - ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following as of December 31:





2008
                
                
                2007Accounts
      receivable
                
                $
                51,503,245
                
                
                $
                19,222,133Less:
      allowance for doubtful accounts
                
                
                -
                
                
                
                -Accounts
      receivable, net of allowance
                
                $
                51,503,245
                
                
                $
                19,222,133Accounts
      receivable (non-current)
                
                $
                -
                
                
                $
                1,618,203Less:
      allowance for doubtful accounts
                
                
                -
                
                
                
                -Accounts
      receivable, net of allowance
                
                $
                -
                
                
                $
                1,618,203





As of
December 31, 2008 and December 31, 2007, the Company considered all accounts
receivable collectable and, therefore, has not recorded an allowance for
doubtful accounts. The Company’s equipment sales contracts allow the customer to
retain 10% of the contract price for one year from the date of purchase.
Accounts receivable as of December 31, 2008 and December 31, 2007 contain
retainage receivables of $0 and $1,618,203, respectively.





NOTE
5 – INVENTORIES





Inventories
consisted of raw material, work-in-process and supplies as of December
31:


F-16


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







2008
                
                
                2007Raw
      material
                
                $
                223,168
                
                
                $
                118,444Work-in-process
                
                
                921,985
                
                
                
                -Low
      cost consumption supplies
                
                
                58,295
                
                
                
                60,036Total
                
                $
                1,203,448
                
                
                $
                178,480





For the
years ended December 31, 2008 and 2007, no provision for obsolete inventories
was recorded by the Company.





NOTE
6 – NOTES RECEIVABLE





Notes
receivable represents trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the
receivables.  This amount is non-interest bearing and is normally paid
within three to six months.  The Company has the ability to submit
request for payment to the customer’s bank earlier than the scheduled payment
date, but will incur an interest charge and a processing fee when it submits the
early payment request.  The Company had $2,157,957 and $202,670
outstanding as of December 31, 2008 and 2007, respectively.





NOTE
7 – COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS





“Costs
and estimated earnings in excess of billings on uncompleted contracts”,
represents revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize revenue and consisted of the
following as of December 31:





2008
                    
                    
                    2007Contracts
      costs incurred plus recognized profits less recognized losses
      to date
                    
                    $
                    -
                    
                    
                    $
                    44,074,924Less
      progress billings
                    
                    
                    -
                    
                    
                    
                    (41,256,802
                    )Costs
      and estimated earnings in excess of  billings
                    
                    $
                    -
                    
                    
                    $
                    2,818,122





NOTE
8 – BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS





“Billings
in excess of costs and estimated earnings on uncompleted contracts” represents
billings in excess of revenues recognized. As of December 31, 2008 and December
31, 2007, there were no billings in excess of revenues
recognized.


F-17


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







NOTE
9 – PROPERTY, PLANT AND EQUIPMENT





The
following is a summary of property, plant and equipment at December 31, 2008 and
December 31, 2007:





December 31, 2008
                  
                  
                  December 31, 2007Buildings
                  
                  $
                  3,936,775
                  
                  
                  $
                  3,612,413Equipment
      and machinery
                  
                  
                  9,508,465
                  
                  
                  
                  7,430,865Motor
      Vehicles
                  
                  
                  1,647,515
                  
                  
                  
                  986,274Furniture
      and office equipment
                  
                  
                  407,912
                  
                  
                  
                  352,840Construction
      in progress
                  
                  
                  6,768
                  
                  
                  
                  6,30715,507,435
                  
                  
                  
                  12,388,699Less:
      accumulated depreciation
                  
                  
                  2,310,316
                  
                  
                  
                  1,388,118Property,
      plant and equipment, net
                  
                  $
                  13,197,119
                  
                  
                  $
                  11,000,581





Depreciation
expense for the years ended December 31, 2008 and 2007 was $806,625 and
$658,937, respectively. For the years ended December 31, 2008 and 2007, no
interest was capitalized into construction in progress.





NOTE
10 – INTANGIBLE ASSETS





The
following is a summary of intangible assets at December 31:





2008
                
                
                2007Land
      use rights
                
                $
                651,136
                
                
                $
                605,669Patents
      and licenses
                
                
                733,500
                
                
                
                683,6111,384,636
                
                
                
                1,289,280Less:
      accumulated amortization
                
                
                173,028
                
                
                
                98,991Intangibles,
      net
                
                $
                1,211,608
                
                
                $
                1,190,289





Amortization
expense for the years ended December 31, 2008 and 2007 amounted to $65,651 and
$54,321, respectively.  For each of the upcoming five years, estimated
amortization expense is expected to be approximately $66,813 per
year.





The
Company paid $458,292 for purchase of land use rights, as of December 31, 2008,
the Company had not obtained the title and therefore reports the payment as a
prepayment for land use right in other assets.


F-18


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







NOTE
11 – LIQUIDATED DAMAGES PAYABLE





Registration
Rights





Pursuant
to the Securities Purchase Agreement entered into between the Company and a
group of accredited investors (“Securities Purchase Agreement”) on October 5,
2007, the Company was obligated to make efforts to file a registration statement
with the Securities and Exchange Commission (“SEC”) to be declared effective by
the SEC on or before March 3, 2008. After March 3, 2008 and for each 30-calender
day period thereafter in which the registration statement fails to be declared
effective, the Company shall pay liquidated damages to investors equal to 1% of
the funds raised, or $244,353, subject to a cap of 10% of total funds raised, or
total liquidated damages of $2,443,532.  On the date of the
transaction, the Company determined that the registration statement would not be
filed and declared effective within the required period and accrued $500,000 as
liquidated damages payable. The liquidated damages was treated as financing cost
at the inception and was recorded as a deduction from additional paid-in capital
in accordance with the provisions of FSP EITF 00-19-2. This amount accrued is
based on the penalties due between March 4, 2008 and May 3, 2008, the date
before which the Company originally anticipated the registration statement would
be declared effective. The registration statement has been declared effective on
October 2, 2008. Accordingly, the total liquidated damages the Company recorded
for failing to meet the filing deadline as required by the agreement amounted to
$1,971,116. To date, no liquidated damages have been paid.





Independent
Directors





Pursuant
to the Securities Purchase Agreement, the Company’s Board of Directors must
consist of a minimum of 5 members, a majority of whom must be “independent
directors” as defined in NASDAQ Marketplace Rule 4200(a)(15) not later than 120
days after the date of the agreement. The Company was required to hold
$1,000,000 in escrow (“Board Escrow Holdback”) and will only be released by the
escrow agent upon receiving requisite written notice from the investor
representatives when this requirement is met. Failing to comply with this
requirement, the Company shall pay liquidated damages to investors equal to 1%
of the funds raised, or $244,353, for each month or part of a month, pro rata,
in which independent directors do not constitute a majority of the 5-member
board.





On the
date of the transaction, the Company determined that this requirement would not
be met within the required period and accrued $500,000 as liquidated damages
payable. The liquidated damages was treated as financing cost at the inception
and was recorded as a deduction from additional paid-in capital in accordance
with the provisions of FSP EITF 00-19-2. This amount accrued is based on the
penalties due between December 8, 2007 to April 8, 2008 on or before which the
Company originally anticipated the Board of Directors would consist of a minimum
of 5 members with a majority being independent directors. The independent
directors were seated on March 20, 2008, curing this delinquency. Total
liquidated damages payable for the independent board member requirement
therefore is $627,173.  To date, no liquidated damages have been
paid.


F-19


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







Total
liquidated damages payable at December 31, 2008 and 2007 amounted to $2,598,289
and $1,000,000, respectively.





NOTE
12 – SHORT TERM BANK LOANS PAYABLE





Balances
consist of the following at December 31:





2008
                  
                  
                  2007Due
      to Shanghai Pudong Development Bank  interest at 5.31%, in
      December 2009, secured by certain
      buildings,  equipment,  and land use
      rights
                  
                  $
                  8,802,000
                  
                  
                  $
                  -Total
                  
                  $
                  8,802,000
                  
                  
                  $
                  -





Total
interest expense on the bank loans for the years ended December 31, 2008 and
2007 amounted to $489,562 and $531,334, respectively.





NOTE
13 – INCOME TAXES





Income
Taxes





The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is
domiciled.





RINO
International Corporation was incorporated in the United States and has incurred
a net operating loss for income tax purpose for the years ended December 31,
2008. The Company had loss carry forwards of approximately $1,854,103 and
$101,528 as of December 31, 2008 and 2007, respectively, for U.S. income tax
purposes, available for offset against future taxable U.S. income expiring in
2028.





Management
believes that the realization of the benefits from the loss carryforward appears
uncertain due to the Company’s historical operating income and continuing
losses. Accordingly, 100% valuation allowance has been provided and no deferred
tax asset benefit has been recorded. The valuation allowance at December 31,
2008 and 2007 was $630,395 and $34,520. The net change in the valuation
allowance was an increase of $595,875.


F-20


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







Innomind
was incorporated in the BVI and under current law of the BVI, income is not
subject to income tax.  Dalian Innomind, Dalian Rino, Dalian Rino
Design and Dalian Rino Construction were incorporated in the PRC and are subject
to PRC income tax which is computed according to the relevant laws and
regulations in the PRC.





In 2007,
Dalian Innomind was entitled to tax exemption granted to entities qualified as
Foreign Invested Enterprise (“FIE”) so no provision for income tax was
made.





Before
July 2007, Dalian Rino was also qualified as Foreign Invested Enterprise
(“FIE”). On July 12, 2007, Dalian Rino changed its license status from Foreign
Invested Enterprise (“FIE”) to a domestic entity and was subject to an income
tax rate of 33% for the period entitled to tax exemption. For the year ended
December 31, 2007, provision of income tax amounted to $5,024,774.





Starting
January 1, 2008, the new Enterprise Income Tax laws went effective. Under the
new law, Dalian Innomind and Dalian Rino are entitled to a three-year income tax
exemption and a 50% income tax reduction for the following three years, no
provision for income tax was made for 2008.





The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate to income before income taxes.
The following table reconciles the statutory rates to the Company’s effective
tax rate for the years ended December 31, 2008 and 2007:





2008
                    
                    
                    2007U.S.
      Statutory rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Foreign
      income not recognized in USA
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )China
      income taxes
                    
                    
                    25.0
                    
                    
                    
                    33.0China
      income tax exemption
                    
                    
                    (25.0
                    )
                    
                    
                    -Effective
      income tax rate
                    
                    
                    0.0
                    %
                    
                    
                    33.0
                    %





Value Added
Tax





Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, VAT, in accordance
with Chinese laws. The VAT standard rate is 17% of the gross sales price. A
credit is available whereby VAT paid on the purchases of semi-finished products
or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished product.





VAT on
sales and VAT on purchases amounted to $37,135,142, and $27,435,925 for the
years ended December 31, 2008 and $12,583,662 and $8,871,497 for the years ended
December 31, 2007, respectively. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent because the VAT taxes are not
impacted by the income tax holiday. As of December 31, 2008 and December 31,
2007, the VAT payable amounted to $4,186,822 and $2,989,365,
respectively.


F-21


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







NOTE
14 – REDEEMABLE COMMON STOCK





On
October 5, 2007, the Company received $24,480,319 (or $21,253,722 net proceeds
after deducting the offering expenses) from a group of accredited investors and
issued 5,464,357 shares of restricted common stock at $4.48 per share. The
Securities Purchase Agreement contained a transferrable provision such that if
any governmental agency in the PRC takes action that adversely affects the
Restructuring Agreements or the Share Exchange Agreement and the company doesn’t
mitigate the adverse effect to the investors’ reasonable satisfaction within
60 days of the PRC action, then the company is required to pay liquidated
damages in an amount equal to the initial investment without interest and the
shareholder must return the shares acquired under the agreement. Consequently,
the total amount of the gross proceeds has been excluded from permanent equity
and recorded as redeemable common stock in accordance with Rule 5-02.28 of
Regulation S-X and Section 211 of the Codification of Financial Reporting
Policies. Although there is no fixed redemption requirement in any of the next
five years, the entire amount of $24,480,319 could become redeemable in any of
the next five years. These shares are included as outstanding common stock for
purposes of earnings per share.





NOTE
15 – COMMON STOCK AND OTHER SHAREHOLDERS’ EQUITY





Statutory
Reserves





The
Company is required to make appropriations to the statutory surplus reserve
based on the after-tax net income determined in accordance with the laws and
regulations of the PRC.  Prior to January 1, 2006 the appropriation to
the statutory surplus reserve should be at least 10% of the after tax net income
determined in accordance with the laws and regulations of the PRC until the
reserve is equal to 50% of the entities’ registered
capital.  Appropriations to the statutory public welfare fund are at
5% to 10% of the after tax net income determined by the Board of
Directors.  Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 % of net income after tax per
annum, such contributions not to exceed 50% of the respective company’s
registered capital.





The
statutory reserve funds are restricted for use to set off against prior period
losses, expansion of production and operation, or for the increase in the
registered capital of the Company. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation.





As of
December 31, 2008 and December 31, 2007, the Company appropriated $4,086,939 and
$1,782,983, respectively, to the reserves funds based on its net income in
accordance with the laws and regulations of the PRC, and the remaining reserve
to fulfill the 50% registered capital requirement amounted to $6,856,854 and
$10,158,101, respectively.


F-22


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







Common Stock and
Warrants





Issuance
of Common Stock in Private Placement





In
connection with the private placement, 250,000 shares of common stock were
issued to a consultant for advisory services. This expense is recorded as
additional paid-in capital in the accompanying financial
statements.





In
connection with the private placement and pursuant to the Engagement Agreement
Providing for Investment Banking Services, dated January 19, 2007 by and between
the Company and the placement agent, the placement agent received the following
compensation: (i) $80,000 cash as an engagement and documentation fee; (ii)
$1,750,000 as a placement commission; (iii) 875,000 shares of Common Stock, and
(iv) warrants to purchase 382,500 shares of Common Stock at an exercise price of
$5.376 per share, exercisable within 6 years of the date of issue. The exercise
price of the warrant is subject to adjustments under certain circumstances and
the warrants permit cashless exercise by the holders. This expense is recorded
as additional paid-in capital in the accompanying financial
statements.





The
warrants issued to the placement agent, qualify as permanent equity under EITF
00-19, the value of such warrants has created offsetting debit and credit
entries to additional paid-in capital.





Issuance
of Common Stock for service





In
connection with an investor relation consulting agreement entered into by the
Company in October 2007, 40,000 shares of common stock were issued as payment
for consulting and advisory services received during 2008. This expense is
recorded as stock compensation expense in the accompanying financial statements.
As of December 31, 2008, the Company does not have any outstanding stock
options.





Warrants





Following
is a summary of the warrant activity:




Number
      of SharesOutstanding
      as of January 1, 2007
                    
                    
                    -Granted
                    
                    
                    382,500Forfeited
                    
                    
                    -Exercised
                    
                    
                    -Outstanding
      as of December 31, 2007
                    
                    
                    382,500Granted
                    
                    
                    -Forfeited
                    
                    
                    -Exercised
                    
                    
                    -Outstanding
      as of December 31, 2008
                    
                    
                    382,500


F-23


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







Following
is a summary of the status of warrants outstanding at December 31,
2008:





Outstanding
      Warrants
                        
                        Exercisable
      WarrantsExercise
      Price
                        
                        Number
      of
                          Shares
                        
                        Average
                          Remaining
                          Contractual
      Life
                        
                        Average
                          Exercise
      Price
                        
                        
                        Number
      of
                          Shares
                        
                        Average
                          Remaining
                          Contractual
      Life$5.376
                        
                        
                        382,500
                        
                        4.74
      years
                        
                        $
                        5.376
                        
                        
                        
                        382,500
                        
                        4.74
      yearsTotal
                        
                        
                        382,500
                        
                        
                        
                        
                        
                        
                        
                        
                        382,500





Issuance
of Common Stock to Former Chief Financial Officer of Dalian Rino





At the
Closing of the Share Exchange Agreement and the private placement, the Company
issued 20,000 shares of common stock to the former chief financial officer of
Dalian Rino, in full satisfaction of Dalian Rino’s obligations to the former
chief financial officer under a Compensation Agreement dated July 30, 2007. The
shares were valued at market on the date of issuance, yielding an aggregate fair
value of total $49,000. This expense was recorded as stock compensation
expense.





NOTE
16 - EARNINGS PER SHARE





The
following demonstrates the calculation for earnings per share for the years
ended December 31:




2008
                  
                  
                  2007Net
      income
                  
                  $
                  21,281,724
                  
                  
                  $
                  10,218,805Adjustments
      for diluted EPS calculation
                  
                  
                  -
                  
                  
                  
                  -Adjusted
      net income for calculating EPS-diluted
                  
                  $
                  21,281,724
                  
                  
                  $
                  10,218,805Weighted
      average number of common stock – Basic
                  
                  
                  25,040,000
                  
                  
                  
                  19,611,510Effect
      of dilutive securities:Warrants
                  
                  
                  108,178
                  
                  
                  
                  82,971Weighted
      average number of common stock – Diluted
                  
                  
                  25,148,178
                  
                  
                  
                  19,694,481Earnings
      per share:Basic
                  
                  $
                  0.85
                  
                  
                  $
                  0.52Diluted
                  
                  $
                  0.85
                  
                  
                  $
                  0.52


F-24


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







NOTE
17 – RELATED PARTY TRANSACTIONS


The
Company owed $596,023 and $106,963 to a stockholder as of December 31, 2008 and
December 31, 2007, respectively, for advances made on an unsecured basis,
payable on demand and interest free. The ultimate manner of settlement will be
in cash. Imputed interest is charged per annum on the amount due at 8% and 7%
for the periods ended December 31, 2008 and December 31, 2007, respectively.
Total imputed interest recorded as additional paid-in capital amounted to
$24,268 and $33,019 for the years ended December 31, 2008 and 2007,
respectively.





NOTE
18 – CONCENTRATIONS AND RISKS





Cash





Cash
includes cash on hand and demand deposits in accounts maintained with stateowned banks within the
People’s Republic of China and with banks within the United States. Total cash
deposited with these banks at December 31, 2008 and December 31, 2007 amounted
to $19,744,139 and $7,344,223, respectively, of which no deposits are covered by
FDIC insurance.  In addition, as of December 31, 2008 and December 31,
2007, restricted cash of $1,030,317 and $1,000,000 (Note 3), respectively, are
uninsured. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank
accounts.





Customers





During
the year ended December 31, 2008, the Company has enlarged its customer base and
no customer accounted for more than 10% of the Company’s total sales, and during
the year ended December 31, 2007, the Company made sales to a small number of
customers with five customers accounting for 88% of the Company’s total sales.
Accounts receivable from those five customers totaled $18,479,541 as of December
31, 2007.





Suppliers





One major
supplier provided approximately 82% of the Company’s purchases of raw materials
for the year ended December 31, 2008 and the amount of advance to this supplier
as of December 31, 2008 was $17,978,181. This same supplier provided 95% of the
Company’s purchase of raw materials for the year ended December 31, 2007, and
the amount of advance to this supplier as of December 31, 2007 was
$9,686,704.





PRC
Risks





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


F-25


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the
PRC.  Under existing PRC foreign exchange regulations, payment of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements.  However, approval
from appropriate governmental authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses, such as the repayment of bank loans denominated in foreign
currencies.  The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.





NOTE
19 – COMMITMENTS AND CONTINGENCIES





Employee
Benefits





The full
time employees of the Company are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and pension benefits
through a Chinese government mandated multi-employer defined contribution plan.
The Company is required to accrue for those benefits based on certain
percentages of the employees’ salaries and make contributions to the plans out
of the amounts accrued for medical and pension benefits.  The total
provisions and contributions made for such employee benefits were $95,980 and
$48,812 for the years ended December 31, 2008 and 2007, respectively. The
Chinese government is responsible for the medical benefits and the pension
liability to be paid to these employees.





Capital
Commitments





As of
December 31, 2008 and December 31, 2007, the Company had firm purchase
commitments for capital projects in progress of $10,594,674 and $750,844
respectively.


F-26


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


(FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER
31, 2008







NOTE
20 – ESCROW ACCOUNTS





At the
private placement closing, Zou Dejun and Qiu Jianping, who, through The Innomind
Trust, together control 71.6% of the Company’s outstanding common stock, and are
the founders of Dalian Rino - delivered to an escrow agent a total of 5,580,000
of their beneficially owned shares of common stock in order to secure the
Company’s obligation under the Securities Purchase Agreement to deliver
additional common stock to the private placement investors in the event the
Company fails to achieve certain after-tax net income targets for fiscal years
2007 and 2008 (“Make Good Escrow Shares”). Those targets are $16,000,000 in
after-tax net income (“ATNI”) for the fiscal year ended December 31, 2007, and
$28,000,000 in after-tax net income for the fiscal year ending December 31,
2008.  For purposes of the Make Good agreements only, no expense
related to return of the shares from escrow would be charged against ATNI. If
the Company had not achieved the 2007 net income target, Zou Dejun and Qiu
Jianping would have been obligated to transfer 1,674,000 shares of their common
stock to the private placement investors on a pro-rata basis.  The
2007 net income target was achieved and the shares have been returned to Zou and
Qiu in 2008.  If the Company failed to achieve the 2008 net income
target, Zou and Qiu would have transferred to the investors the remaining
3,906,000 shares still in escrow.  The 2008 net income target was
achieved and the shares are expected to be returned to Zou and Qiu in
2009.





No later
than February 2, 2008, the Company’s Board of Directors were to consist of a
minimum of 5 members, a majority of whom must be “independent directors” as
defined in NASDAQ Marketplace Rule 4200(a)(15). This covenant was complied with
on March 20, 2008. Until this covenant was complied with, the Company was
required to hold $1,000,000 in escrow (“Board Escrow Holdback”). If for any
reason or no reason the escrow agent did not receive requisite written notice
from the investor representatives as to releasing this sum from escrow within
120 days after the private placement closing, the Company was required to pay
liquidated damages of $244,353 per month (or partial month) until the default is
cured. No liquidated damages have yet been paid as of December 31,
2008.





The cash
held in escrow pursuant to the Board Escrow Holdback as described above will be
accounted for as other current assets and will not be shown as cash or cash
equivalents on the balance sheet until such funds have been released from escrow
pursuant to the terms of the Securities Purchase Agreement. The shares held in
escrow as Make Good Escrow Shares will not be accounted for on our books until
such shares became releasable from escrow pursuant to the terms of the
Securities Purchase Agreement. If any Make Good Escrow Shares are released to
the company management or employees, the value of such shares at the time of
release will be recorded as compensation expense with a corresponding offset to
additional paid-in capital in accordance with SFAS 123(R) paragraph 11. As a
result, the Company recognized $7,499,520 of compensation expense for the year
ended December 31, 2007. Based on the performance for the year ended December
31, 2008, the Company achieved 2008 after-tax net income target. Therefore the
Company accrued $17,498,880 of compensation expense for the year ended December
31, 2008. If any Make Good Escrow Shares are released to the Investors, no entry
will be made. During the time such Make Good Escrow Shares are held in escrow,
they will be accounted for as contingently issuable shares in determining the
EPS denominator in accordance with SFAS 128.


F-27