The following information should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report.

Forward Looking Statements

This quarterly report on Form 10-Q and other reports filed by Company from time to time with the Securities and Exchange Commission (collectively the "Filings") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words "anticipate", "believe", "estimate", "expect", "future", "intend", "plan", or the negative of these terms and similar expressions as they relate to Company or Company's management identify forward-looking statements. Such statements reflect the current view of Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of this report entitled "Risk Factors") relating to Company's industry, Company's operations and results of operations, and any businesses that Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although Company believes that the expectations reflected in the forward-looking statements are reasonable, Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.

Company Overview

We are engaged in the development, exploration, production and distribution of bio-diesel and wholesale distribution and processing of heavy oil and finished oil products through certain contractual agreements between our wholly owned indirect subsidiary Redsky Industrial and Baorun Industrial. Redsky Industrial, a registered WFOE in the People's Republic of China, is a subsidiary of Baorun Group, our direct wholly owned subsidiary.

Basis of Presentations

Our financial statements are prepared in accordance with GAAP and the requirements of Regulation S-X promulgated by the Securities and Exchange Commission.

Critical Accounting Policies

Accounts Receivable

Our policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.

Inventories

Inventories are valued at the lower of cost or market with cost determined on a moving weighted average basis. Cost of work in progress and finished goods comprises direct material, direct production cost and an allocated portion of production overheads.

Property and Equipment

Plants and equipment are stated at the actual cost on acquisition less
accumulated depreciation and amortization. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of depreciation assets to
operations over their estimated service lives, principally on a straight-line
basis. Most property, plant and equipment have a residual value of 5% of actual
cost. The estimated lives used in determining depreciation are:


Building               20 years
Vehicle                5 years
Office Equipment       5 years
Production Equipment   5 years

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Revenue Recognition

Our revenue recognition policies are in compliance with Securities and Exchange Commission Staff Accounting Bulletin 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received prior to meeting all relevant criteria for revenue recognition are recorded as unearned revenue.

Foreign Currency Translation

Our functional currency is the Renminbi ("RMB"). For financial reporting purposes, RMB has been translated into United States dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income." Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

Income Tax Recognition

We account for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" "SFAS 109." SFAS 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. SFAS 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.

Baorun Industrial has obtained income tax abatements for the years ended December 31, 2004 through 2010, due to the fact that it uses waste gas, water and residue in the production of its products. We believe that this abatement is in effect for all periods presented. Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the PRC. Tax abatements are one of the many methods used to promote such business development. If the abatement should be rescinded for future periods, Baorun Industrial would be subjected to tax liabilities. Had the abatement for income taxes not been effect for Baorun Industrial, we estimate that the pro forma financial impact would be as follows:

                                        For the six months ended         For the three months ended
                                                June 30,                          June 30,
                                           2008            2007            2008               2007
Net income before income taxes       $   12,959,643    $ 2,381,531   $    8,294,738    $     1,418,608
Tax provision                             3,239,911        785,905        2,073,685            468,141
Net income                           $    9,719,732    $ 1,595,626   $    6,221,053    $       950,467

Results of Operations

Comparison of Six Months Ended June 30, 2008 and June 30, 2007.

The following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:

                                                 Six Months Ended June 30
                                              2008                      2007
                                                      % of                      % of
                                      $               Sales     $               Sales
Sales                                  93,987,652       100 %    25,276,379       100 %
Cost of Sales                         (80,394,701 )      86 %   (22,318,179 )      88 %
Gross Profit                           13,592,951        14 %     2,958,200        12 %
General & Administrative Expenses        (571,495 )     0.6 %      (514,636 )       2 %
Income from Operation                  13,021,456        14 %     2,443,564        10 %
Other Income (expenses), net              (61,813 )    0.07 %       (62,033 )    0.25 %
Net Income                             12,959,643        14 %     2,381,531         9 %

Net sales. Net sales for six month ended June 30, 2008 were approximately $93.99 million compared to net sales in same period in 2007 of approximately $25.28 million, an increase in revenues of $68.71 million, or 272%. The increase was mainly due to two reasons. First, during the six months ended June 30, 2008, we used military-use railroad routes to sell and deliver our oil products to the customers in the provinces of China that commercial railroads cannot directly connect to. The advantage to delivering oil through military railroad stations and routes, is that we were able to strengthen and extend our sales network to provinces that we were unable to directly connect to before, which increased our sales. Second, there was an increase in our production of bio-diesel which also helped to increase our sales.

Cost of sales. Cost of sales for six month ended June 30, 2008 was approximately $80.39 million compared to cost of sales in same period in 2007 of approximately $22.32 million, an increase of $58.08 million, or 260%. The increase in cost of sales was attributable to the increase of production and sales activities during the six month ended June 30, 2008. Cost of sales as a percentage of sales was approximately 86% for six month ended June 30, 2008 and 88% for the same period in 2007, respectively. The decrease as a percentage of sales was due to the lower production cost through our self-supplied bio-diesel than the purchase price of diesel oil products from the market as we increased our production of bio-diesel during the six months ended June 30, 2008 comparing with same period in 2007.

Gross profit. Gross profit was approximately $13.59 million for six month ended June 30, 2008 as compared to approximately $2.96 million for same period in 2007, representing gross margins of approximately 14% and 12% respectively. During the six month ended June 30, 2008, the gross profit margin for making and selling Bio-diesel oil was approximately 30% and the gross profit margin for buying and reselling gasoline was approximately 11%. The improved gross margin is a result of increased market demand and also the lower cost of self-supplied bio-diesel products.

General and administrative expenses. General and administrative expenses for the six month ended June 30, 2008 were $571,495. The general and administrative expenses for the six month ended June 30, 2007 were $514,636, an increase of $56,859 or 11%. This increase was due to increased sales and productions for the six month ended June 30, 2008 and increase in audit, legal, consulting and filing expenses in connection with the Company of being public in US since October of 2007. The percentage of sales for the six month ended June 30, 2008 and 2007 is about 0.6% and 2%, respectively. The decrease in percentage of sales is due to the well managed operating cost by the company as sales increased in 2008.

Net income. The net income for the six month ended June 30, 2008 was $12.96 million as compared to $2.38 million for the same period in 2007. It was an increase of $10.58 million in net profit or 444%. The management believed that the net income increase is a result of the fast and continuing revenue growth and well control on cost and operating expenses.

Comparison of Three Months Ended June 30, 2008 and June 30, 2007.

The following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:

                                                Three Months Ended June 30
                                              2008                      2007
                                                      % of                      % of
                                      $               Sales     $               Sales
Sales                                  58,426,812       100 %    13,717,654       100 %
Cost of Sales                         (49,847,038 )      85 %   (11,873,889 )      87 %
Gross Profit                            8,579,774        15 %     1,843,765        13 %
General & Administrative Expenses        (251,689 )     0.4 %      (387,535 )       3 %
Income from Operation                   8,328,085        14 %     1,456,230        11 %
Other Income (expenses), net              (33,347 )    0.06 %       (37,622 )    0.27 %
Net Income                              8,294,738        14 %     1,418,608        10 %

Net sales. Net sales for second quarter of 2008 were approximately $58.43 million compared to net sales in second quarter of 2007 of approximately $13.72 million, an increase in revenues of $44.71 million, or 326%. The increase was mainly due to increase in our new customers, ability to meet the demand for bio-diesel oil as we increased manufacturing of bio-diesel, and increased revenue from new leased gas stations in June.

Cost of sales. Cost of sales for second quarter of 2008 was approximately $49.85 million compared to cost of sales in second quarter of 2007 of approximately $11.87 million, an increase of $37.97 million, or 320%. The increase in cost of sales was attributable to the increase of production and sales activities in second quarter of 2008. Cost of sales as a percentage of sales was approximately 85% for second quarter, 2008 and 87% for second quarter, 2007, respectively. The decrease as a percentage of sales was due to relatively low production cost for bio-diesel oil compared to the purchase price of diesel oil products from the market as we increased our production of bio-diesel during the second quarter of 2008 comparing with same period of 2007.

Gross profit. Gross profit was approximately $8.58 million for second quarter of 2008 as compared to approximately $1.84 million for second quarter of 2007, representing gross margins of approximately 15% and 13% respectively. During the second quarter of 2008, the gross profit margin for making and selling Bio-diesel oil was approximately 31% and the gross profit margin for buying and reselling gasoline was approximately 10%. The improved gross margin is a result of increased market demand and also the lower cost of self-supplied bio-diesel products.

General and administrative expenses. General and administrative expenses for the second quarter of 2008 were $251,689. The general and administrative expenses for the second quarter of 2007 were $387,535, a decrease of $135,846 or 35%. The percentage of sales for the second quarter of 2008 and 2007 are 0.4% and 3%, respectively, which was due to well managed operating cost by the company as sales increases in second quarter of 2008.

Net income. The net income for the second quarter of 2008 was $8.29 million as compared to $1.42 million for the second quarter in 2007. It was an increase of $6.88 million in net profit or 485%. The management believed that the net income increase is a result of the fast and continuing revenue growth and well control of the cost and operating expenses.

Liquidity and Capital Resources

Comparison of Six Months Ended June 30, 2008 and December 31, 2007.

As of June 30, 2008 and December 31, 2007, we had cash and cash equivalents of approximately $2.2 million and $1.4 million, respectively. At June 30, 2008, other current assets were approximately $46.9 million and current liabilities were approximately $10.7 million, as compared to other current assets of approximately $34.2 million and current liabilities of approximately $5.5 million at December 31, 2007. Working capital equaled approximately $38.5 million at June 30, 2008, compared to $30 million at December 31, 2007, an increase of 28%. The ratio of current assets to current liabilities was 4.6-to-1 at June 30, 2008, compared to 6.5-to-1 at the December 31, 2007. The increase in working capital in six months ended June 30, 2008 was primarily due to the increased sales during 2008. The decrease in the current ratio in six months ended June 30, 2008 was primarily related to increase in current liabilities of advance from customers.

We believe we have sufficient cash to continue our current business through June 30, 2009 due to expected increased sales revenue and net income from operations. We intend to expand our current operations through (i) our completed acquisition of three oil extraction plants; (ii) expansion of our 100,000 ton bio-diesel manufacturing facility; and (iii) the acquisition of several additional gas stations over the next three years. We expect to finance such expansion through bank loans, the issuance of debt or equity securities, or a combination thereof. Failure to obtain such financing could have a material adverse effect on our business expansion.

Our future capital requirements will depend on a number of factors, including:

· the cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights;

· competing technological and market developments;

· our ability to maintain our existing and establish new collaborative relationships; and

· the development of commercialization activities and arrangements.

We do not anticipate any additional material research and development expenses during the next 12 months.

We do not believe that inflation had a significant negative impact on our results of operations during the year ended June 30, 2009.

The following is a summary of cash provided by or used in each of the indicated types of activities during six months ended June 30, 2008 and 2007:

                                       Six Months Ended
                                           June 30,
                                       2008          2007
Net cash provided by (used in):
Operating Activities              $  1,864,812   $   38,185
Investing Activities                (1,038,203 )   (418,247 )
Financing Activities              $    (70,891 ) $ (346,519 )

Net cash provided by operating activities was $1,864,812 in six months ended June 30, 2008, as compared to $38,185 net cash provided by operating activities in same period of 2007. The increase in net cash during the six months ended June 30, 2008 comparing with same period of 2007 was mainly due to rapid increase in net income and advances from customers, but at the same time, our accounts receivables have increased and we've prepaid next 5 years rents for four new leased gas stations of approximately $8,500,000, which held back our cash inflows.

Net cash used in investing activities was $1,038,203 during the six months ended June 30, 2008, as compared to net cash used in investing activities of $418,247 in same period of 2007. The increase of net cash used in investing activities in 2008 was mainly due to the amounts paid for purchasing three oil extraction plants and further construction and improvements on these three oil extraction plants.

Net cash used in financing activities was $70,891 in the six months ended June 30, 2008 as compared to net cash used in financing activities of $346,519 for same period of 2007. The decrease of net cash flow used by financing activities in 2008 was mainly due to paying off most of our loans during the six months ended June 30, 2007.

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders' equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Contractual Obligations

Short-term loan

The Company is obligated under a short term loan from a commercial bank in the PRC for the amount of $1,457,938 (RMB10, 000,000). This loan was entered into on August 31, 2007 with maturity on August 30, 2008. The principal will be repaid at maturity and the interest is payable per quarter with an interest rate of 8.073% per annum. This loan is guaranteed by Xi'an City Economic & Technology Investment Guarantee Co., Ltd. The Company paid them the guarantee fee of 2% of the loan principal, and collateralized the Company's diesel processing equipments for the guarantee.

Long-term liabilities

Long-term liabilities are the loans payable for the automobiles. On September 27, 2006 the Company entered into a three year note payable for approximately $100,000. This note is collateralized by the car with an annualized interest rate of 6.3%. At June 30, 2008, the outstanding loan balance for this car is $56,061.

In February, 2007, the Company entered into another two notes payable for additional two automobiles. One is a two year note for the loan amount of approximately $25,500 with 7.56% interest rate per annum. The other one is a two year note for the loan amount of $19,800 with 7.56% annual interest rate. At June 30, 2008, the outstanding loan balances for these two automobiles were $24,324. At June 30, 2008, $65,743 of the total outstanding loan balance has been reclassified to current portion of the liabilities that are payable within one year.

Operating leases

As of June 30, 2008, we have three lease agreements for oil storage facilities. The first lease agreement, expiring on June 30, 2016, is a long-term operating lease agreement. The other two lease agreements expiring on December 31, 2008, are short-term renewable agreements. The aggregate payments remaining under these three lease agreements approximately equal $737,000.

During 2007, we leased one gas station for operation under a long-term operating lease agreement expiring on December 31, 2027. Total rent payments for the gas station due during 2008 will equal an aggregate of $20,000.

During the quarter ended June 30, 2008, we leased four gas stations for operation under a long-term operating lease agreement expiring on May 31, 2023. We've prepaid five-year lease payment in advance. The aggregate payments remaining under this lease agreement approximately equal $17,495,000.

Recently Issued Accounting Pronouncements

The Hierarchy of Generally Accepted Accounting Principles

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.

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133." This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of . . .