The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts. They use words such as "anticipate," "estimate," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to:

• Our expectation of continued growth in the demand for our oil;

• Our expectation that we will continue to have adequate liquidity from cash flows from operations;

• A variety of market, operational, geologic, permitting, labor and weather related factors; and

• The other risks and uncertainties which are described below under "RISK FACTORS", including, but not limited to, the following:

• Unanticipated conditions may cause profitability to fluctuate.

• Decreases in purchases of oil by our customer will adversely affect our revenues.

Overview

We are engaged in the exploration and production of crude oil in Northern China. We have an arrangement with the Jilin Refinery of PetroChina Group to sell our crude oil production for use in the China marketplace. We currently operate 247 producing wells located in four oilfields in Northern China and have plans for additional drilling projects.

In particular, through two of our subsidiaries, Song Yuan City Yu Qiao Oil and Gas Development Co. Ltd. ("Yu Qiao") and Chang Ling Longde Oil and Gas Development Co. Ltd. ("LongDe"), we have entered into binding sales agreements with the PetroChina Group, whereby we sell our crude oil production for use in the China marketplace.

We currently operate 4 oilfields located in Northern China, which include:

                            Acreage (Gross developed
Field                           and undeveloped)          Producing Oil Wells     Proved Reserves (Bbls)
Qian'an 112                                      5,249                     219                  5,292,591
Daan 34                                            173                       7                     13,240
Gudian 31                                          324                       7                     95,729
Hetingbao 301                                      475                      14                     52,232

The following chart illustrates our company's organizational structure.

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CONSOLIDATED RESULTS OF OPERATIONS

The Company is paid by PetroChina base on the crude oil price in the international commodity market. Prices in 2008 averaged RMB 4,845 per ton or approximately $94.29 per barrel, which represents an increase of 23% over 2007.

Our cost of net revenues consists of cost of labor, well service and repair, location maintenance, power and fuel, transportation, cost of product, property taxes, production and severance taxes and production related general and administrative costs.

General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, information technology, facilities and human resources personnel, recruiting expenses, professional fees and costs associated with expanding our information systems.

Comparing Fiscal Years Ended December 31, 2008 and 2007:

The following table presents certain consolidated statement of operations
information. Financial information is presented for the 12-month period ending
as of December 31, 2008 and December 31, 2007

                             2008             2007
Revenues, net            $ 58,572,250     $ 19,482,069
Cost and Expenses        $ 23,973,808     $ 10,236,486
Income from Operations   $ 34,598,442     $  9,245,583

Revenues. Revenues for 2008 increased to $58,572,250 from $19,482,069 in 2007 as a result of the increase in oil production and higher oil prices. During the whole year, the Company drilled 90 new oil wells in the four oilfields which are owned by the Company. The total number of producing wells increased from 157 in 2007 to 247 in 2008, a total increase of 57%. Total oil production for 2008 was 645,856 barrels, or approximately a 141% increase, as compared to 267,516 barrels in the same period in 2007 due to the increase in producing wells and the implementation of water flooding in the Qian'an 112 oil field. Oil prices in 2008 averaged RMB 4,845 per ton or approximately $94.29 per barrel, which represents an increase of 23% over 2007 levels of RMB 3,937 per ton or approximately $ 70.03 per barrel.

  Oilfield       2008 wells     2007 wells     2008 Production     2007 Production
 Qian'an112           219            133            621,820             253,116
Hetingbao 301          14             11             16,626              11,318
  Gudian31             7              6              5,821                502
   Daan 34             7              7              1,588               2,580
    Total             247            157            645,856             267,516



Company    2008 wells     2007 wells     2008 Production     2007 Production
Yu Qiao         233            146            629,230             256,198
LongDe           14             11             16,626              11,318

Cost of sales. Cost of sales increased by 136% from $8,941,976 for the year ended December 31, 2007 to $21,137,240 for the year ended December 31, 2008. The increase in cost of sales resulted primarily from the increased number of producing wells and higher production levels in 2008. During 2008, our total number of producing wells increased from 157 in 2007 to 247 in 2008, a total increase of 57%. Higher production also lead to an increase of the Special Oil Surcharge. The company paid a special oil surcharge of $11,105,325 to the PRC government in 2008, while $2,857,376 was paid to the PRC government for the same period in 2007. In addition, depreciation of oil and gas properties was increased by 73% to $6,172,422 in 2008, compared to $3,562,265 in the same period in 2007 by the result of an increase in the number of producing wells.

Operating Expenses. Operating expenses increased by 119% from $1,294,510 for the year ended December 31, 2007 to $2,836,568 for the year ended December 31, 2008. The increase in operating expenses resulted primarily from higher selling and administrative expenses, higher depreciation due to increased fixed assets and an increase in consultant fees related to financing activities. During 2008, the Company paid approximately $396,330 for consulting service in connection with financing activities and other consulting services related to obligations of the Company as a U.S. publicly traded company, as compared with $108,500 in 2007.

General and administrative expenses. General and administrative expenses increased by 123% to $1,959,602 for the year ended 2008 compared to $880,161 for the year ended 2007. This increase was mainly due to expenses associated with increased stock compensation of $708,228 to management and consultants in 2008.

Net Income. The Company's net income increased by 282% to $19,582,038 for the year ended December 31, 2008, compared to $5,132,581 for the year ended December 31, 2007. The increase in net income was primarily due to the increase in revenues as a result in increased production, higher crude oil prices and increased proven reserves which result in lower per-unit depreciation of oil and gas properties.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2008, the Company had cash and cash equivalents of $13,239,213, other current assets of $5,322,441 and current liabilities of $16,995,154. For the year ended December 31, 2008, our primary source of liquidity was $36,203,786 in net cash provided by operations and proceeds from the issuance of a secured debenture in the aggregate principal amount of $15,000,000.

As of December 31, 2008, the Company's current liabilities were $16,995,154, consisting of $10,985,894 in accounts payable primarily comprised of costs related to the drilling of an additional 90 wells in 2008, $3,710,870 in income and other taxes payable, and $1,489,126 for the current portion of secured debenture due to the lender net of discount.

Net cash provided by operating activities was $36,203,786 for the year ended December 31, 2008 compared to $9,503,642 for the year 2007. The increase is primarily related to an increase in sales and net income in 2008.

Net cash used in investing activities was $31,875,938 for the year ended December 31, 2008 compared to $12,334,036 for the year 2007. This is primarily a result of the purchase of oil and gas properties and fixed assets.

Net cash provided by financing activities was $10,079,101 for the year ended December 31, 2008 compared to $4,362,473 for the same period in 2007. This increase is primarily a result of the successful completion of our 8% secured debenture financing in February 2008.

While we expect cash provided by operations may decrease due to the dramatic drop of global oil prices, however as the newly drilled additional oil wells come into production may offset the impact of lower oil price, and still creates positive cash inflow. Global oil prices have declined from historic high levels experienced in 2008, and we anticipate that oil prices will remain below those levels for the balance of 2009. In spite of the lower anticipated oil prices in the current year, we expect that cash flow from operations will be sufficient to allow us to meet all of our obligations and to continue to drill new oil wells.

Capital Commitment

As of December 31, 2008, the Company had capital commitments of $783,000 with a contractor for the completion of drilling of 7 oil wells under construction.

Inflation

Inflation did not have a material impact on our business in 2008 other than the increase in oil price received as discussed above.

Material Subsequent Events

Amendment to 8% Secured Debenture and Warrants

On March 5, 2009, the Company and Lotusbox Investments Limited (the "Investor") entered into Amendment No. 1 to 8% Secured Debenture (the "Amendment") which amended the 8% Secured Debenture (the "Debenture") issued to the Investor on February 28, 2008 for the principal amount of $15,000,000. Pursuant to the Amendment, the Investor agreed to extend the Company's requirement to effect a listing of its common stock on either the NYSE Alternext US LLC (formerly known as the American Stock Exchange) or NASDAQ until August 30, 2010, and the Company agreed to issue warrants to purchase up to (1) 250,000 shares of common stock at a per share exercise price of $2.00 and (2) 250,000 shares of common stock at a per share exercise price of $2.35 (together, the "Warrants"). Also pursuant to the Amendment, the parties have agreed to amend the principal repayment schedule of the Debenture as follows:

Repayment Date          Repayment Amount
August 28, 2008         $750,000
March 28, 2009          $1,250,000
June 28, 2009           $1,250,000
September 28, 2009      $1,250,000
December 28, 2009       $1,250,000
March 28, 2010          $1,875,000
August 28, 2010         $2,500,000
February 28, 2011       $2,500,000
August 28, 2011         $1,500,000
February 28, 2012       $875,000

The Company is obligated to file a registration statement registering the resale of share of the Company's common stock issuable upon exercise of the Warrants on or before the March 5, 2010 (the "Filing Date"). On the 180th day following the Filing Date and each sixth month anniversary thereafter until the registration statement is declared effective, the Company must execute and deliver to the Investor new warrants to purchase up to a total of 62,500 on the same terms as the Warrants.

Settlement and Release Agreement

On March 5, 2009, the Company and Topworth Asset Limited ("Topworth") entered into a Settlement and Release Agreement (the "Settlement") whereby the Company and Topworth agreed to mutually release each other from any and all claims they have against each other, including any and all claims and counterclaims pending in the action brought by the Company in the Third District Court, State of Utah, Civil Case Number 070911868 (the "Action"). Under the Settlement, the parties' shall dismiss the Company's complaint and Topworth's counterclaim. The 627,360 shares of common stock in the Company held in the name of Topworth (the "Shares") that were a subject of dispute in the Action shall be disposed of on the following material terms: Topworth shall deliver all certificates representing the Shares to a designated custodian; the custodian shall hold the certificates until at least June 26, 2009; and, thereafter, the custodian shall release 100,000 of the Shares to Topworth each month until November 30, 2009, when Topworth will be entitled to receive all of the remaining Shares. The custodian shall release the Shares without any restriction on Topworth's ability transfer or sell the Shares imposed by the Company subject to restrictions under the Securities Act of 1933, as amended. The Shares have been held in Topworth's name and have been included in the Company's outstanding shares; as such the Shares will not have an additional dilutive effect on the Company's shareholders.

CRITICAL ACCOUNTING POLICIES

Proved Reserves. Proved oil and gas reserves, as defined by SEC Regulation S-X Rule 4-10(a) (2i), (2ii), (2iii), (3) and (4), are the estimated quantities of crude oil that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

The Company's estimates of proved reserves are made using available geological and reservoir data as well as production performance data. These estimates, made by the Company's engineers, are reviewed annually and revised, either upward or downward, as warranted by additional data. Revisions are necessary due to changes in, among other things, reservoir performance, prices, economic conditions and governmental restrictions. Decreases in prices, for example, may cause a reduction in some proved reserves due to reaching economic limits sooner.

Properties and Equipment. The Company uses the full cost method of accounting for exploration and development activities as defined by the SEC. Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country. The application of the full cost method of accounting for oil and gas properties generally results in higher capitalized costs and higher DD&A rates compared to the successful efforts method of accounting for oil and gas properties.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

RECENT ACCOUNTING PRONOUNCEMENTS

On December 31, 2008, the SEC published the revised rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in existing oil and gas rules to make them consistent with the petroleum resources management system, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used in determining reserves. To determine reserves companies must use a 12-month average price. The Company is required to comply with the amended disclosure requirement for registration statements filed after January 1, 2010, and for annual reports for fiscal years ending on or after December 15, 2009. Early adoption is not permitted. The Company is currently assessing the impact that the adoption will have on the Company's disclosures, operating results, financial position and cash flows.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective beginning January 1, 2009. The Company does not expect the adoption of this statement to have a material impact on its financial position and results of operations.

In December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51." This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement did not have a material impact on the Company's financial position and results of operations.

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 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The adoption of this statement did not have a material impact on the Company's financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that presented in conformity with generally accepted accounting principles in the United States of America. SFA 162 will be effective 60 days following the SEC's approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of this statement did not have a material impact on the Company's financial position and results of operations.

In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60." The scope of this Statement is limited to financial guarantee insurance and reinsurance contracts, as described in the Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee contracts that are derivative instruments included within the scope of SFAS No. 133, "Accounting for Derivative instruments and Hedging Activities." SFAS 163 is effective prospectively for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years; disclosure requirements in paragraphs 30(g) and 31 are effective for the first period (including interim periods) beginning after May 23, 2008. The adoption of this statement did not have a material impact on the Company's financial position and results of operations.

In October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active", to clarify guidance on determining the fair value of a financial asset under SFAS 157 in a market that is not active. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this statement effective September 30, 2008 did not have a material impact on the Company's financial position and results of operations.