Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

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 the 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, the 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 the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the 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 the Company's industry, the Company's operations and results of operations, and any businesses that the 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 the Company believes that the expectations reflected in the forward-looking statements are reasonable, the 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.

Plant, Property and Equipment

Plant, property and equipment is 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:

Net sales. Net sales for the nine months ended September 30, 2008 were approximately $156.9 million compared to net sales in same period in 2007 of approximately $64.8 million, an increase in revenues of $92.1 million, or 142%. The increase was mainly due to four reasons. First, the production and sale of bio-diesel during the first nine months of September 2008 contributed significantly to net sales, compared to the same period last year when we had not yet commenced bio-diesel production. Second, there was an increase in demand for oil products from our customers as their businesses grew and expanded. Third, we had increased revenue as the result of the four new leased gas stations. Fourth, we have commenced selling of supplementary products during the nine months ended September 30, 2008, which we were not selling in the comparable period in 2009.

Cost of sales. Cost of sales for the nine months ended September 30, 2008 was approximately $134.13 million compared to the cost of sales in the same period in 2007 of approximately $57.45 million, an increase of $76.68 million, or 133%. The increase in cost of sales was attributable to an increase in production and sales activities during the nine months ended September 30, 2008. Cost of sales as a percentage of sales was approximately 85.5% for the nine months ended September 30, 2008 and 88.6% for the same period in 2007, respectively. The decrease as a percentage of sales was due to lower production costs as a result of producing our own bio-diesel since October 2007,compared to the cost of purchasing diesel oil products from the market.

Gross profit. Gross profit was approximately $22.74 million for the nine months ended September 30, 2008 as compared to approximately $7.38 million for the same period in 2007, representing gross margins of approximately 14.5% and 11.4% respectively. During the nine months ended September 30, 2008, the gross profit margin for making and selling bio-diesel oil was approximately 30.5% and the gross profit margin for buying and reselling other oil products like gasoline and diesel oil was approximately 10.9%. The improved gross margin is a result of increased market demand for our products and also a reduction in costs as a result of supplying our own bio-diesel.

General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2008 were $962,445. The general and administrative expenses for the nine months ended September 30, 2007 were $801,487, an increase of $160,958 or 20%. This increase was due to hiring additional employees in line with the expansion of our business for the nine months ended September 30, 2008 and increase in audit, legal, consulting and filing expenses in connection with the Company becoming public in US in October of 2007. General and administrative expenses as a percentage of sales for the nine months ended September 30, 2008 and 2007 is approximately 0.6% and 1.24%, respectively. The decrease in percentage of sales is due to management successful managing the Company's operating costs as sales increased in 2008.

Net income. The net income for the nine months ended September 30, 2008 was $22.07 million as compared to $6.48 million for the same period in 2007. It was an increase of $15.59 million in net profit or 241%. Management believes that the net income increase is the result of the fast and continuing revenue growth, as well as controlling costs and operating expenses.

Net sales. Net sales for the three months ended September 30, 2008 were approximately $62.89 million compared to net sales in the three months ended September 30, 2007 of approximately $40.26 million, which was an increase in revenues of $22.63 million, or 56%. The increase was mainly due to an increase in demand for oil products from our existing and new customers, our ability to meet the continued demand for bio-diesel oil as our production increased, increased revenue from the new leased gas stations, and commencing the sale of supplementary products during 2008.

Cost of sales. Cost of sales for the three months ended September 30, 2008 was approximately $53.74 million compared to cost of sales in the three months ended September 30, 2007 of approximately $35.86 million, an increase of $17.88 million, or 50%. The increase in cost of sales was attributable to the increase of production and sales activities in the three months ended September 30, 2008. Cost of sales as a percentage of sales was approximately 85% for the three months ended September 30, 2008 and 89% for the three months ended September 30, 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 commenced our production of bio-diesel since October of 2007.

Gross profit. Gross profit was approximately $9.15 million for the three months ended September 30, 2008 as compared to approximately $4.41 million for the three months ended September 30, 2007, representing gross margins of approximately 15% and 11% respectively. During the three months ended September 30, 2008, the gross profit margin for making and selling bio-diesel oil was approximately 31% and the gross profit margin for buying and reselling other oil products like gasoline and diesel oil was approximately 10.6%. 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 three months ended September 30, 2008 were $390,950. The general and administrative expenses for the three months ended September 30, 2007 were $286,067, an increase of $104,883 or 37%. This increase was due to increased sales and production. The percentage of sales for the three months ended September 30, 2008 and 2007, were 0.6% and 0.7%, respectively. The slight decrease was due to well managed operating costs by the Company as sales increased.

Net income. The net income for the three months ended September 30, 2008 was $9.11 million as compared to $4.1 million for the three months ended September 30, 2007. It was an increase of $5.01 million in net profits, or 122%. Management believes that the net income increase is a result of the fast and continuing revenue growth, as well as controlling costs and operating expenses.

Liquidity and Capital Resources

As of September 30, 2008 and December 31, 2007, we had cash and cash equivalents of approximately $0.5 million and $1.4 million, respectively. At September 30, 2008, other current assets were approximately $55.7 million and current liabilities were approximately $9.49 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 $46.7 million at September 30, 2008, compared to $30 million at December 31, 2007, an increase of 55.67%. The ratio of current assets to current liabilities was 5.9-to-1 at September 30, 2008, compared to 6.5-to-1 at the December 31, 2007. The increase in working capital in nine months ended September 30, 2008 was primarily due to the increased sales during 2008. The decrease in the current ratio in nine months ended September 30, 2008 was primarily related to increase in advance from customers and short term bank loans payable.

We believe we have sufficient cash to continue our current business through September 30, 2009 due to expected increased sales revenue and net income from operations. We intend to continue the expansion of our current operations by (i) acquiring more oil extraction plants; (ii) expanding our 100,000 ton bio-diesel manufacturing facility; and (iii) acquiring 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:

� 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.

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

Net cash used in operating activities was $(409,579) in the nine months ended September 30, 2008, compared to $1,200,339 net cash provided by operating activities in same period of 2007. The decrease in net cash during the nine months ended September 30, 2008 compared with same period of 2007 was primarily due to an increase in account receivables, other receivables, advances to suppliers, inventory, and prepayments of approximately $8,500,000 in rent for the next 5 years for our new leased gas stations . At the same time, our other payables and accrued expenses have decreased.

Net cash used in investing activities was $1,200,352 during the nine months ended September 30, 2008, as compared to net cash used in investing activities of $2,609,572 in same period of 2007. The decrease of net cash used in investing activities in 2008 was because we invested more in fixed assets during 2007 compared to 2008. During the nine months ended September 30, 2008, we paid $1.2 million to purchase three oil extraction plants and for further construction and improvements on these three oil extraction plants, while during the same period of 2007, we had paid $2.48 million for construction in progress which was completed in 2008.

Net cash provided by financing activities was $675,887 in the nine months ended September 30, 2008 as compared to net cash provided by financing activities of $728,399 for same period of 2007. The increase of net cash provided by financing activities in 2008 was mainly due to an increase in short term bank loans during the nine months ended September 30, 2008.

Inflation

We do not believe that inflation had a significant negative impact on our results of operations during the nine months ended September 30, 2008.

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 two short term loans from commercial banks in the PRC. The first loan of $1,457,938 (RMB10, 000,000) was entered into on August 31, 2007 and matures on August 31, 2009. The principal will be repaid at maturity and the interest is payable per quarter with an interest rate of 8.5905% per annum. This loan is guaranteed by Xi'an City Economic & Technology Investment Guarantee Co., Ltd. The Company paid them a guarantee fee equal to 2% of the loan principal, and used the Company's diesel processing equipments as collateral for the guarantee.

The second loan of $733,352 (RMB 5,000,000) was entered into on August 31, 2008 and matures on August 31, 2009. The principal will be repaid at maturity and the interest is payable per month with an interest rate of 8.217% per annum.

Auto loans payable

On September 27, 2006 the Company entered into a three year note payable of approximately $100,000 for one automobile. This note is collateralized by the car with an annualized interest rate of 6.3%. 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 September 30, 2008, the outstanding auto loans balances were $66,889.

Operating leases

As of September 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 nine months ended September 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

Accounting for Financial Guarantee Insurance Contracts

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 this 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 insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement will not have an impact on the Company's financial statements.

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 .