China Integrated Energy (CBEH) 10-K/A 2007 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT

NO. 2

FORM 10-K/A

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2007

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from __________ to __________

Commission File No. 000-25413

China Bio Energy Holding Group Co., Ltd.

(Name of Registrant in its Charter)

Delaware	65-0854589
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
Dongxin Century Square, 7th Floor Hi-Tech Development District Xi’an, Shaanxi Province, People’s Republic of China	710043
(Address of Principal Executive Offices)	(Zip Code)

Issuer’s telephone number: 86 29 8268 9320

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.0001 per share

(Title of Class)

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

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes oNo 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 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 10-K or any amendment to this Form 10-K. x

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

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 common stock, par value $0.0001 per share, held by non-affiliates of the issuer, based on the sale trade price of the common stock, as reported by the OTC Bulletin Board on June 30, 2007, was $2,382,860. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

As of March 20, 2008, there were 25,454,545 shares of the issuer’s common stock, par value $0.0001 per share, outstanding.

Explanatory Note:

This Annual Report on Form 10-K/A is being filed as Amendment No. 2 to our Annual Report on Form 10-K for the year ended December 31, 2007, which was originally filed with the Securities and Exchange Commission on March 31, 2008. We are amending Part IV. Item 15. Exhibits and Financial Statements by adding paragraph (g) to Note 17 to the Registrant’s Consolidated Financial Statements.

TABLE OF CONTENTS

		Page
PART IV
Item 15.	Exhibits.	1

i

PART IV

Item 15. Exhibits.

(a)   1.Financial Statements

An index to Consolidated Financial Statements appears on page F-1.

2.    Schedules

All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information required is set forth in the financial statements or notes thereto.

(b)          Exhibits

Exhibit Number	Description
2.1	Share Exchange Agreement dated as of October 23, 2007. (1)
2.2	Agreement and Plan of Merger, dated November 15, 2007. (2)
3.1	Certificate of Correction filed on July 24, 2007. (3)
3.1	Certificate of Amendment filed on June 11, 2007. (4)
3.1	Articles of Incorporation. (5)
3.1	Certificate of Amendment to Articles of Incorporation. (6)
3.1	Certificate of Ownership and Merger, dated November 15, 2007. (2)
3.1	Certificate of Incorporation of China Bio Energy Holding Group Co., Ltd. (7)
3.2	By-laws. (5)
4.1	Form of Warrant. (1)
4.2	Amended and Restated Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. (1)
10.1	Securities Purchase Agreement, dated as of October 23, 2007. (1)
10.2	Insider Registration Rights Agreement, dated as of October 23, 2007. (1)
10.3	Financing Registration Rights Agreement, dated as of October 23, 2007. (1)
10.4	Share Escrow Agreement, dated as of October 23, 2007. (1)
10.5	Public Relations Escrow Agreement, dated as of October 23, 2007. (1)

1

10.6	Exclusive Business Cooperation Agreement by and between Redsky China and Baorun Industrial , dated as of October 19, 2007. (7)
10.7	Exclusive Option Agreement by and between Gao Xincheng and Baorun Industrial, dated as of October 19, 2007. (7)
10.8	Exclusive Option Agreement by and between Gao Huiling and Baorun Industrial, dated as of October 19, 2007. (7)
10.9	Exclusive Option Agreement by and between Liu Yunlong and Baorun Industrial, dated as of October 19, 2007. (7)
10.10	Equity Pledge Agreement by and among Redsky China, Baorun Industrial and Gao Xincheng, dated as of October 19, 2007. (7)
10.11	Equity Pledge Agreement by and among Redsky China, Baorun Industrial and Gao Huiling, dated as of October 19, 2007. (7)
10.12	Equity Pledge Agreement by and among Redsky China, Baorun Industrial and Liu Yunlong, dated as of October 19, 2007. (7)
10.13	Incentive Option Agreement by and between Redsky and Gao Xincheng, dated as of October 19, 2007. (7)
10.14	Power of Attorney of Gao Xincheng. (8)
10.15	Power of Attorney of Gao Huiling. (8)
10.16	Power of Attorney of Liu Yunlong. (8)
10.17	Nominee Letter between Redsky China and Gao Xincheng. (8)
10.18	Nominee Letter between Redsky China and Gao Huiling. (8)
10.19	Nominee Letter between Redsky China and Liu Yunlong. (8)
10.20	Employment Agreement between Baorun Industrial and Gao Xincheng, dated as of October 23, 2007. (8)
10.21	Employment Agreement between Baorun Industrial and Li Gaihong, dated as of October 23, 2007. (8)
10.22	Employment Agreement between Baorun Industrial and Chen Jun, dated as of October 23, 2007. (8)
10.23	Amendment to Exclusive Business Cooperation Agreement, dated March 24, 2008. (8)
10.24	Sales Contract of Finished Oil by and between Chuan Yu Branch of China Petroleum & Chemical Sales Corporation and Baorun Industrial, dated as of January 10, 2007. (8)
10.25	Finished Oil Sales Contract by and between Sales Company of Shananxi Yanchang Petroleum Oil (Group) Co., Ltd. and Baorun Industrial, dated as of January 10, 2007. (8)
10.26	Sales Contract of Finished Oil by and between Shangdong Jin Cheng Petrochemical Group Co. Ltd. and Baorun Industrial, dated January 10, 2007. (8)

2

10.27	Sales Contract of Finished Oil Zibo City Lin Zi Lu Hua Refined Chemicals Co., Ltd. and Baorun Industrial, dated November 28, 2006. (8)
10.28	Sales Contract of Finished Oil by and between Hubei Hong Xin Petrochemical Industrial Co., Ltd. and Baorun Industrial, dated September 16, 2006. (8)
10.29	Sales Contract of Finished Oil by and between Shouguang City Lian Meng Petroleum & Chemical Co., Ltd. and Baorun Industrial, dated as of May 10, 2005. (8)
14	Code of Business Conduct and Ethics. (8)
21	List of Subsidiaries. (7)
31.1+	Certification of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+	Certification of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32+	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

+ Filed herewith.

(1) Incorporated by reference to the Company’s Form 8-K filed on October 29, 2007.

(2) Incorporated by reference to the Company’s Form 8-K filed on November 23, 2007.

(3) Incorporated by reference to the Company’s Form 10-QSB filed on November 13, 2007.

(4) Incorporated by reference to the Company’s Form 10-QSB filed on August 3, 2007.

(5) Incorporated by reference to the Company’s Registration Statement on Form 10-SB.

(6) Incorporated by reference to the Company’s Definitive Information Statement filed on September 19, 2003.

(7) Incorporated by reference to the Company’s Registration Statement on Form S-1 initially filed on December 7, 2007.

(8) Incorporated by reference to the Company’s Annual Report on Form 10-K initially filed on March 31, 2008.

3

1900 NW Corporate Blvd., Suite East 210 Boca Raton, FL 33431 Tel: 561.886.4200 Fax: 561.886.3330 e-mail. info@sherbcpa.com Offices in New York and Florida

Certified Public Accountants

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Directors

China Bio Energy Holding Group Co., Ltd.

We have audited the accompanying consolidated balance sheets of China Bio Energy Holding Group Co., Ltd. and its Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2007, 2006 and 2005. 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 audits.

We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing 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, and 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 purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Bio Energy Holding Group Co., Ltd. as of December 31, 2007, and 2006, and the results of its operations and its cash flows for the years ended December 31, 2007, 2006 and 2005 in conformity with accounting principles generally accepted in the United States.

/s/ Sherb & Co., LLP

Certified Public Accountants 

Boca Raton, Florida

March 21, 2008

(except for note 17 paragraph (g), as to which the date is June 16, 2008)

CHINA BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

	As of December 31,
	2007		2006
ASSETS
CURRENT ASSETS
Cash & cash equivalents	$	1,382,371	$	631,443
Restricted cash		200,000		641,433
Accounts receivable		288,589		5,745,362
Other receivables		1,548,681		159,857
Prepaid expenses		2,896,493		-
Advance to suppliers		16,546,506		4,276,233
Inventory		12,082,962		7,303,981
Advance to shareholders		-		22,054
Due from related party		593,696		315,497
Total current assets		35,539,298		19,095,860
CONSTRUCTION IN PROGRESS		-		515,742
PROPERTY AND EQUIPMENT, net		8,166,250		704,871
TOTAL ASSETS	$	43,705,548	$	20,316,473
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	179,617	$	2,267,116
Advance from customers		499,908		381,809
Taxes payable		125,015		744,666
Other payables		3,165,677		282,638
Accrued expenses		67,875		-
Notes payable - trade / related party		-		1,282,052
Loan payable		1,370,877		1,019,231
Long term notes payable - current portion		67,287		36,670
Total current liabilities		5,476,256		6,014,182
LONG TERM LIABILITIES		33,655		61,862
Total liabilities		5,509,911		6,076,044
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value; authorized shares 1,000,000; issued and outstanding 1,000,000 shares		1,000		-
Common stock, $0.0001 par value; authorized shares 80,000,000; issued and outstanding 25,454,545 shares and 23,954,545 as of December 31, 2007 and 2006, respectively		2,545		2,395
Paid-in capital		19,611,938		2,533,837
Statutory reserve		2,051,030		1,110,374
Accumulated other comprehensive income		2,319,732		624,806
Retained earnings		14,209,392		9,969,017
Total stockholders’ equity		38,195,637		14,240,429
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	43,705,548	$	20,316,473

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

F-1

CHINA BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

	For the Years Ended December 31,
	2007			2006			2005
Net sales	$	87,104,187		$	54,427,820		$	29,217,184
Cost of goods sold		77,006,690			48,666,440			24,843,313
Gross profit		10,097,497			5,761,380			4,373,871
General and administrative expenses		1,686,760			356,392			216,362
Income from operations		8,410,737			5,404,988			4,157,509
Non-operating income(expenses)
Interest income(expenses)		(142,442	)		(86,254	)		(16,422	)
Other income		328,264			24,845			-
Financial expenses		(16,994	)		-			-
Total non-operating income(expenses)		168,828			(61,409	)		(16,422	)
Net income		8,579,565			5,343,579			4,141,087
Other comprehensive item
Foreign currency translation		1,694,926			464,099			128,667
Comprehensive Income	$	10,274,491		$	5,807,678		$	4,269,754
Net income		8,579,565			5,343,579			4,141,087
Deemed dividend to preferred stockholders		3,398,534			-			-
Net income available to common stockholders	$	5,181,031		$	5,343,579		$	4,141,087
Basic and diluted weighted average shares outstanding
Basic		24,238,107			23,954,545			23,954,545
Diluted		25,145,122			23,954,545			23,954,545
Basic and diluted net earnings per share
Basic	$	0.21		$	0.22		$	0.17
Diluted	$	0.21		$	0.22		$	0.17

F-2

CHINA BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

	For The Years Ended December 31,
	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,579,565		$	5,343,579		$	4,141,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		228,833			104,443			65,861
Bad debt expenses		-			28,930			-
(Increase) decrease in current assets:
Accounts receivable		5,644,946			(3,607,785	)		734,378
Other receivable and prepaid expenses		(4,099,356	)		(143,252	)		299,071
Advance to suppliers		(11,484,067	)		(1,826,306	)		(4,129,702	)
Inventory		(4,098,099	)		(1,791,200	)		(460,985	)
Due from related party		(245,852	)		(37,756	)		(528,426	)
Increase (decrease) in current liabilities:
Accounts payable		(1,889,778	)		1,226,872			1,040,244
Advance from customers		87,896			(83,033	)		(1,456,698	)
Taxes payable		(643,780	)		752,253			(56,980	)
Other payables and accrued expenses		2,811,389			53,803			130,706
Net cash provided by (used in) operating activities		(5,108,303	)		20,548			(221,444	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash for investing activity		(200,000	)		-			-
Sale of investment		-			37,175			-
Acquisition of property & equipment		(6,809,173	)		(412,717	)		(19,659	)
Construction in progress		-			(515,742	)		-
Net cash used in investing activities		(7,009,173	)		(891,284	)		(19,659	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment from / (Advance to) shareholder		22,617			(738	)		(12,790	)
Repayment of short term loan		(1,577,744	)		-			-
Proceeds from short term loan		269,531			1,019,231			-
Repayment from long term notes payable		(4,235	)		-			(21,800	)
Proceeds from long term notes payable		-			89,697			-
Issuance of preferred stock		9,774,993			-			-
Capital contribution		3,905,724			-			-
Notes payable – trade		-			(743,494	)		743,494
Notes payable – related party		-			290,726			(713,912	)
Restricted cash		657,811			225,977			(14,791	)
Net cash provided by (used in) financing activities		13,048,697			881,399			(19,799	)
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS		931,221			10,663			(260,902	)
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS		(180,293	)		464,099			128,033
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR		631,443			156,681			289,550
CASH & CASH EQUIVALENTS, END OF YEAR	$	1,382,371		$	631,443		$	156,681
Supplemental Cash flow data:
Income tax paid	$	-		$	-		$	-
Interest paid	$	137,463		$	108,423		$	40,016

F-3

CHINA BIO ENERGY HOLDING GROUP CO., LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

	Preferred stock				Common stock
	Shares		Amount		Shares		Amount		Additional paid in capital			Statutory reserves		Other comprehensive income		Retained earning			Total
Balance at December 31, 2004		-	$	-		23,954,545	$	2,395	$	2,533,837		$	130,317	$	32,040	$	1,464,408		$	4,162,997
Net income for the year		-		-		-		-		-			-		-		4,141,087			4,141,087
Transfer to statutory reserves		-		-		-		-		-			445,699		-		(445,699	)		-
Foreign currency translation gain		-		-		-		-		-			-		128,667		-			128,667
Balance at December 31, 2005		-		-		23,954,545		2,395		2,533,837			576,016		160,707		5,159,796			8,432,751
Net income for the year		-		-		-		-		-			-		-		5,343,579			5,343,579
Transfer to statutory reserves		-		-		-		-		-			534,358		-		(534,358	)		-
Foreign currency translation gain		-		-		-		-		-			-		464,099		-			464,099
Balance at December 31, 2006		-		-		23,954,545		2,395		2,533,837			1,110,374		624,806		9,969,017			14,240,429
Capital contribution		-		-		-		-		3,905,724			-		-		-			3,905,724
Recapitalization on reverse acquisition		-		-		1,500,000		150		(150	)		-		-		-			-
Shares issued for cash		1,000,000		1,000		-		-		13,172,527			-		-		(3,398,534	)		9,774,993
Net income for the year		-		-		-		-		-			-		-		8,579,565			8,579,565
Transfer to statutory reserves		-		-		-		-		-			940,656		-		(940,656	)		-
Foreign currency translation gain		-		-		-		-		-			-		1,694,9266		-			1,694,926
Balance at December 31, 2007		1,000,000	$	1,000		25,454,545	$	2,545	$	19,611,938		$	2,051,030	$	2,319,732	$	14,209,392		$	38,195,637

F-4

CHINA BIO ENERGY HOLDING GROUP CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

China Bio Energy Holding Group Co., Ltd. (the “Company” or “CBEH”) was originally incorporated in the State of Delaware in July 1998 under the corporate name “AMS Marketing Inc.” and in October 2003, the Company changed its name to “International Imaging Systems, Inc.” On November 15, 2007, through a merger of its newly-formed wholly owned subsidiary, China Bio Energy Holding Group Co., Ltd. (Merger Sub), the Company’s name was changed to “China Bio Energy Holding Group Co., Ltd.” The separate existence of Merger Sub then ceased after the merger. The Company is currently engaged in the development, exploration, production and distribution of bio-diesel and wholesale and processing of heavy oil and finished oil products through its indirect wholly owned operating subsidiary in China.

On October 23, 2007, the Company entered into a Share Exchange Agreement, with Baorun China Group Limited (“Baorun Group”), a company organized under the laws of Hong Kong, and its shareholders Redsky Group Limited (“Redsky Group”), a British Virgin Islands company, and Princeton Capital Group LLP, a New Jersey limited liability partnership, Castle Bison, Inc. and Stallion Ventures, LLC. Redsky Group and Princeton Capital Group owned shares constituting 100% of the issued and outstanding ordinary shares of Baorun Group. Pursuant to the terms of the Share Exchange Agreement, Redsky Group and Princeton Capital Group transferred all of their shares in Baorun Group in exchange for the issuance of 22,454,545 shares of the Company’s common stock to Redsky Group and 1,500,000 shares of the Company’s common stock to Princeton Capital Group. As a result of this share exchange, Baorun Group became wholly-owned subsidiary of the Company, and Redsky Group and Princeton Capital Group acquired an aggregate of approximately 94.11% of the Company’s outstanding common stock.

Redsky Industrial (Xi’an) Co., Ltd. (“Redsky Industrial”), a wholly foreign owned entity (“WFOE”) and a subsidiary of Baorun Group in the People’s Republic of China (the “PRC”), executed a series of exclusive contractual agreements (“Redsky Contracts”) with Xi’an Baorun Industrial Development Co., Ltd. (“Baorun Industrial”). These contractual agreements allow Redsky Industrial to, among other things, exercise significant rights to influence Baorun Industrial’s business operations, policies and management, approve all matters requiring shareholder approval, and the right to include 100% of the net income earned by Baorun Industrial as part of our Consolidated Financial Statements. In addition, to ensure that Baorun Industrial and its shareholders perform their obligations under these contractual arrangements, Baorun Industrial’s shareholders have pledged to Redsky Industrial all of their equity interests in Baorun Industrial. At such time that current restrictions under PRC law on foreign ownership of Chinese companies engaging in the finished oil industry in China are lifted, Redsky Industrial may exercise its option to purchase the equity interests in Baorun Industrial directly.

Baorun Industrial was registered as a privately owned company on November 11, 1999 in the PRC. Its business operations consist of processing and distributing heavy oil and finished oil. It also engages in the research and development, manufacturing and distribution of bio-diesel. Baorun Industrial distributes its oil products to clients primarily located in the Shaanxi, Henan, Hunan, Sichuan, Hubei, Guizhou, and Xinjiang provinces of the PRC.

As Baorun Group owns Redsky Industrial, which will effectively control Baorun Industrial, Baorun Industrial is deemed a subsidiary of Baorun Group, a legal subsidiary of the Company. Based on Baorun Industrial’s contractual relationship with Redsky Industrial, the Company has determined that a variable interest entity has been created in accordance with FASB Interpretations - FIN 46(R): Consolidation of Variable Interest Entities (as amended) (“FIN 46(R)”). Under FIN 46(R), subsequent to the Redsky Contract and the Exchange Agreement, Baorun Industrial is to be presented as a consolidated subsidiary of the Company.

Prior to the acquisition of Baorun Group, the Company was a non-operating public shell corporation. Pursuant to Securities and Exchange Commission rules, the merger or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered a capital transaction in substance, rather than a business combination. Accordingly, for accounting purposes, the transaction has been treated as a reverse acquisition and a recapitalization, and pro-forma information is not presented. Transaction costs incurred in the reverse acquisition have been charged to expense.

F-5

The Company believes that current PRC corporate rules and regulations do not preclude Redsky Industrial, and thereby the Company, from exercising effective control of Baorun Industrial, the operating entity of the Company. Pursuant to the terms of the Business Cooperation Agreement, as amended (“Cooperation Agreement”) entered into between Redsky Industrial and Baorun Industrial, Baorun Industrial shall granted to Redsky Industrial the right to claim 100% of the net income, or loss, of Baorun Industrial in consideration for the services provided by Redsky Industrial,. In addition, Baorun Industrial granted to Redsky Industrial the right to any residual returns and dividends from Baorun Industrial.

The assets and liabilities of Baorun Industrial are accounted for at their historical rate, similar to the manner in which Baorun Group was treated by the Company in the Share Exchange. Baorun Industrial is not a self-supporting entity and requires the support of Redsky Industrial and their related entities. Redsky Industrial and its related entities were required to finance Baorun Industrial through the issuance of shares of preferred stock by the Company, Redsky Industrial’s ultimate parent. The financing of the Company (Note 16), concurrent with the Share Exchange Agreement, was entered into to enable Baorun Industrial to pursue bio-energy production projects, and to expand existing conventional oil/energy projects. Bio-energy production and the marketing of their products is an industry with limited operating history, and might require additional financing above what Redsky Industrial, the Company and its related entities have currently advanced to Baorun Industrial.

Under the Cooperation Agreement, Baorun Industrial cannot assign its rights under such agreement to another third party without Redsky Industrial’s consent. Under the agreement, Redsky Industrial must notify Baorun Industrial of its intent to assign the agreement to a third party but does not need the consent of Boarun Industrial for such assignment. Under the Cooperation Agreement Redsky Industrial is to absorb 100% of the net income, or loss, of Baorun Industrial. In addition, Baorun Industrial granted to Redsky Industrial the right to any residual returns and dividends from Baorun Industrial. Accordingly, as Redsky Industrial is a wholly owned subsidiary of Baorun Group, which is ultimately a subsidiary of the Company, 100% of Baorun Industrial will be consolidated into Redsky Industrial and ultimately the Company. The right to absorb these benefits, and expenses, are in place for the entire life of the Cooperation Agreement, or until such time that the Cooperation Agreement is voided or cancelled.

Under the series of agreements between Redsky Industrial and the shareholders of Baorun Industrial, prior to the sale of an equity interest of Baorun Industrial to Redsky Industrial, the shareholder of Baorun Industrial selling his or her proportional equity interest must inform the other remaining shareholders of Baorun Industrial of such a transaction.

Pursuant to the terms of the Exclusive Option Agreements among Redsky Industrial, Baorun Industrial and all three shareholders of Baorun Industrial, the purchase price for the equity interest of Baorun Industrial was not established. The purchase price is to be designated by Redsky Industrial to the extent allowed by relevant laws and regulations of the PRC.

F-6

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principle of consolidation

The accompanying consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Baorun Group and Redsky Industrial, and its consolidated subsidiary, Baorun Industrial (collectively, the “Company”). All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

In preparing the financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the statement of cash flows, we consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

As of December 31, 2007 and 2006, we maintained restricted cash of $200,000 in an escrow account for the use of the Company’s investor relations only, and $641,433 in a bank account that is collateral for certain bank loans, respectively. These amounts are presented as restricted cash on the accompanying consolidated balance sheets.

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. Based on historical collection activity, no allowance was deemed necessary at December 31, 2007. The bad debt allowance at December 31, 2006 was $28,930.

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.

Advances from Customers

Advances from customers consist of prepayments to the Company for products that have not yet been shipped to the customers. Any amounts received prior to satisfying the Company’s revenue recognition criteria are recorded as deferred revenue or advances from customers. The Company will recognize prepayments from customers as revenue at the time the delivery of goods is made.

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:

F-7

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”, the Company examines 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.

Construction in Progress

Construction in progress is recorded at its purchase price. Construction in progress refers to the bio-diesel production facility that the Company was constructing as of December 31, 2006. The construction in progress has been completed during the year ended December 31, 2007 and has been transferred into the plant and equipment.

Impairment of Long-Lived Assets

Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of December 31, 2007 and 2006, there were no significant impairments of its long-lived assets.

Income Taxes

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

According to the related regulation of Chinese tax authority, since Baorun Industrial uses the waste gas, water and residue to produce products, the Company is eligible for the exemption of income taxes for six years from year 2004 to year 2010. Net income for the years ended December 31, 2007, 2006 and 2005 would have been reduced by $3,100,000, $1,760,000 and $1,370,000, respectively, if Baorun Industrial was not exempt from income taxes.

Baorun Group and Redsky Industrial had net operating losses of approximately $769,000 and $44,000, respectively, at December 31, 2007. A 100% valuation allowance has been established due to the uncertainty of its realization.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48. As a result of the implementation of Interpretation 48, the Company recognized no material adjustments to liabilities or stockholders’ equity. When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

F-8

Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) 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 before all of the relevant criteria for revenue recognition are met are recorded as unearned revenue.

Sales revenue represents the invoiced value of goods, net of value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

Sales returns and allowances was $ 0 for each of 2007, 2006 and 2005. The Company does not provide unconditional right of return, price protection or any other concessions to its customers.

Cost of Goods Sold

Cost of goods sold consists primarily of material costs, direct labor, manufacturing overhead and related expenses, which are directly attributable to the production of products.  Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients’ financial condition and customer payment practices to minimize collection risk on accounts receivable.

The operations of the Company are located 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, as well as by the general state of the PRC economy.

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

Cash flows from investing activity exclude transfer from construction in progress of $528,910 to property and equipment for 2007.

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Fair Value of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Foreign Currency Translation and Comprehensive Income (Loss)

The Company’s 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.

This quotation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China.

On July 21, 2005, the central government of China allowed the RMB to fluctuate, ending its decade old valuation peg to the U.S. dollar. Historically, the Chinese government has benchmarked the RMB exchange ratio against the U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. The Company does not believe that its foreign currency exchange rate fluctuation risk is significant, especially if the Chinese government continues to benchmark the RMB against the U.S. dollar.

The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130) “Reporting Comprehensive Income.” Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the year ended December 31, 2007, 2006 and 2005 included net income and foreign currency translation adjustments.

Basic and diluted earning per share (EPS)

Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if the additional shares of common stock were dilutive. Diluted net earning per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase shares of common stock at the average market price during the period. The following table presents a reconciliation of basic and diluted earning per share:

	December 31,
	2007		2006		2005
Net income available to common stockholders	$	5,181,031	$	5,343,579	$	4,141,087
Weighted average shares outstanding - basic		24,238,107		23,954,545		23,954,545
Effect of dilutive securities:
Convertible preferred stock		859,278		-		-
Unexercised warrants		47,737		-		-
Weighted average shares outstanding- diluted		25,145,122		23,954,545		23,954,545
Earnings per share - basic	$	0.21	$	0.22	$	0.17
Earnings per share - diluted	$	0.21	$	0.22	$	0.17

F-10

Segment Reporting

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131 has no effect on the Company’s financial statements as substantially all of the Company’s operations are conducted in one industry segment, that of processing and distributing finished oil. All of the Company’s assets are located in the PRC. All of the Company’s sales are in the PRC and are involved in the processing and distribution of finished oil. In the last quarter of the year ended December 31, 2007, the Company had sales of approximately $4,580,000 from its biodiesel facility.

New Accounting Pronouncements

Business Combinations

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific items, including:

· Acquisition costs will be generally expensed as incurred;

· Noncontrolling interests (formerly known as “minority interests” - see SFAS 160 discussion below) will be valued at fair value at the acquisition date;

· Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

· In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

· Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

· Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, since we are a calendar year-end company we will continue to record and disclose business combinations following existing GAAP until January 1, 2009. We expect SFAS 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.

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 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Like SFAS 141R discussed above, earlier adoption is prohibited. We have not completed our evaluation of the potential impact, if any, of the adoption of SFAS 160 on our consolidated financial position, results of operations and cash flows.

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Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value, and expands disclosures about fair value measurements required under the accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for fiscal year, including financial statements for an interim period within the fiscal year. The Company is currently evaluating the impact, if any, that SFAS No. 157 will have on its financial statements.

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R

In September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending after December 15, 2006. We adopted the provisions of SFAS No. 158 for the year end 2006, and the effect of recognizing the funded status in accumulated other comprehensive income was not significant. The new measurement date requirement applies for fiscal years ending after December 15, 2008.

Fair Value Option for Financial Assets and Financial Liabilities

In February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is analyzing the potential accounting treatment.

Considering the Effects of Prior Year Misstatements in Current Year Financial Statements

In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The Company adopted SAB 108 in the fourth quarter of 2006 with no impact on its financial statements.

3. CASH BANK ACCOUNT

Cash includes cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Total cash in state-owned banks at December 31, 2007 and 2006 amounted to $1,377,141 and $1,272,876, respectively, of which no deposits are covered by insurance. 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.

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4. INVENTORY

Inventories consisted of the following:

	December 31,
	2007		2006
Petroleum	$	2,909,158	$	716,477
Diesel		6,079,751		1,298,776
Heavy Oil		1,620,487		5,288,728
Other Oil		1,473,566		-
Total	$	12,082,962	$	7,303,981

5. OTHER RECEIVABLES

Other receivables represent deposits made for diesel oil equipment purchase and acquisition of three oil mill factories. As of December 31, 2007 and 2006, other receivables were $1,548,680 and $159,857, respectively.

6. PLANT AND EQUIPMENT

Plant and Equipment are summarized as follows:

	December 31,
	2007		2006
Building	$	314,459	$	294,084
Diesel Equipment		7,500,890		-
Office Equipment		98,788		72,818
Other Equipment		25,086		21,926
Motor Vehicles		746,759		578,963
		8,685,982		967,791
Less: Accumulated Depreciation		519,732		262,920
Total	$	8,166,250	$	704,871

Depreciation expense for the periods ended December 31, 2007, 2006 and 2005 amounted to $228,833, $104,443 and $65,861, respectively.

7. DUE FROM RELATED PARTY

“Due from related party” represents the advance to and prepayment for the purchase from a related company that is 40% owned by one of the shareholders of Baorun Industrial. As of December 31, 2007 and 2006, $593,696 and $315,497, respectively, was due from this related party Purchases from this related party during 2007, 2006 and 2005 were approximately $0, $644,000 and $969,000, respectively. During 2007, “due from related party” was mainly the advance to this related company.

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8. MAJOR CUSTOMERS AND VENDORS

Major Customers

During year 2007 and 2006, the Company has increased its finished oil customers and requested payment in advance from the customers. For the years ended December 31, 2007, there were no major customers who made sales over 5% of the Company's total sales as the Company is diversifying its customer base. For the year ended December 31, 2006 and 2005, five customers accounted for approximately 40% and 72% of the Company's sales, respectively, and these customers accounted for approximately 60% of the Company's outstanding accounts receivable at December 31, 2006.

Major Suppliers

For the years ended December 31, 2007, 2006 and 2005, five suppliers accounted for approximately 86%, 66%, and 73% of the Company’s purchases, respectively. At December 31, 2007 and 2006, the accounts payable to these five suppliers were approximately $0 and $2,010,706, respectively. Management believes that other suppliers could provide raw materials on comparable terms.

9. VALUE ADDED TAX PAYABLE

Tax payable mainly consisted of value added tax payable of $125,015 for the year ended December 31, 2007. For the year ended December 31, 2006, it consisted of the value added tax in the amount of $744,666.

10. OTHER PAYABLE

Other payable mainly consisted of payable for the loan from Ningxia Yuanshun Petrochemical Company. Ningxia Yuanshun Petrochemical Company got this loan with the same amount from Redsky Industrial which was included in prepaid expenses. For the years ended December 31, 2007 and 2006, the other payable were $3,165,677 and $282,638, respectively.

11. INCOME TAXES

During the years ended December 31, 2007, 2006 and 2005, Baorun Industrial obtained approval from the PRC tax authority for the exemption of income taxes.

Despite the income tax exemption of Baorun Industrial, the Company is governed by the income tax law of the PRC concerning private-run enterprises, which are generally subject to tax at a statutory rate of 33% on income reported in the statutory financial statements after appropriated tax adjustments.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31,

	2007			2006			2005
US statutory rates		34	%		34	%		34	%
Tax rate difference		(1	)%		(1	)%		(1	)%
Effect of tax holiday		(33	)%		(33	)%		(33	)%
Valuation allowance		-			-			-
Tax per financial statements		-			-			-

The following table gives the proforma financial impact had the PRC taxes not been abated.

	Years ended December 31,
	2007		2006		2005
Net income before income taxes	$	8,579,565	$	5,343,579	$	4,141,087
Tax provision		3,099,930		1,763,381		1,366,559
Net income	$	5,479,635	$	3,580,198	$	2,774,528

12. LOAN PAYABLE

The Company is obligated under a short term loan from a commercial bank in the PRC for the amount of $1,370,877 (RMB10,000,000). This loan was entered into on August 31, 2007 and matures on August 30, 2008. The principal will be repaid at maturity and the interest is payable quarterly at the 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 pledged the Company’s diesel equipment as collateral for the guarantee.

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Notes Payable – Trade / Related Party

The Company, on occasion, satisfies the payment of their accounts payable, through the issuance of notes payable with certain vendors. These notes are issued by the Company's bank. These notes are usually of a short term nature, approximately three to six months in length. They do not bear interest and are paid by the company's bank to the vendors upon presentation to the Company's bank on the date of maturity. Total notes payable as of December 31, 2007 and 2006 were approximately $0 and $1,282,000, respectively.

13. LONG-TERM LIABILITIES

Long-term liabilities are the loans payable for the acquisition of automobiles. On September 27, 2006 the Company entered into a three years note payable for approximately $100,000. This note is collateralized by the car with an annualized interest rate of 6.3%. At December 31, 2007 and 2006, the outstanding loan balance for this car was $70,325 and $98,532, respectively.

In February, 2007, the Company entered into another two notes payable for the acquisition of two automobiles. One is a two years note for the loan amount of approximately $25,500 with 7.56% interest rate per annum. The other one is a two years note for the loan amount of $19,800 with 7.56% annual interest rate. At December 31, 2007, the outstanding loan balances for these two automobiles were $17,229 and $13,388, respectively. At December 31, 2007, $67,287 of the total outstanding loan balance has been reclassified to current portion of the liabilities that are payable within one year.

14. COMMITMENTS

Employee Agreements

The Company entered into an employment agreement with Mr. Gao Xincheng to employ him as the Chairman, effective as of October 23, 2007. The current term of the agreement expires on October 22, 2010, but is renewable upon agreement by the parties to the agreement, unless earlier terminated by either party. Mr. Gao's base monthly salary is $800. The Company pays premiums for Mr. Gao for social insurance schemes such as Pension, Unemployment, Medical Insurance, etc., in accordance with relevant PRC laws and regulations. The Company has the right to adjust the salary and welfare of Mr. Gao. In connection with this agreement, Mr. Gao also executed a Confidentiality and Non-competition Agreement with the Company.

The Company entered into an employment agreement with Ms. Li Gaihong to employ her as the Chief Financial Officer, effective as of October 23, 2007. The current term of the agreement expires on October 22, 2010, but is renewable upon agreement by the parties to the agreement, unless earlier terminated by either party. Ms. Li's base monthly salary is $500. The Company pays premiums for Ms. Li for social insurance schemes such as Pension, Unemployment, Medical Insurance, etc. in accordance with relevant PRC laws and regulations. The Company has the right to adjust the salary and welfare of Ms. Li. In connection with this agreement, Ms. Li also executed a Confidentiality and Non-competition Agreement with the Company.

The Company leases one oil storage facility under a long term, non-cancelable, and renewable operating lease agreement expiring on June 30, 2008.

The Company leases another two oil storage facilities under one year, non-cancelable, and renewable operating lease agreements expiring on December 31, 2007. One lease agreement has been renewed for one year with expiration date on December 31, 2008. The other lease agreement has been terminated pursuant to its terms. The Company entered into a new one year, non-cancelable and renewable lease agreement for a new oil storage facility with an expiration date on December 31, 2008.

During 2007, the Company leased one gas station for operation under a long-term, non-cancelable operating lease agreement with an expiration date of December 31, 2027. This lease is classified as an operating lease.

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These non-cancelable operating lease agreements require that the Company pay certain operating expenses applicable to the leased premises. Future minimum rental payments required under these operating leases are as follows:

Year Ending December 31,	Amount
2008	$	175,000
2009		20,000
2010		20,000
2011		20,000
2012		20,000
Total	$	255,000

Total rent expense for the years ended December 31, 2007, 2006, and 2005 amounted to $173,386, $92,997 and $170,289, respectively.

15. STATUTORY RESERVES

Pursuant to the new corporate law of the PRC effective January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.

Surplus reserve fund

The Company is now only required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The Company transferred $940,656, $534,358 and $445,699 to this reserve for years 2007, 2006 and 2005, respectively.

The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing stockholders in proportion to their stockholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

Common welfare fund

Common welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income to this fund. The Company did not make any contribution to this fund for any of the years ended December 31, 2007, 2006 and 2005.

This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable except upon liquidation.

Pursuant to the “Circular of the Ministry of Finance (MOF) on the Issue of Corporate Financial Management after the Corporate Law Enforced” (No.67 [2006]), effective on April 1, 2006, issued by the MOF, companies transferred the balance of SCWF (Statutory Common Welfare Fund) as of December 31, 2005 to Statutory Surplus Reserve. Any deficit in the SCWF was charged in turn to Statutory Surplus Reserve, additional paid-in capital and undistributed profit of previous years. If a deficit still remains, it should be transferred to retained earnings and be reduced to zero by a transfer from after tax profit of following years. At December 31, 2005, the Company did not have a deficit in the SCWF.

F-16

16. STOCKHOLDERS’ EQUITY

Reverse Merger

On October 23, 2007, the Company entered into a Share Exchange Agreement with Baorun China, its shareholders Redsky Group Limited, Princeton Capital Group LLP and Castle Bison, Inc. and Stallion Ventures, LLC, the Company’s then principal stockholders. Pursuant to the terms of the Share Exchange Agreement, Redsky Group and Princeton Capital Group transferred all of their shares constituting 100% of the issued and outstanding ordinary shares of Baorun China in exchange for the issuance of 22,454,545 shares of the Company’s common stock to Redsky Group and 1,500,000 shares of the Company’s common stock to Princeton Capital Group. As a result of this share exchange, Baorun China became a wholly-owned subsidiary of the Company, and Redsky Group and Princeton Capital Group acquired an aggregate of approximately 94.11% of the Company’s outstanding common stock.

At the same time, Redsky Industrial, a WFOE subsidiary of Baorun China in the PRC, executed a series of exclusive contractual agreements with Baorun Industrial. These contractual agreements allow Redsky Industrial to, among other things, secure significant rights to influence Baorun Industrial’s business operations, policies and management, approve all matters requiring shareholder approval, and the right to include 100% of net income earned by Baorun Industrial as part of our Consolidated Financial Statements.

We have determined a variable interest entity has been created in accordance with FASB Interpretations - FIN 46(R): Consolidation of Variable Interest Entities (as amended) (“FIN 46 (R)”). Under FIN 46 (R), as a result of the contractual arrangements between Redsky Industrial and Baorun Industrial and the Exchange Agreement, Baorun Industrial is presented as our consolidated subsidiary.

Series A Convertible Preferred Stock with Series A-1 and Series A-2 warrants Issued for Cash

Concurrently with the share exchange, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with one accredited investor for the sale of securities consisting of (i) 1,000,000 shares of the Company’s Series A convertible preferred stock, (ii) a series A-1 warrant to purchase 3,409,091 shares of the Company’s common stock at an exercise price of US$3.00 per share, and (iii) a Series A-2 warrant to purchase 2,272,728 shares of the Company’s common at an exercise price of US$4.40 per share (the Series A-1 and Series A-2 warrants, collectively the “Warrants”), for aggregate gross proceeds equal to $10,000,000. Net proceeds of $9,774,993 have been received by the Company.

Each share of preferred stock is convertible into a number of fully paid and non-assessable shares of common stock equal to the quotient of the liquidation preference amount per share of preferred stock, or $10.00, divided by the conversion price, which initially is $2.20 per share, subject to certain adjustments, or approximately 4,545,455 shares of common stock if all 1,000,000 shares of preferred stock converted. No dividend is declared during the year.

Deemed dividend allocated to warrants is $1,585,631. The value of warrants mentioned was determined by allocation of principal using the Black-Scholes pricing model with the following assumptions: discount rate - 1.37%; dividend yield - 0%; expected volatility - 30% and term of 5 years. Additionally, the Company recorded $1,812,903 as dividend from beneficial conversion, which reflects the difference between the fair market price and effective conversion rate. Pursuant to EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27, “Application of Issue No. 98-5 in Certain Convertible Instruments,” the total value of $3,398 534 was recorded as a deemed dividend.

17. OPERATING RISK

(a) Country risk

Currently, the Company’s revenues are mainly derived from sale of oil products in the PRC. The Company hopes to expand its operations in the PRC, but, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company’s financial condition.

F-17

(b) Products risk

The Company competes with larger companies that have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel. There can be no assurance that the Company will remain competitive with larger competitors.

(c) Exchange risk

The Company cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on the exchange rate of Chinese Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.

(d) Political risk

Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the PRC. Additionally, the PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company’s ability to operate in the PRC could be affected.

(e) Key personnel risk

The Company’s future success depends on the continued services of executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-person insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing.

(f) Late filing risk

If the Company does not timely file and have declared effective the registration statement to register the shares being offered by the selling stockholders, the Company will be subject to liquidated damages in the amount of 0.75% of the purchase price of the securities being registered, per month, subject to a maximum limit of 7.5%.

(g) All the Company’s operations are in the PRC. There is no assurance that CBEH, the U.S. parent, will be able to receive funds from its PRC subsidiary for the payment of ongoing expenses and the distribution of dividends.

The following schedule is the balance sheet of CBEH, the U.S. parent, as of December 31, 2007:

Total Assets:
Restricted cash	$	200,000
Investment in Baorun Group		9,574,993
	$	9,774,993
Stockholders’ Equity:
Preferred stock, $.001 par value; authorized shares
1,000,000; issued and outstanding 1,000,000 shares	$	1,000
Common stock, $.0001 par value; authorized shares		2,538
80,000,000; issued and outstanding 25,387,041 shares
Additional paid in capital		9,771,455
	$	9,774,993

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company has duly caused this Amendment No. 2 to Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.

	China Bio Energy Holding Group Co., Ltd.
	By:	/s/ Gao Xincheng
		Name: Gao Xincheng
		Title: Chief Executive Officer and President
June 20, 2008

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/ Gao Xincheng	Chairman of the Board, Chief	June 20, 2008
Gao Xincheng	Executive Officer and President (principal executive officer)
/s/ Li Gaihong	Chief Financial Officer (principal	June 20, 2008
Li Gaihong	financial and accounting officer) and Director

Exhibit Index

Exhibit Number	Description
2.1	Share Exchange Agreement dated as of October 23, 2007. (1)
2.2	Agreement and Plan of Merger, dated November 15, 2007. (2)
3.1	Certificate of Correction filed on July 24, 2007. (3)
3.1	Certificate of Amendment filed on June 11, 2007. (4)
3.1	Articles of Incorporation. (5)
3.1	Certificate of Amendment to Articles of Incorporation. (6)
3.1	Certificate of Ownership and Merger, dated November 15, 2007. (2)
3.1	Certificate of Incorporation of China Bio Energy Holding Group Co., Ltd. (7)
3.2	By-laws. (5)
4.1	Form of Warrant. (1)
4.2	Amended and Restated Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. (1)
10.1	Securities Purchase Agreement, dated as of October 23, 2007. (1)
10.2	Insider Registration Rights Agreement, dated as of October 23, 2007. (1)
10.3	Financing Registration Rights Agreement, dated as of October 23, 2007. (1)
10.4	Share Escrow Agreement, dated as of October 23, 2007. (1)
10.5	Public Relations Escrow Agreement, dated as of October 23, 2007. (1)
10.6	Exclusive Business Cooperation Agreement by and between Redsky China and Baorun Industrial , dated as of October 19, 2007. (7)
10.7	Exclusive Option Agreement by and between Gao Xincheng and Baorun Industrial, dated as of October 19, 2007. (7)
10.8	Exclusive Option Agreement by and between Gao Huiling and Baorun Industrial, dated as of October 19, 2007. (7)
10.9	Exclusive Option Agreement by and between Liu Yunlong and Baorun Industrial, dated as of October 19, 2007. (7)
10.10	Equity Pledge Agreement by and among Redsky China, Baorun Industrial and Gao Xincheng, dated as of October 19, 2007. (7)

10.11	Equity Pledge Agreement by and among Redsky China, Baorun Industrial and Gao Huiling, dated as of October 19, 2007. (7)
10.12	Equity Pledge Agreement by and among Redsky China, Baorun Industrial and Liu Yunlong, dated as of October 19, 2007. (7)
10.13	Incentive Option Agreement by and between Redsky and Gao Xincheng, dated as of October 19, 2007. (7)
10.14	Power of Attorney of Gao Xincheng. (8)
10.15	Power of Attorney of Gao Huiling. (8)
10.16	Power of Attorney of Liu Yunlong. (8)
10.17	Nominee Letter between Redsky China and Gao Xincheng. (8)
10.18	Nominee Letter between Redsky China and Gao Huiling. (8)
10.19	Nominee Letter between Redsky China and Liu Yunlong. (8)
10.20	Employment Agreement between Baorun Industrial and Gao Xincheng, dated as of October 23, 2007. (8)
10.21	Employment Agreement between Baorun Industrial and Li Gaihong, dated as of October 23, 2007. (8)
10.22	Employment Agreement between Baorun Industrial and Chen Jun, dated as of October 23, 2007. (8)
10.23	Amendment to Exclusive Business Cooperation Agreement, dated March 24, 2008. (8)
10.24	Sales Contract of Finished Oil by and between Chuan Yu Branch of China Petroleum & Chemical Sales Corporation and Baorun Industrial, dated as of January 10, 2007. (8)
10.25	Finished Oil Sales Contract by and between Sales Company of Shananxi Yanchang Petroleum Oil (Group) Co., Ltd. and Baorun Industrial, dated as of January 10, 2007. (8)
10.26	Sales Contract of Finished Oil by and between Shangdong Jin Cheng Petrochemical Group Co. Ltd. and Baorun Industrial, dated January 10, 2007. (8)
10.27	Sales Contract of Finished Oil Zibo City Lin Zi Lu Hua Refined Chemicals Co., Ltd. and Baorun Industrial, dated November 28, 2006. (8)
10.28	Sales Contract of Finished Oil by and between Hubei Hong Xin Petrochemical Industrial Co., Ltd. and Baorun Industrial, dated September 16, 2006. (8)
10.29	Sales Contract of Finished Oil by and between Shouguang City Lian Meng Petroleum & Chemical Co., Ltd. and Baorun Industrial, dated as of May 10, 2005. (8)
14	Code of Business Conduct and Ethics. (8)
21	List of Subsidiaries. (7)
31.1+	Certification of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2+	Certification of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32+	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

+ Filed herewith.

(1) Incorporated by reference to the Company’s Form 8-K filed on October 29, 2007.

(2) Incorporated by reference to the Company’s Form 8-K filed on November 23, 2007.

(3) Incorporated by reference to the Company’s Form 10-QSB filed on November 13, 2007.

(4) Incorporated by reference to the Company’s Form 10-QSB filed on August 3, 2007.

(5) Incorporated by reference to the Company’s Registration Statement on Form 10-SB.

(6) Incorporated by reference to the Company’s Definitive Information Statement filed on September 19, 2003.

(7) Incorporated by reference to the Company’s Registration Statement on Form S-1 initially filed on December 7, 2007.

(8) Incorporated by reference to the Company’s Annual Report on Form 10-K initially filed on March 31, 2008.