Zhaoheng Hydropower (ZHYLF) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2008

OR

r	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from                                        to

Commission file number 000-52786

ZHAOHENG HYDROPOWER COMPANY

(Exact Name of Registrant as Specified in Its Charter)

Nevada	41-1484782
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

F/19, Unit A, JingFengCheng Building 5015 Shennan Road, Shenzhen PRC	518025
(Address of Principal Executive Offices)	(Zip Code)

(011-86) 755-8207-0966

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such

shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x     No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company.)	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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of August 11, 2008, there were 71,692,999 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

INDEX

		Page
	PART I            FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
	PART II             OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES

PART I — FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
	September 30,		December 31,
	2008		2007
ASSETS	(Unaudited)
Current Assets:
Cash	$	3,114,904	$	994,719
Notes receivable		-		202,349
Accounts receivable, net of allowance for doubtful accounts $327,652
and $307,090 respectively		2,430,558		1,915,471
Dividend receivable		-		71,460
Other receivables		117,498		145,075
Prepaid expenses and other current assets		67,541		85,971
Total current assets		5,730,501		3,415,045
Investment in subsidiary		571,837		535,951
Property, plant and equipment, net of accumulated depreciation of
$40,254,091 and $34,380,646 respectively		73,504,610		30,634,626
Due from related parties		16,369,507		17,529,838
Other assets		174,429		175,886
Construction in progress		2,553,107		32,455,855
Property use rights, net		1,227,057		1,169,905
Goodwill		401,122		-
Total assets	$	100,532,170	$	85,917,106
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	12,606	$	133,163
Other payables		962,224		1,739,867
Salary payable and judgements payable		31,032		7,600
Taxes payable		643,586		157,525
Due to related parties		3,581,833		31,444
Advances from customers		35,793		34,021
Total current liabilities		5,267,074		2,103,620
Loans payable-long term		64,623,419		60,567,944
Stockholders' Equity:
Preferred Stock: $.001 par value; 20,000,000 authorized, no shares issued and outstanding
at September 30, 2008 and December 31, 2007, respectively		-		-
Common Stock: $.001 par value, 780,000,000 authorized, 71,692,943 and 2,005,973 issued
and outstanding at September 30, 2008 and December 31, 2007, respectively		71,693		2,006
Additional paid-in capital		19,336,244		19,405,931
Statutory surplus reserve		666,952		666,952
Retained earnings		6,357,052		628,704
Accumulated other comprehensive income		4,209,736		2,541,949
Total stockholders' equity		30,641,677		23,245,542
Total liabilities and stockholders' equity	$	100,532,170	$	85,917,106
See notes to unaudited consolidated financial statements

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ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007
Revenues	$	5,156,207		$	3,191,260		$	9,789,788		$	7,722,300
Cost of revenues		722,820			424,892			1,942,789			1,303,246
Gross profit		4,433,387			2,766,368			7,846,999			6,419,054
Operating expenses:
Selling expense, General and administrative expenses		400,003			317,658			934,438			1,039,914
Operating income		4,033,384			2,448,710			6,912,561			5,379,140
Other income (expenses):
Interest income		677,264			2,845			1,642,276			34,084
Interest expense		(1,223,717	)		(257,405	)		(2,686,779	)		(695,817	)
Nonoperating income		-			(6,766	)		-			66,833
Nonoperating expense		(926	)		(13,789	)		(21,932	)		(37,333	)
Other income		311			109,800			26,540			109,800
Other expense		-			(16,285	)		-			(16,285	)
Investment income		29,893			-			189,043			-
Total other income (expenses)		(517,175	)		(181,600	)		(850,852	)		(538,718	)
Income before income taxes		3,516,209			2,267,110			6,061,709			4,840,422
Income taxes		178,936			196,289			333,228			366,742
Income before minority interest		3,337,273			2,070,821			5,728,481			4,473,680
Minority interest		-			(278,937	)		-			976,781
Net income	$	3,337,273		$	1,791,884		$	5,728,481		$	3,496,899
Unrealized foreign currency translation gain		42,977			1,075,250			1,667,787			983,831
Comprehensive  income	$	3,380,250		$	2,867,134		$	7,396,268		$	4,480,730
Net income per common share- basic and diluted	$	0.05		$	0.89		$	0.15		$	1.74
Weighted average number of shares
outstanding-basic and diluted		71,692,943			2,005,973			37,742,881			2,005,973
See notes to unaudited consolidated financial statements.

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ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
	For the Nine Months Ended September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,728,481		$	3,496,899
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expenses		1,215,494			799,182
Minority interest		-			997,331
Changes in operating assets and liabilities:
Notes receivable		211,463			9,311
Accounts receivable		(378,887	)		1,299,999
Dividend receivable		74,679			-
Other receivables		36,526			(839,843	)
Prepaid expense		(34,631	)		(124,431	)
Other assets		(321,600	)		(90,861	)
Accounts payable and accrued expenses		102			(949,940	)
Other payables		(976,945	)		(1,030,490	)
Advances from customers		(35,554	)		88,390
Taxes payable		465,943			329,730
Net cash provided by operating activities		5,985,071			3,985,277
CASH FLOWS FROM INVESTING ACTIVITIES
Due from related parties		5,868,204			(12,894,046	)
Purchase of equity investment		(2,626,077	)		-
Purchase of property, plant and equipment		(7,131,947	)		(107,213	)
Investment in construction of hydropower station		-			(11,486,794	)
Net cash used in investing activities		(3,889,820	)		(24,488,053	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend paid		-			(3,158,772	)
Proceeds from long-term loans		-			21,682,452
Net cash provided by financing activities		-			18,523,680
NET INCREASE (DECREASE) IN CASH		2,095,251			(1,979,096	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		24,934			265,845
CASH, BEGINNING OF YEAR		994,719			4,819,766
CASH, ENDING OF PERIOD	$	3,114,904		$	3,106,514
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest paid	$	2,686,779		$	2,551,175
Income tax paid	$	239,804		$	173,430
See notes to unaudited consolidated financial statements

3

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
	Preferred Stock				Common Stock
	Shares		Amount		Shares		Amount		Additional Paid-in Capital		Statutory Surplus Reserve		Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance, January 1, 2008		-	$	-		2,005,973	$	2,006	$	5,470,767	$	-	$	(5,514,655	)	$	2,541,949	$	2,500,067
Recapitalization of reverse acquisition		-		-		69,686,970		69,687		13,865,477		666,952		6,143,226			-		20,745,342
Commprehensive income:
Net income		-		-		-		-		-		-		5,728,481			-		5,728,481
Unrealized foreign currency translation		-		-		-		-		-		-		-			1,667,787		1,667,787
Subtotal																			7,396,268
Balance, September 30, 2008		-	$	-		71,692,943	$	71,693	$	19,336,244	$	666,952	$	6,357,052		$	4,209,736	$	30,641,677
See notes to unaudited consolidated financial statements

4

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

Note 1 – ORGANIZATION AND BUSINESS OPERATIONS

Certified Technologies Corporation ("Certified") was incorporated under the laws of the State of Minnesota in January, 1984. Certified was formed to market a fire retardant chemical formulation to the commercial aviation and business furniture industries. Certified filed for a Chapter 11 bankruptcy on July 11, 2000, which was converted to a Chapter 7 on October 23, 2000. The bankruptcy closed on November 4, 2004.

On May 13, 2008, Zhaoheng Investment Limited, a British Virgin Island Corporation ("Zhaoheng BVI") entered into a share exchange agreement (the “Share Exchange Agreement”) with Certified resulting in a change of control of Certified. Pursuant to the Share Exchange Agreement, Certified issued an aggregate of 69,686,970 shares of common stock, par value $0.001 (the “Common Stock”), to Embedded Internet Solutions Limited (“Embedded Internet”), a Cayman Islands company wholly owned by Guosheng Xu, our current Chief Executive Officer and Chairman, in exchange for all of the shares of common stock of Zhaoheng BVI (the “Share Exchange”). Contemporaneously with the closing of the Share Exchange, certain holders of our Common Stock completed a sale of approximately 572,170 shares of Common Stock owned by them to Embedded Internet pursuant to a stock purchase agreement (the “Stock Purchase”). As a result of the completion of the Share Exchange and the Stock Purchase, Embedded Internet now owns shares of our Common Stock constituting approximately 98% of our outstanding capital stock.

Upon the consummation of the Share Exchange, Certified ceased being a shell company and is now engaged in the investment and operation of small and medium sized hydropower stations in the People’s Republic of China (“PRC”).

In November 2007, Zhaoheng BVI’s wholly-owned subsidiary, Zhaoheng Hydropower (Hong Kong) Limited (“Zhaoheng HK”), was established in Hong Kong. Guosheng Xu, the sole shareholder of Zhaoheng BVI, combined his equity interests in the following four operating companies (collectively, the “Operating Entities”): (1) Shenzhen Zhaoheng Hydropower Co., Ltd., ("Shenzhen Zhaoheng") (2) Hunan Zhaoheng Hydropower Co., Ltd. (“Hunan Zhaoheng”), (3) Hunan Sanjiang Power Co., Ltd., (“Hunan Sanjiang”) and (4) Hunan Jiuli Hydropower Construction Co., Ltd. (“Hunan Juili”), each incorporated under laws of the PRC, and injected them into the Company in December 2007. This combination of ownership is collectively referred to as “Capital Injection”.

On February 27, 2008, Certified reincorporated in the State of Nevada and on July 17, 2008, Certified changed its corporate name from “Certified Technologies Corporation” to “Zhaoheng Hydropower Company”.

Hereafter, Zhaoheng BVI, Zhaoheng HK, the Operating Entities that consolidated their equity interest into Zhaoheng BVI, Zhaoheng Hydropower Company, and any subsequent acquisition to the Capital Injection are referred to as the “Company”, unless specific reference is given to a specific company. All assets and liabilities are recorded at their historical costs.

In December 2007, one of the Company’s subsidiaries Hunan Sanjiang entered into a letter of intent to transfer its 100% interest in Hunan Juili to its related party, Shenzhen Zhaoheng Industrial Co., Ltd., for a consideration of RMB 13,038,000. All relevant procedures were completed in April 2008. As a result, Hunan Jiuli is not a subsidiary of the Company as of June 30, 2008.

On June 15, 2008, Hunan Zhaoheng succeeded in the buyout of Guizhou Jingrong Industrial Development Co., Ltd (“Guizhou Jingrong”) in Rongjiang County of the Guizhou Province. The acquisition was undertaken to allow the Company to diversify its operations, to improve its financial condition and increase shareholder value.

The Company uses the purchase method of accounting for qualifying business combinations. Under the purchase method of accounting, the assets and liabilities of acquired companies are recorded at their estimated fair values at the date of acquisition. The excess of cost over their fair values is recognized as an intangible asset. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, identified intangible assets are amortized over their estimated useful lives. The equity consideration for Guizhou Jingrong was initially estimated at $2,332,668 and the

5

amount was paid on June 30, 2008. After final adjustment pursuant to the acquisition agreement, the final cost was set at $2,681,150. The Company had paid the difference by September 30, 2008.

The Company, by virtue of their ownership structure, owns three hydropower stations (Hunan Sanjiang Hydropower Station, Hunan Sanjiang Left Bank Hydropower Station and Guizhou Jingrong Industrial Development Station) and other relevant operating assets located in the People’s Republic of China (“PRC”).

The financial statements as presented hereby consolidated for the nine months ended September 30, 2008 and 2007. The accompanying unaudited financial statements of the Company as of September 30, 2008 and 2007 had been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as promulgated by the US Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements for the nine months ended September 30, 2008 and 2007 are unaudited and include all adjustments considered necessary for a fair presentation of the results of operations for the nine month periods ended September 30, 2008 and 2007. All such adjustments are of a normal recurring nature. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for a full fiscal year.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company’s four Operating Entities.  Inter-company items and transactions have been eliminated in combination.

Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts of accounts receivable, and the useful life of property, plant and equipment.

Cash and Cash Equivalents

For purposes of the consolidated cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

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 September 30, 2008 and December 31, 2007 amounted to $3,111,092 and $994,693 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.

Accounts Receivable

The Company conducts its business operations in the PRC. Accounts receivables are reported at net realizable value. Management reviews its accounts receivable on a regular basis. Delinquent accounts are written off when it’s determined that the amounts are uncollectible. Accounts receivable, net of the allowance for doubtful accounts, as of September 30, 2008 and December 31, 2007 were $2,430,558 and $1,915,471 respectively.

Investments in Subsidiary

We use the cost method to account for investments in common stock of entities in which we have a minority voting interest or in which we otherwise have the ability to exercise significant influence or the right to share any net earnings or losses of the entity. Under the cost method, the investment is originally recorded at cost. We are

6

recording the investment in Zhaoheng Weile Tungsten (Shimen), Ltd. (“Weile”) as an investment under the cost method of accounting.

Property, Plant and Equipment

Property, plant and equipment are stated at the actual cost on acquisition less accumulated depreciation. Depreciation is 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. Property and equipment have a residual value of 10% of actual cost. The estimated lives used in determining depreciation are:

Classification	Useful Years
Dams	50 years
Buildings	20 -50 years
Machine equipment	10-30 years
Electronic and other equipment	3-10 years

Maintenance and repairs are charged to expense as incurred. Significant renewals and improvements are capitalized.

Construction in Progress

As of September 30, 2008, "construction in progress" refers to the auxiliary project of Hunan Sanjiang Left Bank Hydropower Station and Guizhou Jingrong’s expansion project which amounted to $2,553,107. As of  December 31, 2007, it refers to Hunan Sanjiang Left Bank Station, which amounted to $32,455,855. We started to test operations in April 2008. The amounts allocated to "construction in progress" was transferred to property, plant and equipment in July 2008. The carryover amount is $34,909,173.

Intangible Assets

Intangible assets represent the excess of cost over fair value of non-contractual relationships. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, intangible assets are amortized over their useful lives. The useful life for the intangible assets is 20 years since July 2008.

Acquisitions

The Company accounts for acquisitions using the purchase method of accounting in accordance with SFAS No. 141.  In each of our acquisitions we determined that fair values were equivalent to the acquired historical carrying costs.  The estimated purchase price and the preliminary adjustments to historical book value of business entities acquired were recorded by the Company at the pre-acquisition carrying amount.

Revenue Recognition

The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition.  In general, the Company records revenue when persuasive evidence of an arrangement exists, power have been delivered , the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

Sales revenue represents the invoiced value of goods or service, net of a value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate 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 production.

Major Suppliers

The Company’s supplies are mainly related to spare parts of low value that are used for maintenance of the hydropower factories. As the Company could source the supplies from various suppliers on comparable terms, no concentration risk is perceived.

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Major Customers

For the nine months ended September 30, 2008 and 2007, the major five customers accounted for approximately 100% and 90.71%, respectively, of the Company’s total sales. As at September 30, 2008 and December 31, 2007, accounts receivables from these customers were 100% and 94% of the Company’s total outstanding balance.

Foreign Currency Translation

The functional currency of the Company is the Chinese Renminbi (“RMB”). The financial statements of the Company are translated to United Stated dollars using year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transaction occurred.  Net gains and losses resulting from foreign exchange translations are included in the statements of operations and stockholders' equity as other comprehensive income. The cumulative translation adjustment and effect of exchange rate changes at September 30, 2008 and December 31, 2007 was $4,209,736 and $2,541,949, respectively.

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.

Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rates during the nine months ended September 30, 2008 and 2007.

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2008	2007	2008	2007
Period end RMB : U.S. Dollar exchange rate	6.8551	7.5176	6.8551	7.5176
Average year-to-date RMB : U.S. Dollar exchange rate	6.8529	7.5691	6.9989	7.6758

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through PRC authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at the rates applied in the translation.

Comprehensive Income (Loss)

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 nine months ended September 30, 2008 and the year ended December 31, 2007 included net income and foreign currency translation adjustments.

Impairment of Long-lived Assets

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the estimated fair value and the book value of the underlying asset. The Company did not incur any impairment charges during the nine months ended September 30, 2008 and 2007.

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Minority Interest

Under generally accepted accounting principles when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the majority interest since there is no obligation of the minority interest to assume liability on such losses. The Company, therefore, has absorbed all losses applicable to a minority interest where applicable. If future earnings do materialize, minority interest shall be credited to the extent of such losses previously absorbed.

Income Taxes

The Company accounts for income taxes under the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109").

Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Value Added Taxes (VAT)

The Company is required to charge and to collect for value added taxes on their sales. In addition, the Company pays value added taxes on their primary purchases, recorded as a receivable. These amounts are netted for financial statement purposes.

Basic and Diluted Earnings per Share

Basic income per common share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented.  Diluted income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments (including accounts receivable, due from/to related parties, account payable, bank loans and notes receivable) approximate fair value due to either the relatively short period to maturity or float market interest rate of those instruments.

Concentrations and Credit Risks

For the nine months ended September 30, 2008 and 2007, all of the Company’s sales came from companies located in the PRC.  As of September 30, 2008 and December 31, 2007, all of the Company’s assets were located in the PRC.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS 157 are effective for the fiscal years beginning after November 15, 2007. Therefore, the Company adopted this standard on January 1, 2008, and the adoption of this statement did not have a material impact to the Company’s financial condition or results of operations.

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In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires (a) recognition of the funded status (measured as the difference between the fair value of the plan assets and the benefit obligation) of a benefit plan as an asset or liability in the employer’s statement of financial position, (b) measurement of the funded status as of the employer’s fiscal year-end with limited exceptions, and (c) recognition of changes in the funded status in the year in which the changes occur through comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure the plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. This Statement has no current applicability to the Company’s financial statements. Management adopted this Statement on January 1, 2007, and the adoption of SFAS 158 did not have a material impact to the Company’s financial position, results of operations, or cash flows.   

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted this standard on January 1, 2008, and the adoption of this statement did not have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for business combination. Under SFAS No. 141(R), 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 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141(R) 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.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe that SFAS 160 will have a material impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of SFAS 161.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

Note 3 – NOTES RECEIVABLE

The Company, on occasion, allows their customers to satisfy the payment of their trade debt to the Company, through the issuance of notes receivable with the Company as the beneficiary. These notes receivable are usually of a short term nature, approximately three to six months in length. These notes do not bear interest and are paid by the customer’s bank to the Company’s bank upon presentation to the customer’s bank on the date of maturity. In the event of insufficient funds to repay these notes, the company's bank can proceed with bankruptcy proceedings

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against the customer in China. Total notes receivable as of September 30, 2008 and December 31, 2007 were $0 and $202,349 respectively.

Note 4 – DIVIDEND RECEIVABLE

Dividend receivable at September 30, 2008 and December 31, 2007 amounted to $0 and $71,460, respectively. Dividend receivable is investment income receivable on the investment in Zhaoheng Weile Tungsten (Shimen), Ltd. (see Note 7).

Note 5 – OTHER RECEIVABLES

Other receivables at September 30, 2008 and December 31, 2007 amounted to $117,498 and $145,075 respectively. Other receivables are primarily advance travel expenses to employees.

Note 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of advances to suppliers and tax refund. Prepaid expenses and other current assets at September 30, 2008 and December 31, 2007 amounted to $67,541 and $85,971 respectively.

Note 7 – INVESTMENT IN SUBSIDIARY

As of September 30, 2008 and December 31, 2007, Hunan Zhaoheng invested $571,837 and $535,951, respectively, for a 49% equity interests in Zhaoheng Weile Tungsten (Shimen), Ltd. (“Weile”). For this investment, Hunan Zhaoheng will not participate in the management of Weile, but receive annual dividend at a fixed rate of 20% of its original capital contribution to Weile as long as the production line is put into operation. Weile had started its production line since October 2007. The investment was accounted for historical cost. The dividend generated from this investment was presented as investment income in our unaudited consolidated financial statements. The investment income was then calculated based on the above investment term. Total investment incomes for the three months ended September 30, 2008 and 2007 were $29,893 and $0. For the nine months ended September 30, 2008 and 2007, the investment incomes were $189,043 and $0, respectively.

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Note 8 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of September 30, 2008 and December 31, 2007 are summarized as follows:

Items	September 30, 2008			December 31, 2007
	(Unaudited)
Dams	$	72,105,460		$	42,467,137
Buildings		1,953,900			8,278,953
Machine equipment		38,827,851			13,434,886
Electronic and other equipment		871,490			834,296
Total		113,758,701			65,015,272
Less: Accumulated Depreciation		(40,254,091	)		(34,380,646	)
	$	73,504,610		$	30,634,626

Depreciation expenses for the nine months ended September 30, 2008 and 2007 was $1,194,311 and $760,039, respectively.

Note 9 – OTHER ASSETS

Other assets consisted of the following:

Items	September 30, 2008		December 31, 2007
	(Unaudited)
Spare parts	$	167,607	$	175,886
Deposit		6,822		-
	$	174,429	$	175,886

Note 10 – CONSTRUCTION IN PROGRESS

As of September 30, 2008, "construction in progress" refers to the Auxiliary project of Hunan Sanjiang Left Bank Hydropower Station and Guizhou Jingrong’s expansion project at which amounted to $2,553,107. As of December 31, 2007, it refers to Hunan Sanjiang Left Bank Station, which amounted to $32,455,855, we started to test operations in April 2008. The amount allocated to "construction in progress" was transferred to property, plant and equipment in July 2008. The carryover amount is $34,909,173.

Note 11 – PROPERTY USE RIGHT

Property use right consists of the following as of September 30, 2008 and December 31, 2007

Items	September 30, 2008			December 31, 2007
	(Unaudited)
Property use right	$	1,412,087		$	1,321,471
Less: Accumulated amortization		(185,030	)		(153,566	)
	$	1,227,057		$	1,169,905

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Amortization expenses for the nine months ended September 30, 2008 and 2007 amounted to $21,183 and $39,143 respectively.

Note 12 – TAXES PAYABLE

Taxes payable at September 30, 2008 and December 31, 2007 amounted to $643,586 and $157,525 respectively. Taxes payable are summarized below:

Items	September 30, 2008		December 31, 2007
	(Unaudited)
Business tax payable	$	129,208	$	33,680
Value added tax payable		252,097		34,309
Property tax payable		22,087		42,470
Income tax payable		211,434		45,196
Other taxes and government fees		28,760		1,870
	$	643,586	$	157,525

Note 13 – OTHER PAYABLES

Other payables at September 30, 2008 and December 31, 2007 amounted to $962,224 and $1,739,867, respectively. Other payables were the final payment withheld from the construction contractors until occupancy of the ongoing construction of Sanjiang Left Bank Hydropower Station (details please refer to Note 10).

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Note 14 – LONG-TERM LOANS

The Company was obligated for the following long-term loans as of September 30, 2008 and December 31, 2007:

Lenders	September 30, 2008		December 31, 2007
	(Unaudited)
Due to Construction Bank of China on April 30, 2010. Interest rate is adjusted every 12 months based on the bench mark rate set by the People’s Bank of China. For the year of 2007, the average interest rate was 7.2%. Pledged with property, plant and equipment.	$	6,272,701	$	5,879,055
Due to Construction Bank of China on July 30, 2011. Interest rate is adjusted every 12 months based on the bench mark rate set by the People’s Bank of China. For the years of 2007 and 2006, the average interest rate was 6.8% and 6.3%, respectively Pledged with property, plant and equipment and guaranteed by Shenzhen Zhaoheng Industrial Ltd.		2,917,536		2,734,444
Due to Construction Bank of China on August 30, 2011. Interest rate is adjusted every 12 months based on the bench mark rate set by the People’s Bank of China. For the years of 2007 and 2006, the average interest rate was 7.02% and 6.3%, respectively Pledged with property, plant and equipment and guaranteed by Shenzhen Zhaoheng Industry Ltd.		8,752,608		8,203,333
Due to Bank of China on March 3, 2012. Interest rate is Floated based on the prime rate set by the People’s Bank of China. For the years of 2007 and 2006 the average interest rate are 6.84% and 6.72%, respectively. Pledged with 66.7% equity of Hunan Zhaoheng Hydropower Ltd.  and guaranteed by Shenzhen Zhaoheng Industry Ltd.		23,340,287		21,875,556
Due to Industrial & Commerce Bank of China on March 23, 2022. Fixed interest rate of 7.11%. Guaranteed by Shenzhen Zhaoheng Industry Ltd.		23,340,287		21,875,556
Total		64,623,419		60,567,944
Less: short-term loans		–		–
Long-term loans	$	64,623,419	$	60,567,944

The future payments of loan principles for the next 5 years are as below:

	2008		2009		2010		2011		2012 and after
Projected payment of loan principle	$	-	$	-	$	6,272,701	$	11,670,143	$	46,680,575

Note 15 – STOCKHOLDERS’ EQUITY

Reverse Merger

On May 13, 2008, the shareholder (Guoheng Xu) of the Company entered into a share exchange agreement with those of Certified. Pursuant to the agreement, Certified issued an aggregate of

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69,686,970 shares of common stock, par value $0.001 (the “Common Stock”) to Embedded Internet, in exchange for all of the shares of common stock of Embedded Internet.  Contemporaneously with the closing of the Share Exchange, certain holders of Certified's Common Stock completed a sale of approximately 572,170 shares of Common Stock owned by them to Embedded Internet pursuant to a stock purchase agreement.  As a result of the completion of the Share Exchange and the Stock Purchase, Embedded Internet former shareholders own shares of Certified’s Common Stock constituting approximately 98% of Certified’s total outstanding capital stock.

Statutory Reserve

Shenzhen Zhaoheng, Hunan Zhaoheng and Hunan Sanjiang are foreign-invested companies in PRC, according to relevant laws and regulations in China, the companies reserve some profit as reserve fund, enterprise development fund with the exact amount decided by the board of directors. As of September 30, 2008 and December 31, 2007, the Company had a statutory surplus reserve of $666,952.

Domestic companies located in the PRC are required to make appropriations to statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with law of the PRC. Appropriation to the statutory surplus reserve should be 10% of the after tax net income determined in accordance with the generally accepted accounting principles of the PRC (“PRC GAAP”) until the reserve is equal to 50% of the entities’ registered capital or members’ equity. Guizhou Jinrong, as a domestic company, did not provide any reserves because of net loss incurred for the quarterly period ended September 30, 2008.

The Company, is an entity registered in the British Virgin Islands and is, as a result, not required to provide statutory reserves.

Retained Earnings

As of September 30, 2008 and December 31, 2007, the details of retained earnings are listed as below:

Items	September 30, 2008		December 31, 2007
	(Unaudited)
Retained earnings	$	6,357,052	$	628,704
Statutory surplus reserve		666,952		666,952
	$	7,024,004	$	1,295,656

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Note 16 – INCOME TAXES

Refer to the table below for general description of tax treatments for each of the four major operating entities as mentioned.

Entity		Tax treatments
Hunan Zhaoheng	-	Preferential rate of 15% (income tax), and will increase to 25% progressively within the next five years from January 1, 2008 onwards.
	-	40% reduction of income tax for the purchase of locally manufactured equipments.
	-	Based on related regulation of PRC, this company fulfills the condition of applying 2 years tax exemption and subsequently 3 years 50% reduction in income tax from January 1, 2008 onwards, related application is now processing.
Guizhou Jinrong	-	Preferential rate of 15% (income tax), and will increase to 25% progressively within the next five years from January 1, 2008 onwards.
	-	Based on related regulation of the PRC, this company fulfills the condition of applying 2 years tax exemption and subsequently 3 years 50% reduction in income tax from January 1, 2008 onwards, related application is now processing.
Hunan Sanjiang	-	Preferential rate of 15% (income tax), and will increase to 25% progressively within the next five years from January 1, 2008 onwards.
	-	Two years tax exemption from the first profit year (2005) and subsequently 50% reduction in income tax for the next 3 years including years ended December 31, 2007, 2008 and 2009.
Shenzhen Zhaoheng	-	15% of income tax rate for the years ended December 31, 2007 and 2006 and will increase to - 25% progressively within the next five years from January 1, 2008 onwards.

Note 17 – RELATED PARTY TRANSACTIONS

For the quarterly period ended September 30, 2008 and for the year ended December 31, 2007, the Company distributed power to its long-term invested company, Weile, limited at market price. For the nine months ended September 30, 2008 and 2007, the total sales amounted to $204,899 and $164,813, respectively.

The Company leases its warehouse, plant and operating space to its related party, Weile, for 5 years as of June 1, 2006 under an operating lease agreement. The rent is $1,312 per month with an exemption period of 5 months.

As of September 30, 2008 and December 31, 2007, the amounts due from related parties were $16,369,507 and $17,529,838, respectively. All amounts are due on demand, and all advances are without security. The details of payments owed by related parties are listed as below:

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Related party	Relationship		September 30, 2008		December 31, 2007	Interest rate
			(Unaudited)
Weile	Long-term investment	$	1,234,312	$	931,169	12% annual; without security
Hunan Jiuli Hydropower Construction Co., Ltd.	The same major shareholder		1,493,637		-	Interest free; without security
Zhaoheng Industrial	The same major shareholder		13,641,558		16,598,669	120% of the bench mark rate set the People’s Bank of China annual; without security
Total		$	16,369,507	$	17,529,838

Starting from January 1, 2008, we started charging interest on the loans to our related party Shenzhen Zhaoheng Industrial Co., Ltd. (“Zhaoheng Industrial”) whose major shareholders are also the majority shareholders fo the Company. For the nine months ended September 30, 2008 and 2007, the interest incomes were $2,505,385 and $0, respectively. Interest rates charged on these loans are 120% of the bench mark rate as set by the People’s Bank of China. The bench mark rate as of September 30, 2008 was 7.47%. Accordingly, the Company charged 8.96% interest on this related party loan receivable as of September 30, 2008. As of September 30, 2008 and December 31, 2007, the loans to Zhaoheng Industrial amounted to $13,641,558 and $16,598,669.

As of September 30, 2008 and December 31, 2007, the amounts due to related parties were $3,581,833 and $31,444, respectively and due on demand. The details of due to related parties are listed as below:

Related party	Relationship	September 30, 2008		December 31, 2007		Interest rate
		(Unaudited)
Original shareholders of Certified Technologies Corp.	Original shareholders of the Company	$	-	$	31,444	Interest free without security
Zhaoheng holdings limited.	The same major shareholder		3,581,833		-	Interest free without security
Total		$	3581,833	$	31,444

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Note 18 – OPERATING RISKS

(a) Country risk

Currently, the Company's revenues are derived fully from distribution of power in the PRC. A change in relevant regulations or downturn in the economic environment of the PRC could have a material adverse effect on the Company's financial condition.

(b) Products risk

The Company competes with larger companies, who 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 generates and distributes power locally in the PRC. All transactions are settled in local currency. Therefore, the Company believes that the relevant exchange risk exposure should not be significant.

(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-man 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.

Note 19 – SUBSEQUENT EVENTS

In China, electricity tariff is regulated by Provincial Price Bureau and reevaluated on a periodic basis as market conditions dictate. Such conditions can be consumer demand and inflation, among others. On September 24, 2008, Price Bureau of Hunan Province promulgated a document to increase the benchmark electricity rate of Hunan Sanjiang and Hunan Zhaoheng from RMB 0.28/KWH to RMB 0.295/KWH. As such, the Company will record additional revenue of approximately $240,000 in October 2008 based on the new electricity rate for the electricity sold to Changde Branch of State Grid Corporation of China (“SGCC”) based on revenue generated from July 1 to September 30, 2008.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

The information contained in this report include statements that are not purely historical facts and that are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements regarding our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, growth of our blower business and establishment of our turbine business. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “projects,” “should,” and similar expressions, or the negatives of such terms, identify forward-looking statements.

The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments. There can be no assurance that future developments actually affecting us will be those anticipated.  These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results to be materially different from those expressed or implied by these forward-looking statements, including the following:

•  vulnerability of our business to general economic downturn;

•  operating in the PRC generally and the potential for changes in the laws of the PRC that affect our operations;

•  failure to meet or timely meet contractual performance standards and schedules;

•  dependence on the steel and iron markets;

•  exposure to product liability and defect claims;

•  ability to obtain all necessary government certifications and/or licenses to conduct our business;

•  cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and

•  other factors referenced in this report.

These risks and uncertainties, along with others, are also described in the Risk Factors section in Part I, Item 1A of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Company Overview

As a result of the share exchange or “reverse acquisition” transaction consummated on May 13, 2008, Zhaoheng Hydropower Company became a holding company conducting operations through an indirect operating subsidiary: Zhaoheng Hydropower (Hong Kong) Limited (“Zhaoheng HK”), a company operating in China. As a wholly owned subsidiary of the Company, Zhaoheng Investment Limited (BVI), a British Virgin Islands corporation, owns 100% of the capital stock of Zhaoheng HK.

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Zhaoheng Hydropower Company and its subsidiaries (collectively, “Zhaoheng”, “we”, “us”, “our” and “the Company”) are engaged in generating and supplying hydropower in Midwest China. We focus on small to medium sized hydropower stations and aim to become a leader in our industry.

The Company entered the hydropower industry in 2002. After 2 years of exploring the available opportunities in the industry, the Company acquired Hunan Sanjiang Hydropower Station with an installed capacity of 62.5MW, from a state-owned company in 2003.

In April 2008, the Company completed the construction of the Hunan Zhaoheng Hydropower Station (also called “Hunan Sanjiang Left Bank Hydropower Station”), which provides an additional 50MW capacity. Hunan Zhaoheng Hydropower Station is the expansion project of Hunan Sanjiang Hydropower Station. They share the same dam and are located on the left and right bank of the river respectively. In June 2008, the Company acquired the Guizhou Yongfu Hydropower station. Currently, Zhaoheng’s portfolio consists of three hydropower stations with an aggregate installed capacity of 120MW:

·   Hunan Sanjiang Hydropower Station : 62.5MW

·   Hunan Zhaoheng Hydropower Station: 50MW

·   Guizhou Yongfu Hydropower Station: 7.5MW

Zhaoheng’s business consists primarily of the following three activities:

1.   Development –

(i)   identify and invest in small and medium hydropower stations in China; and

(ii)   secure sales contracts with the State Grid Corporation of China and the China Southern Power Grid Corporation annually.

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2.   Operation –

(i)   operate hydropower stations; and

(ii)   generate hydropower and supply electricity to power grid companies.

3.   Construction –

(i)   construct quality power stations with high economic value and substantial return on investment.

Zhaoheng’s current operations are in the Hunan and Guizhou Provinces. The Hunan Sanjiang Hydropower Station, Hunan Zhaoheng Hydropower Station and Guizhou Yongfu Hydropower Station primarily service the Changde Branch of State Grid Corporation of China and China Southern Power Grid Corporation, two state-owned power grid companies.

Hydropower Industry

Hydropower is the cheapest form of large-scaled clean energy and can be highly utilized in China with its vast amount of water resources. The generation of hydropower does not consume or pollute water nor does it produce greenhouse gases. The per capita installed capacity in China only amounts to 0.5 KW, one-sixth of the level in the United States. At the same time, China is rich in hydropower resources. With a technically exploitable capacity of 542 GW and annual potential output capacity of 2.47 trillion KWH, China ranks number one in the world in  potential  hydraulic resources. However, by the end of 2007, the installed capacity of hydropower only amounted to 145.26 GW and the utilization level in China is only 26.8%,  much lower than the 65-85% range in developed countries such as U.S., Japan, and European countries. The central government of China has rated the development of hydropower as a top priority and plans to increase the utilization of hydropower to 55% by 2020, which will require a substantial amount of capital investment.

The various policies issued by the central government in the past 2 years are testament to the government’s intention to encourage and support the small – medium hydropower stations in the country. For example, the government offers tax incentives for hydropower companies and guarantees 100% purchase of the electricity generated by hydropower stations. The government is also gradually implementing the “Same Price for Same Power” policy, giving hydropower producers substantial room for revenue increase.

On January 28, 2008, the State Development and Reform Commission (“SDRC”) promulgated the “Opinions on Regulating the Investment into the Power Generation Enterprises by the Employees in Power System”, stipulating that leaders of grid enterprises at the level of prefecture city or the power dispatching personnel, financial personnel, and managers cannot invest in power generation companies within the coverage of their power grid. Those who already invested in power generation companies are required to sell their shares within one year. This will reduce competition in our industry and create many acquisition opportunities for us.

For the nine months ended September 30, 2008, total power output in China amounted to 2.61 trillion KWH, an increase of 9.9% from the same period in the prior year. Output of hydropower and thermal power increased 17.0% and 8.2%, respectively, from the same period in the prior year. With the rapid growth of China’s economy, power generation cannot meet power demand and the power industry in China is now growing at a fast space.

One of the biggest uncertainties in our business is the unpredictability of rainfall. In a particular year, the amount of rainfall may be significantly less than the average for prior years. In the event this decrease in rainfall levels takes place in the regions where our hydropower stations are located, the ability of our stations to generate power will be hampered. Therefore, our revenue will also be impacted. In order to mitigate this risk, the Company has been adopting certain strategies such as diversifying the locations of our future stations, both acquired and self-constructed.  We believe that this is a sound and effective strategy to stabilize the impact of uneven and unpredictable rainfall levels.

Results of Operations

The following table sets forth runoff and output of our Hunan facilities from January to September in 2008 and 2007, respectively.

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	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep
Runoff (million m3), 2008	397	360	527	1,036	1,415	878	1656	3655	1243
Output (million KWH), 2008	8.29	11.93	13.7	32.13	29.83	29.2	22.57	55.9	41.33
Runoff (million m3), 2007	500	656	919	907	627	1,286	4361	1300	802
Output (million KWH), 2007	16.72	19.14	28.51	28.93	21	30.94	36.69	39.01	26.84

*In the event the runoff exceeds the maximum diversion discharge of turbines, the excessive amount of water is wasted.

With the usage of two new generating units at our subsidiary, Hunan Zhaoheng Hydropower Co., Ltd., in April and the acquisition of Guizhou Jingrong Industrial Development Co., Ltd. in June 2008, the Company now owns 9 generating units with total installed capacity of 120 MW and annual potential output capacity of 430 million KWH. The potential output capacity has increased by 60% from September 30, 2007. Currently, all generating units are in good working condition.

The following table sets forth certain operating data for the periods indicated:

	For Three Months Ended September 30,						For Nine Months Ended September 30,
	2008			2007			2008			2007
Revenues	$	5,156,207		$	3,191,260		$	9,789,788		$	7,722,300
Cost of revenues		722,820			424,892			1,942,789			1,303,246
Gross profit		4,433,387			2,766,368			7,846,999			6,419,054
Operating Expenses		400,003			317,658			934,438			1,039,914
Operating income		4,033,384			2,448,710			6,912,561			5,379,140
Interest Income		677,264			2,845			1,642,276			34,084
Interest Expense		(1,223,717	)		(257,405	)		(2,686,779	)		(695,817	)
Net Income	$	3,337,273		$	1,791,884		$	5,728,481		$	3,496,899
Gross Margin		86.0	%		86.7	%		81.2	%		83.1	%
Operating Margin		78.2	%		76.7	%		70.6	%		69.7	%
Net Income Margin	$	64.7	%	$	56.1	%	$	58.5	%	$	45.3	%

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Revenues

Revenues for the three months ended September 30, 2008 were $5,156,207, an increase of $1,964,947 or 61.6% from $3,191,260 during the three months ended September 30, 2007. For the nine months period ended September 30, 2008, revenues were $9,789,788, an increase of $2,067,488 or 26.8% from total revenues of $7,722,300 reported during the nine months ended September 30, 2007. This growth was due primarily to an increase in installed capacity and power output. Two new generating units with total installed capacity of 50MW were put into use in April 2008 and another hydropower station was acquired in June 2008, bringing the total installed capacity of the Company to 120MW by September 30, 2008. Electricity tariff varies in different seasons and different hours. The following table sets fort electricity tariff in the nine months ended September 30, 2008 for Hunan Sanjiang and Hunan Zhaoheng (Except for Hunan Zhaoheng during its trial run in April 2008). In the dry season of January and February of 2008, when electricity tariff was highest, rainfall in Lishui Basin where our Sanjiang Hydropower Plants are located was much less compared to the same period of 2007. Also, the electricity tariff for Hunan Zhaoheng Hydropower Co. Ltd during its trial run in April 2008 was only RMB 0.08/K WH. As a result,  average electricity tariff for our Hunan facilities was RMB 0.2773/KWH for the three months ended September 30, 2008, higher than the RMB 0.2744/KWH for the three months ended September 30, 2007.  Average electricity tariff for our Hunan facilities was RMB 0.2698/KWH for the nine months ended September 30, 2008, lower than the RMB 0.2774/KWH for the nine months ended September 30, 2007.

Season	Month	Tariff(RMB/KWH)
		Peak	High	Low	Valley
Dry	1, 2	0.3744	0.3744	0.32	0.2208
Ordinary	3, 7, 8, 9	0.3276	0.3276	0.28	0.1932
Rainy	4, 5, 6,	0.2925	0.2925	0.25	0.1725

Cost of Revenues

Cost of revenues consists of depreciation expense of property, plant and equipment, equipment maintenance cost, direct labor, overhead and state taxes (not including value-added tax, price exclusive tax and corporate income tax).

Cost of revenues for the three months ended September 30, 2008 was $722,820 or 14.0% of revenues.  For the same period one year ago, cost of revenues was $424,892 or 13.3% of revenues. Cost of revenues for the nine months ended September 30, 2008 was $1,942,789, or 19.8% of our revenues.  This represents an increase from  $1,303,246 or 16.9% of our revenues from the nine months ended September 30, 2007. Our Hunan Zhaoheng Hydropower Station is an expansion project of the existing Hunan Sanjiang Hydropower Station and the annual average utilization hour of expansion project usually can not match the existing facility. As a result, cost of revenues, which largely consists of depreciation expense, increased slightly as a percentage of revenues for the nine months ended September 30, 2008 compared with the same period in 2007.

Operating Expenses

Total operating expenses, which include selling, general and administrative expenses increased to $400,003 for the three months ended September 30, 2008, as compared to $317,658 for the three months ended September 30, 2007. Comparing the nine months periods ended September 30, 2008 and September 30, 2007, operating expenses were $934,438, or 9.54% of revenues in 2008 and $1,039,914, or 13.46% of revenues in 2007. The decrease in operating expenses for the nine months period was mainly due to savings from 1) a discontinued leather trading business operated by one of our subsidiaries, Shenzhen Zhaoheng Hydropower Co., Ltd. (“Shenzhen Zhaoheng”) in December 2007; and 2) sales of  Hunan Jiuli Hydropower Construction Co. Ltd to our related company Shenzhen Zhaoheng Industrial Co., Ltd in April 2008.

Interest Income

For the nine months ended September 30, 2008, we realized interest income of $1,642,276, compared with interest income of $34,084 for the nine months ended September 30, 2007. Starting from January 1, 2008, two of our

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subsidiaries, Hunan Sanjiang Power Co., Ltd. (“Hunan Sanjiang”) and Hunan Zhaoheng Hydropower Co., Ltd. (“Hunan Zhaoheng”), started charging interest on the loans to Shenzhen Zhaoheng Industrial Co., Ltd. (“Shenzhen Zhaoheng Industrial”), a related party with a common controlling shareholder. Interest rates charged on  loans to related parties are 120% of the bench mark rate set by the People’s Bank of China. As of September 30, 2008, the loans to Shenzhen Zhaoheng Industrial amounted to $13,641,558, compared to $16,598,669 as of December 31, 2007.

Interest Expense

Interest expense was $1,223,717 for the nine months ended September 30, 2008, compared with $257,405 for the same period in 2007. This increase was due to 1) the capitalization of interest expense incurred during the construction period of the new hydropower plant established by one of our subsidiaries, Hunan Zhaoheng; and 2)  incurring a new loan in the amount of RMB 43 millions from China Construction Bank in July 2007.

Investment Income

Total investment income for the three months ended September. 30, 2008 and September 30, 2007 was $29,893 and $0 respectively. For the nine months ended September 30, 2008 and September 30, 2007, the investment income was $189,043 and $0, respectively. The investment income was generated from the long-term investment at Zhaoheng Weile Tungsten (Shimen), Ltd. (“Weile”). As of September 30, 2008 and December 31, 2007, we invested $571,837 and $535,951 respectively for a  49% equity interests in Weile. For this investment, we will not participate in the management of Weile, but will receive an annual dividend at a fixed rate of 20% of the original capital contribution to Weile as long as the production line is put into operation. Weile  started its production line in October 2007. The investment was accounted for at cost basis. Dividends generated from this investment are presented as investment income in our unaudited consolidated financial statements and the investment income was  calculated based on the above investment term.

Net Income

Net income increased to $3,337,273 for the three months ended September 30, 2008 from $1,791,884 for the period ended September 30, 2007. As a percentage of revenue, net income was approximately 64.7% for the three months ended September 30, 2008, as compared to approximately 56.1% for the same period ended September 30, 2007.

For the nine months ended September 30, 2008 and September 30, 2007, net income increased to $5,728,481 in 2008 from $3,496,899 in 2007. As a percentage of net sales, net income was approximately 58.5% for the nine months ended September 30, 2008, compared to approximately 45.3% for the nine months ended September 30, 2007.

The increase in net income as a percentage of revenue was mainly due to reduced operating expenses and increased interest income. In addition, we realized investment income of $189,043 in Zhaoheng (Shimen) Weile Tungsten Co., Ltd. for the nine months ended September 30, 2008.

Liquidity and Capital Resources

Historically, we financed our operations and capital expenditures with equity financing from our stockholders, cash flows from operations and bank loans. Over the years, we developed good working relationships with the Bank of China, Industrial and Commercial Bank of China, China Construction Bank and China Agriculture Bank. To keep pace with the rapid growth and expansion of our business, we may need to raise additional capital, primarily to acquire developed hydropower stations or to construct new stations. As a result, we will seek to raise additional funds to finance our future growth.

Cash Flows

    For the nine months ended September 30, 2008, we had a net increase in cash and cash equivalents of $2,095,251. Cash flow from operating activities was $5,985,071, cash outflow from investing activities was $43,889,820 and we did not have any financing activities this quarter. The primary components of cash generated by operating activities were: (a) net income of $5,728,481; (b) a $1,215,494 increase in depreciation and amortization; (c) a decrease of $211,463 in notes receivable and (d) an increase of $465,943 in taxes payable offset by: a) an increase in accounts receivable of $378,887; b) an increase of $321,600 in other assets; and c) a decrease of $976,945 in other payables.

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The primary components of cash used in investing activities were: (i) $7,131,947 in connection with the construction of hydropower plant in Hunan offset by (i) $2,626,077 in connection with the adjustment of the acquisition of Jingrong Industrial Development Co., Ltd. in Rongjiang County of Guizhou Province; and (ii) a decrease in due from related parties of $5,916,147.

Critical Accounting Policies

Management's discussion and analysis of its financial condition and results of operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. In Note 2 to the unaudited consolidated financial statements, “Summary of Significant Accounting Policies”. Management makes its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following reflects the most critical accounting policies that currently affect our financial condition and results of operations:

1.   Consolidation

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries (“the Group”). Significant intercompany transactions have been eliminated in consolidation. Investments in which the company has a 20 percent to 50 percent voting interest and where the company exercises significant influence over the investee are accounted for using the equity method.

As of September 30, 2008, the particulars of the subsidiaries are as follows:

Name of Company	Place of  Incorporation	Date of  Incorporation	Attributable Equity Interest	Registered  Capital
Shenzhen Zhaoheng Hydropower Co., Ltd.	PRC	8/3/1999	100	RMB 11,000,000
Hunan Sanjiang Power Co., Ltd	PRC	11/8/2001	100	RMB 199,400,000
Hunan Zhaoheng Hydropower Co., Ltd	PRC	6/25/2003	100	RMB 150,000,000
Jingrong Industrial Development Co., Ltd	PRC	1/24/2002	100	RMB 1,000,000

2.   Economic and Political Risks

Our operations are conducted in the PRC. Accordingly, our business, financial condition, and results of operations may be influenced by the political, economic and legal environment in the PRC.

The operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The operating results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

3.   Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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 consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of plant and machinery. Actual results could differ from those estimates.

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4.   Cash and Cash Equivalents

For purposes of the consolidated cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

5.   Investment in Subsidiaries

We use the cost method to account for investments in common stock of entities in which we have a minority voting interest or in which we otherwise have the ability to exercise significant influence or the right to share any net earnings or losses of the entity. Under the cost method, the investment is originally recorded at cost. We are recording the investment in Zhaoheng Weile Tungsten (Shimen), Ltd. (“Weile”) as an investment under the cost method of accounting.

Zhaoheng Weile Shimen Co., Ltd. is 49% owned by the Company and is engaged in downstream processing and sales of tungsten.

6.   Accounts and Other Receivable

Accounts and other receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company extends unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable. Allowance for uncollectible accounts as of September 30, 2008 was not significant.

7.   Bad Debt Recognition Standard and Calculation Method

(a) Bad Debt Recognition Standard

(i) Uncollectible debt due to debtor's bankruptcy or death.

(ii) Uncollectible debt due to debtor’s inability to keep account current for over half year, which is also approved by the board as bad debt.

(b) Allowance Method of Accounting for Bad Debt

The Company’s accounting method for bad debt allowance is based on the aging of receivables (including receivables and other receivables), with consideration of debtor’s financial situation.  The allowance for bad debt is calculated as following:

Aging of Receivables	Rate for Bad Debt Allowance
Within 30 days		1	%
30-60 days		3	%
60-90 days		6	%
90-180 days		30	%
180-360 days		50	%
Over 360 days		100	%

8.   Revenue recognition

Our revenue recognition policies are structured to comply with Staff Accounting Bulletin No. 104 (“SAB104”). SAB 104 requires that revenue can only be recognized when it is realized or realizable and earned. Revenue generally is realized or realizable and earned when all four of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.

Determination of criterion (4) is based on our judgment regarding the collectability of those amounts. Historically, we have not encountered any significant problems with collectability and thus have determined that it is not necessary to defer revenue recognition on that basis. Should changes in conditions cause us to determine this

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criterion is not met for certain future transactions, revenues for any reporting period could be adversely affected by delaying recognition of such revenues.

9.   Property, Plant and Equipment

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation. Depreciation is recorded by the straight-line method over the estimated original useful lives of the assets. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property, plant and equipment used in production is reported in cost of sales.

Long-term assets are reviewed annually as to whether their carrying value has become impaired. The Company did not record any impairment charges during the nine months ended September 30, 2008 or 2007.

10.   Intangible Asset

Intangible assets are stated at cost less amortization and accumulated impairment loss. Amortization is provided over their estimated useful lives, using the straight-line method.

11.   Construction in Progress

Construction in progress represents the cost of constructing new hydropower station. The major cost of construction includes construction materials, direct labor and overhead.

Completed items are transferred from construction in progress to property, plant and equipment, when they are ready for their intended use.

12.   Foreign Currency Translation

Transactions and balances originally denominated in Chinese dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”, and are included in determining net income or loss.

The Company’s reporting currency is the U.S. dollar. The functional currency of the Company's Chinese subsidiaries is the Chinese dollar or Renminbi (“RMB”). For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into Chinese dollars at the exchange rate prevailing at the balance sheet date and weighted average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollar at the rates used in translation.

13.   Income Tax

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.

Pursuant to the tax laws of the PRC, general enterprises are subject to income tax at a new effective rate of 25% since January 1, 2008.

The Group is engaged in the energy industry whose development is encouraged by the government. According to the income tax regulation, any company engaged in the hydropower industry enjoys a favorable tax rate. We are

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exempt from corporate income tax for the first two years and entitled to a 50% tax reduction for the following three years. Refer to the table below for general description of tax treatments for each of the entities as mentioned.

Entity	Tax treatments
Hunan Zhaoheng	-  Preferential rate of 15% (income tax), and will increase to 25% progressively within the next five years from January 1, 2008 onwards. -  40% reduction of income tax for the purchase of locally manufactured equipments. -  Based on related regulation of PRC, this company fulfills the condition of applying 2 years tax exemption and subsequently 3 years 50% reduction in income tax from   January 1, 2008 onwards, related application is now processing.
Guizhou Jinrong	- -  Preferential rate of 15% (income tax) based on the policies of the grand development of China’s Western region
Hunan Sanjiang	-  Preferential rate of 15% (income tax), and will increase to 25% progressively within the next five years from January 1, 2008 onwards. -  Two years tax exemption from the first profit year (2005) and subsequently 50% reduction in income tax for the next 3 years including years ended December 31, 2007, 2008 and 2009.
Shenzhen Zhaoheng	-  15% of income tax rate for the years ended December 31, 2007 and 2006 and will increase to - 25% progressively within the next five years from January 1, 2008 onwards.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not required for a smaller reporting company.

ITEM 4.  CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) , as appropriate, to allow timely decisions regarding required disclosure.

As of June 30, 2008, an evaluation was performed under the supervision and with the participation of our management, including the CEO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our management, including the CEO, concluded that our disclosure controls and procedures were effective as of June 30, 2008.

PART II-OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None.

ITEM 1A.  RISK FACTORS

           An investment in our common stock or other securities involves a number of risks.  You should carefully consider each of the risks described below before deciding to invest in our common stock.  If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment.

           The risk factors presented below are all of the ones that we currently consider material.  However, they are not the only ones facing our company.  Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us.  There may be risks that a particular investor views differently from us, and our analysis might be wrong.  If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make.  In such case, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

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

 We commenced our current line of business operations in 2002. Our limited operating history may not provide a meaningful basis on which to evaluate our business. Although our revenues have grown rapidly since inception, we cannot assure you that we will maintain our profitability or that we will not incur net losses in the future. We expect that our operating expenses will increase as we expand. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:

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- raise adequate capital for expansion and operations;

- implement our business model and strategy and adapt and modify them as needed;

- increase awareness of our brands, protect our reputation and develop customer loyalty;  

- manage our expanding operations and service offerings, including the integration of any future acquisitions;

-   maintain adequate control of our expenses;  

- anticipate and adapt to changing conditions in the hydropower utility market in which we operate as well as the impact of any changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.

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

Our failure to compete effectively may adversely affect our ability to generate revenue.

We compete primarily on the basis of our ability to secure sales contracts with local government entities in small- and medium-sized cities that allow us the exclusive rights to develop hydropower distribution networks and supply hydropower in these cities. There can be no assurance that such contracts will be available to us in new areas as we attempt to expand or that our competitors will negotiate more favorable arrangements. We expect that we will be required to continue to invest in building hydropower distribution infrastructure. Our business requires large amounts of working capital to fund our operations. Our competitors may have better resources and better strategies to raise capital which could have a material adverse effect on our business, results of operations or financial condition.

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

Our continued growth is dependent upon our ability to generate more revenue from our existing distribution systems and raise capital from outside sources. We believe that in order to continue to capture additional market share, we will have to raise more capital to fund the construction and installation of the hydropower distribution network for our customers under existing contracts and for additional customers. In the future we may be unable to obtain the necessary financing on a timely basis and on acceptable terms, and our failure to do so may adversely affect our financial position, competitive position, growth and profitability. Our ability to obtain acceptable financing at any time may depend on a number of factors, including:

-   our financial condition and results of operations,

- the condition of the PRC economy and the hydropower industry in the PRC, and

-   conditions in relevant financial markets in the United States, the PRC and elsewhere in the world.

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

If our business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing and expanding hydropower stations and service offerings and in integrating acquired businesses with our own. Such eventualities will increase demands on our existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or adversely affect our operations and cause delay in construction and/or acquisition of hydropower stations, longer operation location completion cycle, and administrative inefficiencies.

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If we are unable to successfully complete and integrate new operational locations in a timely manner, our growth strategy could be adversely impacted.

An important element of our growth strategy has been and is expected to continue to develop additional hydropower stations in small- and medium-sized cities. However, integrating businesses involves a number of special risks, including the possibility that management may be distracted from regular business concerns by the need to integrate operations, unforeseen difficulties in integrating operations and systems, problems relating to assimilating and retaining the employees of the acquired business, accounting issues that arise in connection with the acquisition, challenges in retaining customers, and potential adverse short-term effects on operating results. In addition, we may incur debt to finance future operation locations, and we may issue securities in connection with future operation locations that may dilute the holdings of our current or future stockholders. If we are unable to successfully complete and integrate new operations in a timely manner, our growth strategy could be adversely impacted.

Our success depends on our ability to identify and develop additional hydropower stations and negotiate and enter into favorable franchise agreements with local governments of the operation locations.

Our success depends on our ability to identify new hydropower stations and negotiate and enter into favorable franchise agreements with local governments of the operational locations that grant us long-term exclusive right to develop the hydropower stations and supply hydropower in the operational location. Our failure to identify and develop additional hydropower stations and obtain the exclusive rights to be the developer of hydropower stations and distribute hydropower in such operational locations would curb our revenue growth and may have adverse impact on our financial conditions and operating results.

Our success depends on our ability to obtain large industrial supply contracts and master residential supply contracts with large quantity of end users.

 Our success depends on our ability to obtain large industrial supply contracts and master residential supply contracts with large quantity of end users. Our failure to obtain large industrial supply contracts and master residential supply contracts with large quantity of end users will adversely affect our ability to generate revenue and our growth potential and may have adverse impact on our financial conditions and operating results.

Our hydropower business can be affected by adverse weather conditions.

Our hydropower projects depend on the near-continuous operation of their equipment. Should the productivity of some or all of this equipment be compromised or should the equipment fail altogether, our business would be adversely affected. We may also experience difficulty in hiring qualified operating personnel.

The primary equipment of our hydropower stations include reciprocating engine generator sets and hydropower generating equipment.  This equipment is subject to mechanical failure that we may not be able to predict and that can render specific stations inoperable for considerable periods of time. This risk also extends to failures of the electricity grid near our projects that could prevent the affected project or projects from delivering its electricity. In addition, we may experience price increases for, or difficulty in obtaining, spare parts for its projects and in identifying and hiring personnel qualified to operate, maintain and repair the specialized equipment that makes up parts of its projects.

Our hydropower generation stations rely on rainfall and snowfall to provide water flow for hydropower production. Rainfall vary from year-to-year and an extended period of below-normal rainfall would significantly reduce our revenue. Each hydropower station is entirely dependent on the water flow through where it is located.

New construction of hydropower stations may be delayed by governmental review and approval as well as environmental concerns.

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Construction of each hydropower project is subject to special sessions of governmental review and approval.  These reviews include an analysis of the impact on the environment and environmental protection, water use, feasibility studies, soil and water conservation programs. These reviews could delay the completion of each hydropower project which would hinder our expansion plans and could have a material adverse effect on our financial condition and results of operation.

Since a majority of small hydropower stations are located in rural and mountainous areas, the cost of construction may be high and operation of the stations may be difficult.

The majority of hydropower stations are built in remote mountain villages and townships. The construction of hydropower projects in such remote and mountainous locations will increase cost of each project and require us to raise additional capital.  In addition, the remote locations of the hydropower stations will result increased costs of managing and operating such projects.

We are responsible for the indemnification of our officers and directors.

Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.

 We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire such personnel in the future, our ability to improve our products and implement our business objectives could be adversely affected.

Our future success depends heavily upon the continuing services of the members of our senior management team, in particular our Chief Executive Officer, Mr. Guosheng Xu. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and senior technology personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or senior technology personnel, or attract and retain high-quality senior executives or senior technology personnel in the future. Such failure could materially and adversely affect our future growth and financial condition.

Risks Related to Doing Business in the PRC.

We face the risk that changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.

The PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social life.

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The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.

A slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for our services and our business.

We are a holding company. All of our operations are conducted in the PRC and all of our revenues are generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. The solar hot water and renewable energy industry in the PRC is relatively new and growing, but we do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the PRC economy which may affect demand for solar hot water heaters and boilers. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and materially and adversely affect our business.

Inflation in the PRC could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austerity policy can lead to a slowing of economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.

Zhaoheng HK  is subject to restrictions on paying dividends and making other payments to us.

We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than our investments in our subsidiaries. As a result of our holding company structure, we rely primarily on dividends payments from our subsidiary in China. However, PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our subsidiary and affiliated entity in China are also required to set aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. See “Government control of currency conversion may affect the value of your investment.” Furthermore, if our subsidiary or affiliated entity in China incurs debt on their own in the future, the 

instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiary is unable to receive all of the revenues from our operations through these contractual or dividend arrangements, we may be unable to pay dividends on our common stock.

Governmental control of currency conversion may affect the value of your investment.

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The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and

expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.

The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.

The fluctuation of the Renminbi may materially and adversely affect your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

On July 21, 2005, the PRC government changed its decade-old policy pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 2.0% appreciation of the RMB against the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.

Recent PRC State Administration of Foreign Exchange (“SAFE”) Regulations regarding offshore financing activities by PRC residents, have undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect the implementation of our acquisition strategy, and a failure by our stockholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident stockholders to liability under PRC law.

The PRC State Administration of Foreign Exchange, or SAFE, issued a series of public notices in 2005 (the “SAFE Regulations”), which require registrations with, and approval from, SAFE on direct or indirect offshore investment activities by PRC resident individuals. The SAFE Regulations require that if an offshore company directly or indirectly formed by or controlled by PRC resident individuals (“SPC”) intends to acquire a PRC company, such acquisition will be subject to strict examination by the SAFE. Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise. Certain stockholders of the Company who are PRC residents are subject to the SAFE Regulations by virtue of being stockholders of Zhaoheng (BVI) prior to the consummation of the Share Exchange.

The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in January 2005 (“January Notice”) requiring registrations with, and approval from, SAFE on direct or indirect

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offshore investment activities by PRC resident individuals. The January Notice states that if an offshore company directly or indirectly formed by or controlled by PRC resident individuals (“SPC” - as referred to in the October Notice, see the following) intends to acquire a PRC company, such acquisition will be subject to strict examination by the central SAFE, the SAFE bureau at the highest level, which requires the disclosure by PRC resident individuals regarding their ownership status with an SPC or any other asset link between or among the parties to the acquisition transaction.

In April 2005, SAFE issued another public notice clarifying the January Notice (“April Notice”). In accordance with the April Notice, if a PRC company is acquired by an SPC, the PRC resident stockholders of an SPC are required to submit a registration form to the local SAFE branch to register his or her respective ownership interests in the SPC, even such transaction occurred prior to the January Notice. The April Notice does not specify the timeframe during which such retrospective registration must be completed. The PRC resident must also file amendments if there is a material event affecting the SPC, such as, among other things, a change to share capital, a transfer of shares, or if the SPC is involved in a merger and an acquisition or a spin-off transaction or uses its assets in the PRC to guarantee offshore obligations. Furthermore, the April Notice expanded the definition of the term “foreign acquisition”, which makes the registration obligation applicable to any transaction that results in PRC residents directly or indirectly holding shares in an SPC.

On October 21, 2005, SAFE issued the third public notice (“October Notice”) effective from November 1, 2005 (“Effective Date”), which shall supersede the January Notice and April Notice by clarifying the documentation requirement and procedure of any registration process occurring after the Effective Date. It defines the term “SPC” as to be an offshore company directly or indirectly formed by or controlled by PRC resident entities or resident individuals for the purpose of equity financing (including financing by convertible bonds) by the assets or interests in a PRC entity. It also clarifies that the registration approval authority is the local SAFE, instead of the central SAFE, as set forth in the January Notice.

As such, our stockholders who are PRC residents, must comply with the registration and disclosure requirements provided thereunder. As of the date hereof, Mr. Xu, our Chief Executive Officer and Chairman of the Board, has completed the registration with the SAFE. Our other PRC stockholders who are subject to the SAFE regulations are in the process of registering with the SAFE.

Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could adversely affect our operations.

A renewed outbreak of SARS or another widespread public health problem in the PRC, where all of the Company’s revenue is derived, could have an adverse effect on our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

Because our principal assets are located outside of the United States and all of our directors and all our officers reside outside of the United States, it may be difficult for you to enforce your rights based on U.S. Federal Securities Laws against us and our officers and some directors in the U.S. or to enforce U.S. Court Judgment against us or them in the PRC.

All of our directors and all of our officers reside outside of the United States. In addition, our operating subsidiary, is located in the PRC and substantially all of its assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil

35

judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.

We may face obstacles from the communist system in the PRC.

Foreign companies conducting operations in PRC face significant political, economic and legal risks. The Communist regime in the PRC, including a cumbersome bureaucracy, may hinder Western investment.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

The PRC historically has not adopted a Western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.

Risks Related to Our Common Stock.

Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.

Our officers, directors and affiliates beneficially own approximately 98.0% of our Common Stock. Mr. Guosheng Xu, our Chairman and Chief Executive Officer, beneficially owns approximately 98% of our Common Stock through his wholly-owned subsidiary Embedded Internet. As a result, Mr. Xu is able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporation transactions including business combinations. Yet Mr. Xu’s interests may differ from other stockholders. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock. See “Security Ownership of Certain Beneficial Owners and Management” under Item 2.01 of this Current Report for more information regarding beneficial ownership of securities of our management.

We are not likely to pay cash dividends in the foreseeable future.

We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary. In addition, our operating subsidiary, from time to time, may be subject to restrictions on its ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.

There is currently a limited trading market for our common stock.

Our common stock is quoted on the over-the-counter Bulletin Board. However, our bid and asked quotations have not regularly appeared on the OTC Bulletin Board for any consistent period of time. There is no established trading market for our common stock and our common stock may never be included for trading on any stock exchange or through any other quotation system (including, without limitation, the NASDQ Stock Market). You may not be able to sell your shares due to the absence of a trading market.

Our common stock may be also subject to the "penny stock" rules to the extent that the price drops below $5.00, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale. See "MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS." These requirements may further limit your ability to sell your shares.

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Our common stock is illiquid and subject to price volatility unrelated to our operations.

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.  

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

Exhibit Number	Description of Exhibit
31.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a).
31.2*	Certification of Acting Principal Financial Officer pursuant to Rule 13a-14(a).
32.1*	Certification of Principal Executive Officer and Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

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SIGNATURES

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

	ZHAOHENG HYDROPOWER COMPANY
Dated: November 14, 2008	By:	/s/ Guosheng Xu
		Name: Guosheng Xu
		Title:  Chairman and Chief Executive Officer
		(principal executive officer and duly authorized officer)
Dated: November 14, 2008	By:	/s/ Guosheng Xu
		Name: Guosheng Xu
		Title:  Acting Chief Financial Officer
		(principal financial officer)