UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K /A

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Amendment No. 2

ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

For the fiscal year ended December 31, 2008

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

For the transition period from: _____________ to _____________

000-52770

(Commission File Number)

PACIFIC ASIA PETROLEUM, INC.

 (Exact name of registrant as specified in its charter)

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Delaware	30-0349798
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or Organization)	Identification No.)

250 East Hartsdale Ave., Suite 47, Hartsdale, New York 10530

 (Address of Principal Executive Office) (Zip Code)

(914) 472-6070

(Registrant’s telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value.

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨   No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨   No ý

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 ý    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or  information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 definition of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”  and ”smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer  ý    Non-accelerated filer  o    Small reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No ý

 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2008) was approximately $605,534,419 (based on $18.75 per share, the average bid price and asked price of the Common Stock as reported by Pink Sheets LLC on such date). For purposes of the foregoing calculation only, all directors, executive officers and 10% beneficial owners have been deemed affiliates.  As of April 27, 2009, there were 41,919,785 shares of Common Stock outstanding.

CAUTIONARY STATEMENT

All statements, other than statements of historical fact, included in this Form 10-K, including without limitation the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Description of Business,” are, or may be deemed to be, forward-looking statements. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Pacific Asia Petroleum, Inc. and its subsidiaries and joint-ventures, (i) Pacific Asia Petroleum, Limited, (ii) Inner Mongolia Production Company (HK) Limited, (iii) Pacific Asia Petroleum (HK) Limited, and (iv) Inner Mongolia Sunrise Petroleum JV Company (collectively, the “Company”), to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this Form 10-K.

In our capacity as Company management, we may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations which may be included in our filings with the Securities and Exchange Commission (the “SEC”), reports to stockholders and information provided in our web site.

The words or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,” “forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar expressions identify “forward-looking statements.”  Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  We wish to caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  We are calling to your attention important factors that could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The following list of important factors may not be all-inclusive, and we specifically decline to undertake an obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.  Among the factors that could have an impact on our ability to achieve expected operating results and growth plan goals and/or affect the market price of our stock are:

· Lack of operating history, operating revenue or earnings history.

· Dependence on key personnel.

· Fluctuation in quarterly operating results and seasonality in certain of our markets.

· Possible significant influence over corporate affairs by significant shareholders.

· Our ability to enter into definitive agreements to formalize foreign energy ventures and secure necessary exploitation rights.

· Our ability to raise capital to fund our operations.

· Our ability to successfully integrate and operate acquired or newly formed entities and multiple foreign energy ventures and subsidiaries.

· The competition from large petroleum and other energy interests.

· Changes in laws and regulations that affect our operations and the energy industry in general.

· Risks and uncertainties associated with exploration, development and production of oil and gas, drilling and production risks.

· Expropriation and other risks associated with foreign operations.

· Risks associated with anticipated and ongoing third party pipeline construction and transportation of oil and gas.

· The lack of availability of oil and gas field goods and services.

· Environmental risks, economic conditions, and other risk factors detailed herein.

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PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

Pacific Asia Petroleum, Inc. (“PAP” or the “Company”) is a development stage company formed to develop new energy ventures, directly and through joint ventures and other partnerships in which it may participate. Members of the Company’s senior management team have experience in the fields of petroleum engineering, geology, field development and production, operations, international business development and finance. Several members of the Company’s management team have held management and executive positions with Texaco Inc. and have managed energy projects in the People’s Republic of China (the “PRC” or “China”) and elsewhere in Asia and other parts of the world. Members of the Company’s management team also have experience in oil drilling, operations, geology, engineering and sales in China’s energy sector.  The Company considers itself currently to be engaged in a single business segment--oil and gas exploration, development and production.

The Zijinshan Production Sharing Contract

The Company is a party to an Agreement for Joint Cooperation entered into in November 2006 with China United Coalbed Methane Co., Ltd. (“CUCBM”) (the Chinese Government-designated company holding exclusive rights to negotiate with foreign companies with respect to coalbed methane (“CBM”) production in China). This agreement grants the Company the exclusive rights to a large contract area for CBM production located in the Shanxi Province of China (the “CUCBM Contract Area”), with an option to convert such arrangement into a production sharing contract (“PSC”).  On October 26, 2007, Pacific Asia Petroleum, Ltd. (“PAPL”), a wholly-owned subsidiary of the Company, entered into a PSC with CUCBM for the exploitation of CBM resources in the CUCBM Contract Area (the "Zijinshan PSC"). The Zijinshan PSC provides, among other things, that PAPL must drill three (3) exploration wells and carry out 50 km of 2-D seismic data acquisition (a minimum commitment for the first three (3) years with an estimated expenditure of $2.8 million) and drill four (4) pilot development wells during the next two (2) years at an estimated cost of $2 million (in each case subject to PAPL’s right to terminate the Zijinshan PSC). After the exploration period but before commencement of the development and production period, CUCBM will have the right to acquire a 40% participating interest and work jointly to develop and produce CBM under the Zijinshan PSC. Pursuant to the Zijinshan PSC, all CBM resources (including all other hydrocarbon resources) produced from the CUCBM Contract Area are shared as follows:  (i) 70% of production is provided to PAPL and CUCBM for recovery of all costs incurred; (ii) PAPL has the first right to recover all of its exploration costs from such 70% and then development costs are recovered by PAPL and CUCBM pursuant to their respective participating interests; and (iii) the remainder of the production is split by CUCBM and PAPL receiving between 99% and 90% of such remainder depending on the actual producing rates (a sliding scale) and the balance of the remainder (between 1% and 10%) is provided to the Government of China.

The Zijinshan PSC has a term of thirty (30) years and was approved in 2008 by the Ministry of Commerce of China. In December 2008, the Company and CUCBM finalized a mutually agreed work program pursuant to which the Company has now commenced exploration operations under the Zijinshan PSC. The Zijinshan PSC is in close proximity to the major West-East and the Ordos-Beijing gas pipelines which link the gas reserves in China’s western provinces to the markets of Beijing and the Yangtze River Delta, including Shanghai. The Zijinshan PSC covers an area of approximately 175,000 acres.  

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The Chifeng Oil Opportunity

Through Inner Mongolia Sunrise Petroleum JV Company (“IMPCO Sunrise”), the Company commenced operational activities in China and successfully drilled its first well in a prospective area in Inner Mongolia in cooperation with Chifeng Zhongtong Oil and Natural Gas Co. (“Chifeng”) pursuant to a Contract for Cooperation and Joint Development (the “Chifeng Agreement”) (described in greater detail under “Principal Business Strategy” of this section).  The Company’s drilling operations in this area have been suspended pending receipt of a production license from the Chinese government.  The Company is pursuing a combination of strategies to have such production license awarded, including a possible renegotiation of the Chifeng Agreement with the goal of increasing the financial incentives to all the parties involved, and the Company is also pursuing a strategy focused on entering into negotiations with respect to an opportunity to acquire the existing production from the 22 sq. km. Kerqing Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance the Chifeng Agreement in scale and value.

The ChevronTexaco Asset Transfer Agreement

In September 2007, the Company entered into four Asset Transfer Agreements (the “Chevron Agreements”) with ChevronTexaco China Energy Company (“ChevronTexaco”) for the purchase by the Company of participating interests held by ChevronTexaco in production sharing contracts in respect of four CBM and tight gas sand resource blocks located in the Shanxi Province of China with an aggregate contract area of approximately 1.5 million acres for an aggregate base purchase price of $61,000,000, adjusted in April 2008 to $50,000,000.  Due to delays in receipt of required Chinese government approvals of these transfers, coupled with renewal terms proposed by ChevronTexaco that were not acceptable to the Company, in December 2008 the Company exercised its right to terminate three of the four Chevron Agreements and received its full deposit amounts back from ChevronTexaco with respect to these three terminated Chevron Agreements. The Company and ChevronTexaco remain parties to that certain Asset Transfer Agreement – Baode Area, dated September 7, 2007, as amended on April 24, 2008 (the “ChevronTexaco ATA”), which relates to the purchase by the Company of ChevronTexaco’s 35.7142% participating interest held by ChevronTexaco in a production sharing contract in respect of a CBM resource block (the “Baode PSC”) with a total area of approximately 160,000 acres (the “Baode Block”).  The base purchase price under the ChevronTexaco ATA is $2 million, subject to upward adjustment to account for ChevronTexaco’s cash flow payments and operating costs paid with respect to the interests from June 30, 2007 (the “Effective Date”) through the closing date, and downward adjustment to account for ChevronTexaco’s receipt of revenues derived from the interests from the Effective Date through the closing date.  The Company paid to ChevronTexaco a $650,000 deposit toward the purchase price in 2007, which is refundable if the ChevronTexaco ATA is terminated under certain conditions. The closing of the asset transfer contemplated pursuant to the ChevronTexaco ATA is contingent upon a number of conditions precedent, including the approval of certain related agreements by the PRC Ministry of Land and Natural Resources and the assignment of ChevronTexaco’s participating interest by the PRC Ministry of Commerce, which approvals and assignment are currently in the process of being secured.  The aggregate costs and expenses paid by ChevronTexaco in carrying out work on the assets from July 1, 2007 to October 31, 2008 were estimated by it to be $1,990,784.

The BHP Asset Transfer Agreement

On March 29, 2008, the Company entered into an Asset Transfer Agreement (the “BHP ATA”) with BHP Billiton World Exploration Inc. (“BHP”) for the purchase by the Company of BHP’s 64.2858% participating interest held by BHP in the Baode PSC (as defined above) at a purchase price of $2,000,000, subject to upward adjustment to account for BHP’s cash flow payments and operating costs paid with respect to BHP’s participating interest from April 1, 2008 through the closing date, and downward adjustment to account for BHP’s receipt of revenues derived from its participating interest from that date through the closing date. The Company has paid to BHP a $500,000 deposit toward the purchase price, which is refundable if the BHP ATA is terminated under certain conditions.  Upon closing, the Company will assume BHP’s operator obligations related to the Baode PSC.  The aggregate costs and expenses paid by BHP in carrying out work on the assets from April 1, 2008 to October 31, 2008 were estimated by it to be $623,365.

Upon closing of both the ChevronTexaco ATA and the BHP ATA, the Company will acquire a 100% participating interest in the Baode PSC.  Pursuant to the terms of the Baode PSC, the Chinese government is entitled to acquire up to a 30% participating interest in the Baode PSC from the then-current parties to the Baode PSC upon certain conditions and in exchange for certain payments to such parties.  Assuming the Company consummates one or both

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of the ChevronTexaco ATA and the BHP ATA, such asset acquisitions will not constitute the acquisition of a business, but the acquisition of title to hydrocarbon natural resources under the surface of the land.  These assets are not presently capable of independent operation as a business, and no employees, revenues, or customers will be acquired.

The Well Lead Agreement on Cooperation

On September 30, 2008, the Company entered into an Agreement on Cooperation (the “AOC”) with Well Lead Group Limited (“Well Lead”), pursuant to which the parties agreed to use reasonable efforts to negotiate and enter into a mutually acceptable Sale and Purchase Agreement for purchase by the Company of up to 39% of Well Lead’s interests (the “WL Interest”) in Northeast Oil (China) Development Company Ltd. (“Northeast Oil”).  Northeast Oil owns a 95% interest in oilfield blocks Fu710 and Meilisi723 in the Fulaerjiqu Oil Field in Qiqihar City, Heilongjiang Province in the People’s Republic of China (the “WL Oil Blocks”).  The proposed transaction is subject to due diligence review of the WL Interest, the WL Oil Blocks and other matters.  Under the proposed transaction, the Company would acquire a 25% interest in Northeast Oil for a purchase price of $9.8 million, comprised of $5.0 million cash (one-half paid at closing and the remainder in five equal monthly installments commencing eight months after closing) and the issuance of Company Common Stock valued at $4.8 million.  In addition, at closing, the Company would have the option to purchase an additional 14% interest in Northeast Oil foran additional $5.5 million in cash payable at closing.  In accordance with the AOC, the Company paid Well Lead a nonrefundable payment of $50,000 in cash for the right of exclusive negotiations for the acquisition of the Interest through November 30, 2008, which exclusive term has expired.

After completing the initial phase of due diligence on Well Lead, the WL Interest and the WL Oil Blocks, the Company has commenced additional negotiations with Well Lead and other related parties to expand the potential acquisition to include other Well Lead interests and related parties.  These additional Well Lead interests and related parties include additional producing oilfields in China, a Well Lead-affiliated technology company that has been applying its intellectual property to successfully enhance production in the WL Oil Blocks (and other oil fields in China), and certain Well Lead-related venture companies. The Company now seeks to acquire a 51% participating interest in all these Well Lead assets and related parties, and the Company and Well Lead have reached a verbal agreement in principle with respect thereto.  The Company anticipates that the total purchase price for all Well Lead interests to be acquired by the Company will be less than the amounts originally provided for in the AOC for the WL Oil Blocks alone.  The Company has commenced phase two of its due diligence review with a goal to conclude such review and negotiate, sign and consummate a definitive acquisition agreement by April 30, 2009.  However, the Company can make no assurances that it will be able to successfully consummate any transaction with Well Lead on terms and conditions satisfactory to the Company, or at all.

Handan Gas Distribution Venture

The Company entered into a Letter of Intent in November 2008 to possibly acquire a 51% ownership interest in the Handan Changyuan Gas Co., Ltd. (“HCG”) from the Beijing Tai He Sheng Ye Investment Company Limited. HCG owns and operates gas distribution assets in and around Handan City, China. HCG was founded in May 2001, and is the primary gas distributer in Handan City, which is located 250 miles south of Beijing, in the Hebei Province of the People’s Republic of China. HCG has over 300,000 customers and owns 35 miles of a main gas pipeline, and more than 450 miles of delivery gas pipelines, with a delivery capacity of 300 million cubic meters per day.  HCG also owns an 80,000 sq. ft. field distribution facility. Gas is being supplied by Sinopec and PetroChina from two separate sources.  Revenues for HCG have been increasing at an average rate of over 40% per year over the last 3 years. The Company will continue its final legal and financial due diligence, along with identifying a partner to join the Company with an objective of entering into a mutually agreed final sale and purchase agreement by the end of the second quarter of 2009.

Financing

In the third calendar quarter of 2006, the Company closed a private equity financing that raised approximately $4.6 million, and in May 2007 the Company closed a private equity financing that raised an additional $17 million from qualified investors, for an aggregate of approximately $21.6 million raised in equity financings to date.  The

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Company has not yet generated any meaningful revenue to fund its ongoing working capital requirements as well as possible acquisition and development activities.

In order to fully implement its business strategy, including development and production required under the Zijinshan PSC, ongoing production under the Chifeng Agreement, consummation of the asset transfers contemplated pursuant to the ChevronTexaco ATA and the BHP ATA and development and production under the Baode PSC,  thereafter, as well as other transactions contemplated with Well Lead, and the Beijing Tai He Sheng Ye Investment Company Limited, the Company will need to raise significant additional capital. In the event the Company is unable to raise such capital on satisfactory terms or in a timely manner, the Company would be required to revise its business plan and possibly cease operations completely.

Organization

The Company was incorporated in the State of Delaware in 1979 under the name “Gemini Marketing Associates, Inc.”  In 1994, the Company changed its name from “Gemini Marketing Associates, Inc.” to “Big Smith Brands, Inc.,” in 2006 it again changed its name to “Pacific East Advisors, Inc.,” and in 2007 it again changed its name to “Pacific Asia Petroleum, Inc.” As Big Smith Brands, Inc., the Company operated as an apparel company engaged primarily in the manufacture and sale of work apparel, and was listed on the Nasdaq Stock Market’s Small-Cap Market from 1995 until December 4, 1997, and the Pacific Stock Exchange from 1995 until April 1, 1999.  In 1999, the Company sold all of its assets related to its workwear business to Walls Industries, Inc., and in 1999 filed for voluntary bankruptcy under Chapter 11 of the United States Bankruptcy Code. The final bankruptcy decree was entered on August 8, 2001, and thereafter the Company existed as a “shell company,” but not a “blank check” company, under regulations promulgated by the SEC and had no business operations and only nominal assets until May 2007, when it consummated the mergers of Inner Mongolia Production Company LLC (“IMPCO”) and Advanced Drilling Services, LLC (“ADS”) into wholly-owned subsidiaries of the Company.  See “The Mergers” below.  In December 2007, the Company merged these wholly-owned subsidiaries into the parent company, resulting in the cessation of the separate corporate existence of each of IMPCO and ADS and the assumption by the Company of the businesses of IMPCO and ADS.  In connection with the mergers, the Company changed its name from “Pacific East Advisors, Inc.” to “Pacific Asia Petroleum, Inc.”  In July 2008, the Company consummated the merger of Navitas Corporation, a Nevada corporation whose sole assets were comprised of Company Common Stock and certain deferred tax assets, with and into the Company, and the separate corporate existence of Navitas Corporation ceased upon effectiveness of the merger.  Unless the context otherwise requires, the term “Company” as used herein collectively refers to the Company and its wholly-owned subsidiaries and joint ventures, including (i) Inner Mongolia Production Company (HK) Limited, (ii) Inner Mongolia Sunrise Petroleum JV Company, (iii) Pacific Asia Petroleum (HK) Limited, and (iv) Pacific Asia Petroleum, Limited.

The Common Stock of PAP is quoted on the OTC Bulletin Board under the symbol “PFAP.OB.” See, “Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities.”

The Company’s executive offices are located at 250 East Hartsdale Ave., Suite 47, Hartsdale, New York 10530. The Company also has an office located in Beijing, China. PAP may be contacted by telephone at (914) 472-6070, and its website is www.papetroleum.com.  The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available on the Company’s website free of charge as soon as practicable after such reports are electronically filed or furnished to the SEC.  Investors may register on the site to receive updates about the company.

Subsidiaries and Joint Ventures

The  following summarizes the corporate structure of PAP and its subsidiaries (“we,” “our,” “us,” or the “Company”), and its joint venture partner.

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Inner Mongolia Production Company (HK) Limited

In December 2005, the Company formed a Hong Kong corporation, Inner Mongolia Production Company (HK) Limited, which is a wholly owned subsidiary of the Company (“IMPCO HK”), for the purpose of entering into certain business transactions in China.  IMPCO HK is a joint venture partner in Inner Mongolia Sunrise Petroleum JV Company, described in more detail below.

Inner Mongolia Sunrise Petroleum JV Company and Beijing Jinrun Hongda Technology Co., Limited

In March 2006, the Company formed Inner Mongolia Sunrise Petroleum JV Company (“IMPCO Sunrise”), a Chinese joint venture company which is owned 97% by IMPCO HK and 3% by Beijing Jinrun Hongda Technology Co., Ltd. (“BJHTC”), an unaffiliated Chinese corporation.  The Company formed IMPCO Sunrise as an indirect subsidiary to engage in Chinese energy ventures.  Under Chinese law, a foreign-controlled Chinese joint venture company must have a Chinese partner. BJHTC is IMPCO HK’s Chinese partner in IMPCO Sunrise. IMPCO Sunrise is governed and managed by a Board of Directors comprised of three members, two of whom are appointed by IMPCO HK and one by BJHTC.

IMPCO HK has advanced a total of $400,507 to BJHTC, which then invested that amount in IMPCO Sunrise and issued notes to IMPCO HK for that amount. The notes are repayable in Chinese yuan (“RMB”).  As of December 31, 2008, IMPCO HK  recorded an impairment adjustment of $273,618 on these notes to reduce the carrying amount to $386,415. Based upon the delay in achieving net income in IMPCO Sunrise,  the impact of the significant decline in the price of oil in the second half of 2008, the amount of uncollected interest on the note, and the required date for repayment, it was determined in the fourth quarter of 2008 that the note was impaired. The impairment adjustment included the write-off of accrued interest included in the principal balance.  BJHTC is obligated to apply any remittances received from IMPCO Sunrise directly to IMPCO HK. IMPCO Sunrise is authorized to pay these remittances directly to IMPCO HK on BJHTC’s behalf, until the debt is satisfied.

IMPCO Sunrise is a party to the Chifeng Agreement and is pursuing the Chifeng opportunity as described above.

Pacific Asia Petroleum, Limited

In September 2007, the Company formed Pacific Asia Petroleum, Limited (“PAPL”) as a wholly-owned Hong Kong corporate subsidiary of the Company for the purpose of entering into certain business transactions in China.  The Company is the sole shareholder of PAPL.  PAPL is a party to the Zijinshan PSC, the ChevronTexaco ATA and the BHP ATA.

Pacific Asia Petroleum (HK) Limited

In May 2008, the Company formed a Hong Kong corporation, Pacific Asia Petroleum (HK) Limited, which is a wholly owned subsidiary of the Company (“PAP HK”), for the purpose of entering into certain business transactions in China.  PAP HK has not entered into any transactions to date.

The Mergers

On December 11, 2006 PAP entered into: (i) an Agreement and Plan of Merger and Reorganization (the “ADS Merger Agreement”) with DrillCo Acquisition, LLC (“ADS Merger Sub”), a Delaware limited liability company and a wholly-owned subsidiary of PAP, and ADS, and (ii) an Agreement and Plan of Merger and Reorganization (the “IMPCO Merger Agreement,” and together with the ADS Merger Agreement, the “Merger Agreements”) with IMPCO Acquisition, LLC (“IMPCO Merger Sub”), a New York limited liability company and a wholly-owned subsidiary of PAP, and IMPCO. Immediately prior to the closing of the Mergers, ADS closed a private equity financing (the “ADS Offering”) pursuant to which ADS raised $17 million in exchange for the issuance of 13,600,000 ADS Class B Interests to qualified investors. Pursuant to the Merger Agreements, as amended and restated on February 12, 2007, as further amended on April 20, 2007, effective upon the May 7, 2007 closing, (i) ADS merged with and into ADS Merger Sub, and ADS Merger Sub as the surviving entity changed its name to “Advanced Drilling Services, LLC” and continued to carry on the business of ADS, (ii) IMPCO merged with and into IMPCO Merger Sub, and IMPCO Merger Sub as the surviving entity changed its name to “Inner Mongolia Production Company LLC” and continued to carry on the business of IMPCO, (iii) each of the 9,850,000 ADS Class A Interests which were issued and outstanding automatically converted into the right to receive an aggregate of

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9,850,000 shares of PAP Common Stock, (iv) each of the 13,600,000 ADS Class B Interests issued in the ADS Offering which were issued and outstanding automatically converted into the right to receive an aggregate of 13,600,000 shares of PAP Series A Convertible Preferred Stock, (v) each of the 347,296 IMPCO Class A Units which were issued and outstanding automatically converted on a 1:17 basis into the right to receive an aggregate of 5,904,032 shares of PAP Common Stock, and (vi) each of the 594,644 IMPCO Class B Units which were issued and outstanding automatically converted on a 1:17 basis into the right to receive an aggregate of 10,108,952 shares of PAP Series A Convertible Preferred Stock. Upon closing of the Mergers, PAP also assumed warrants to purchase 1,860,001 ADS Class B Interests issued to certain ADS placement agents in connection with the ADS Offering, which warrants became exercisable for 1,860,001 shares of PAP Series A Convertible Preferred Stock as a result of the Mergers.

The Mergers were structured so as to constitute part of a single transaction pursuant to an integrated plan and to qualify as a tax-free transaction. Under the terms of the Merger Agreements, PAP changed its name to “Pacific Asia Petroleum, Inc.,” all of the persons serving as directors and officers of PAP resigned, the number of directors of PAP was set at three, and the following persons were appointed as the officers and directors of PAP immediately following the Mergers: (i) Frank C. Ingriselli, Chief Executive Officer, President, Secretary and Director; (ii) Laird Q. Cagan, Director; (iii) Elizabeth P. Smith, Director; (iv) Stephen F. Groth, Vice President and Chief Financial Officer; and (v) Jamie Tseng, Executive Vice President.  Subsequent to the consummation of the Mergers, Robert C. Stempel was appointed to the Board of Directors of PAP in February 2008, James F. Link was appointed to the Board of Directors of PAP in July 2008, and Richard Grigg was appointed as Senior Vice President and Managing Director of PAP in August 2008.

In December 2007, PAP consummated the mergers of IMPCO and ADS into PAP, resulting in the cessation of the separate corporate existence of each of IMPCO and ADS and the assumption by PAP of the businesses of IMPCO and ADS.

Automatic Conversion

Pursuant to the Amended and Restated Certificate of Incorporation of PAP, dated May 2, 2007, as a result of the average closing sales price of PAP’s Common Stock exceeding $3.125 per share for twenty consecutive trading days, upon the close of trading on June 5, 2007, all of PAP’s 23,708,952 shares of issued and outstanding Series A Convertible Preferred Stock were automatically converted on a 1:1 basis into a total of 23,708,952 shares of Common Stock of PAP (the “Autoconversion”).

Market Overview

We believe that although economic growth in China has slowed recently, it will continue at a faster pace than in the countries of the Organization of Economic Cooperation and Development (“OECD”) and most other developing countries, as will China’s consumption of increasing amounts of energy. Because China’s economy is still less energy-efficient than the U.S. economy, requiring an estimated four times as many BTUs per dollar of Gross Domestic Product (“GDP”), this growth is expected to continue to amplify the country’s increasing energy demand for some time (U.S. Department of Energy: International Energy Annual & International Petroleum Monthly). China’s GDP grew to $3.38 trillion in 2007 at market exchange rates (China National Bureau of Statistics), surpassing that of the Federal Republic of Germany, and making China the 3rd largest economy in the world.  China passed Japan in late 2003 to become the world’s second largest petroleum consumer. According to data from the U.S. Department of Energy, between 2000 and 2007, oil use in China grew by an average of 7% per year. In 2007, Chinese demand reached 7.6 million barrels per day, more than one-third the level in the United States. At the same time, domestic crude oil output in China has grown more slowly over the past five years, forcing imports to expand rapidly to meet demand. Since 2000 China’s oil imports have more than doubled, growing from 1.4 million barrels per day to 3.7 million barrels per day in 2007, when they accounted for nearly half of Chinese oil demand.

According to testimony by Jeffrey Logan, Senior Energy Analyst and China Program Manager at the International Energy Agency, to the U.S. Senate Committee on Energy and Natural Resources on February 3, 2005, China has become an economic superpower and now plays a key role in the supply and demand of many global commodity markets, including oil. He indicated that while China’s historical growth was not dependent on energy, its growth was now very dependent on the development and growth of oil and gas, with every one percent increase in GDP causing energy demand to grow by over 1.5 percent.  Although the Chinese government has set a goal of reducing per-GDP energy consumption by 20% between 2005 and 2010, the strong linkage between energy and China’s

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economic growth is reflected in the forecasts of the International Energy Agency (“IEA”).  In its 2008 World Energy Outlook, the IEA projected that China’s petroleum demand would continue to grow at 3.5% per year through 2030, increasing by 9 million barrels per day and accounting for 43% of global oil demand growth over this period. Nor is the energy impact of China’s growth confined to oil.  The IEA expects China and India together to account for more than half of all incremental global energy demand through 2030.

Natural gas represents a particularly under-utilized energy source in China, supplying only 3% of the country’s energy needs, compared with 23% globally and in the U.S. We believe that its low emissions, combined with the low cost and high efficiency of gas turbines, make gas an attractive fuel for meeting China’s future electric power demand. The Chinese government has indicated that it would like to expand gas use significantly, and the National Development and Reform Commission has set a goal of increasing gas’s share of the market to 5.3% by 2010 (U.S. Department of Energy: International Energy Annual & International Petroleum Monthly).China’s domestic natural gas production increased to 76 billion cubic meters (2.7 trillion cubic feet) in 2008 (China National Bureau of Statistics) and is planned to double to 160 billion cubic meters (5.7 trillion cubic feet) by 2015 (China Daily, quoting an official of the Ministry of Land and Resources).

The government of China has taken a number of steps to encourage the exploitation of oil and gas within its own borders to meet the growing demand for oil and to try to reduce its dependency on foreign oil. Notably, the government has reduced complicated restrictions on foreign ownership of oil exploitation projects and has passed legislation encouraging foreign investment and exploitation of oil and gas.

Through successive “Five Year Plans” China has undertaken a strategic reorganization in the oil industry by means of market liberalization, internalization, cost-effectiveness, scientific and technological breakthrough and sustainable development. Changes were made in the structures of oil reservation and exploration such as permitting more oil imports into the domestic market and allocating a greater percentage of oil and gas in non-renewable energy consumption. The reorganization was aimed at ensuring a smooth and sustainable oil supply, at low cost and meeting a goal for sound economic growth. The guiding principles of reform focused on developing the domestic market by expanding exploration efforts while practicing conservation and building oil reserves. These efforts focused on building key infrastructure for oil and gas transportation and storage by targeting the development of oil and gas pipelines to a target of 14,500 km in total length, and building storage facilities, including a strategic petroleum reserve of approximately 100 million barrels and facilities for 1.14 billion cubic meters of gas (40 billion cubic feet). In order to further technical development and innovation, substantial resources were devoted to oil and gas exploration.

Chinese policymakers and state-owned oil companies have embarked on a multi-pronged approach to improve oil security by diversifying suppliers, building strategic oil reserves, purchasing equity oil stakes abroad, and enacting new policies to lower demand. When it became a net oil importer in 1993, almost all of China’s crude imports came from Indonesia, Oman and Yemen. After diversifying global oil purchases over the past decade, Chinese crude imports now come from a much wider range of suppliers. By 2006, Angola was China’s largest supplier, accounting for 15 percent of imports, followed by Saudi Arabia, Iran, Russia, and Oman.  46% of China’s crude oil imports come from the Middle East, and 32% from Africa (U.S. Department of Energy: China Country Analysis Brief.)The three major government-owned oil companies in China are (i) China Petroleum & Chemical Company, or “Sinopec,” (ii) China National Offshore Oil Corporation, or “CNOOC,” and (iii) PetroChina Company Limited, or “PetroChina” (also sometimes referred to as “China National Petroleum Corporation” or “CNPC,” which is the government company owning the majority of PetroChina). PetroChina is China’s largest producer of crude oil and natural gas and has operations in 29 other countries. Sinopec is China’s largest refining, storage and transmission company. CNOOC is China’s largest offshore oil and gas exploration and development company. Each of these companies has been granted a charter by the Chinese government to engage in various stages of oil and gas procurement, transportation and production in China. Substantially all oil and gas exploration, storage and transportation by foreign entities in China must be conducted via joint ventures with one of these companies, or with another Chinese company that has entered into an arrangement with one of these companies and been authorized by the appropriate government authorities to engage in such activities in China.

Unlike the developed petroleum markets of the member countries of the OECD, the oil market in China still includes important elements of central planning. Each year, the National Development and Reform Commission publishes the projected target for the production and sale of crude oil by the three state oil companies, based on the domestic consumption estimates submitted by domestic producers, including PetroChina, Sinopec and CNOOC, the

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production capacity of these companies, and the forecast of international crude oil prices. The actual production levels are determined by the producers themselves and may vary from the submitted estimates. PetroChina and Sinopec set their crude oil median prices each month based on the average Singapore market FOB prices for crude oil of different grades in the previous month. In addition, PetroChina and Sinopec negotiate a premium or discount to reflect transportation costs, the differences in oil quality, and market supply and demand. The National Development and Reform Commission will mediate if PetroChina and Sinopec cannot agree on the amount of premium or discount.

Market Opportunity

While the barriers to entry for foreign entities to engage in the development of oil and gas resources in China have recently eased, we believe that many small companies still face significant hurdles due to their lack of experience in the Chinese petroleum industry. Development requires specialized grants and permits, experience with obtaining scarce drilling and exploration equipment in remote regions and the ability to manage projects efficiently during times of resource shortages. The Company hopes to take advantage of the energy development opportunities that exist in China today by leveraging its management team’s prior exploration experiences in China and existing relationships with oil industry executives and government officials in China. In addition, we believe that members of the Company’s production team have the hands-on experience with projects in Asia that we believe is essential to any successful petroleum project in China.

While China’s growth has been affected by the global financial crisis and recession, declining to a year-on-year rate of 6.8% in the fourth quarter of 2008, its government has already committed to a fiscal stimulus amounting to 4 trillion RMB ($586 billion), which includes investment in energy infrastructure (World Bank: China Quarterly Update, December 2008).  Estimates for growth in 2009 range from 4% to 8% (World Bank website,) accounting for most of the growth in the world this year. We believe China remains a very attractive investment opportunity in a difficult global environment.

Principal Business Strategy

The Company is a development-stage company formed to develop new energy ventures, directly and through joint ventures and other partnerships in which it may participate. In 2006, the Company commenced operations in China and is currently engaged in the business of oil and gas exploration, development, production and distribution in China. The Company has entered into a production sharing contract, an oil development opportunity, letters of intent and agreements for joint cooperation, pending asset transfer agreements, and other agreements covering several energy ventures in China.

The Company has entered into the Zijinshan PSC to explore for CBM and tight gas sand resources in China.

In November 2006, the Company entered into an Agreement for Joint Cooperation (the “Cooperation Agreement”), with CUCBM, the Chinese Government-designated company holding exclusive rights to negotiate with foreign companies with respect to CBM production, covering an area in the Shanxi Province of China referred to as the Zijinshan Block (the “CUCBM Contract Area”). Under the Cooperation Agreement, CUCBM and the Company agreed to negotiate in good faith the terms of a PSC covering the CUCBM Contract Area, and CUCBM agreed to keep the CUCBM Contract Area exclusive for the development by the Company under the PSC. The CUCBM Contract Area is approximately 175,000 acres, and is in proximity to the major West-East gas pipeline which links the gas reserves in China’s western provinces to the markets of the Yangtze River Delta, including Shanghai. As required by the Cooperation Agreement, the Company conducted feasibility studies over the CUCBM Contract Area, and concluded that the Area has prospectivity. The Company elected to convert its interest into a PSC, and on October 26, 2007, PAPL entered into the Zijinshan PSC with CUCBM for the exploitation of CBM and tight gas sand resources in the CUCBM Contract Area. The PSC provides, among other things, that PAPL must drill three (3) exploration wells and carry out 50 km of 2-D seismic data acquisition (a minimum commitment for the first three (3) years with an estimated expenditure of $2.8 million) and drill four (4) pilot development wells during the next two (2) years at an estimated cost of $2 million (in each case subject to PAPL’s right to terminate the Zijinshan PSC).  During the development and production period, CUCBM will have the right to acquire a 40% participating interest and work jointly to develop and produce CBM under the Zijinshan PSC.  Pursuant to the Zijinshan PSC, all CBM resources (including all other hydrocarbon resources) produced from the CUCBM Contract Area are to be shared as follows:  (i) 70% of production is provided to PAPL and CUCBM for recovery of all costs incurred; (ii) PAPL has

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the first right to recover all of its exploration costs from such 70% and then development costs are recovered by PAPL and CUCBM pursuant to their respective participating interests; and (iii) the remainder of the production is split by CUCBM and PAPL receiving between 99% and 90% of such remainder depending on the actual producing rates (a sliding scale) and the balance of the remainder (between 1% and 10%) is provided to the government of China.  The Zijinshan PSC has a term of thirty (30) years and was approved by the Ministry of Commerce of China in 2008.  In December 2008, the Company and CUCBM finalized a mutually agreed work program pursuant to which the Company may immediately commence exploration operations under the Zijinshan PSC.

The Zijinshan PSC is in close proximity to the major West-East and the Ordos-Beijing gas pipelines which link the gas reserves in China’s western provinces to the markets of Beijing and the Yangtze River Delta, including Shanghai. The Zijinshan PSC covers an area of approximately 175,000 acres.  

The Company is pursuing an oil development opportunity in Inner Mongolia with Chifeng.

Inner Mongolia, China’s northern border autonomous region, features a long, narrow strip of land sloping from northeast to southwest. It stretches 2,400 km from west to east and 1,700 km from north to south. Inner Mongolia traverses between northeast, north, and northwest China. The third largest among China’s provinces, municipalities, and autonomous regions, the region covers an area of 1.18 million square km, or 12.3% of the country’s territory. It neighbors eight provinces and regions in its south, east and west and Mongolia and Russia in the north, with a borderline of 4,200 km. In 2005 China and the Inner Mongolia Municipality awarded to Chifeng the exclusive authority to develop and exploit oil resources in the area known as the “ShaoGen Contract Area,” an area of approximately 353 square kilometers located in Chifeng, China. In 2005 and 2006, Chifeng drilled several wells throughout the ShaoGen Contract Area and discovered oil.

In July 2006, the Company’s management began discussions with Chifeng and hired an independent Chinese oil consultant to conduct a feasibility study on the Company’s behalf. This feasibility study concluded that based on “investigation and research in-depth for oil resources, exploitative environment and international markets, it is feasible for exploitation of oil and gas . . .” The report contained the following conclusions:

· There is a very high potential for oil resources with excellent geological conditions for petroleum;

· A very significant oil field (part of the Liahoe oilfield, known as the Kerqing oilfield) was discovered in the area, which makes drilling in the ShaoGen Contract Area favorable; and

· The petroleum system has been proved as there are existing wells in the area with tested transmission infrastructure in place.

In August 2006, the Company (through IMPCO Sunrise) and Chifeng entered into a Contract for Cooperation and Joint Development (the “Chifeng Agreement”), setting forth the terms and conditions for carrying out work and exploiting the development acreage in the ShaoGen Contract Area owned by Chifeng (the “Development Area”). Under the Chifeng Agreement:

· Chifeng is responsible for selecting well locations in consultation with the Company;

· Chifeng has overall authority, responsibility and management over the Development Area and all operations in the field;

· Chifeng is responsible for drilling successive wells until there is a completed successful well (defined as a well having produced at a minimum average rate of 2-3 tons/day of crude oil over the first 60-day period, with the Company owning 100% of the oil produced within such 60-day period);

· The Company paid Chifeng 50% of the cost to drill the initial well (1,500,000 RMB, or approximately US$200,000 at the time of payment) as a deposit;

· The Company is required to pay: : (a)  the same amount for the next two wells after each successful well has been drilled, which at December 31, 2008 was approximately US$220,000; and (b) 1,500,000 RMB (about

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$220,000) for each successful well; and (c) a 5% royalty/management fee from the gross production of crude oil, which shall be paid “in kind” to Chifeng;

· The balance of oil production will be owned by the Company. The Company is obligated to provide the balance of the oil produced to Chifeng and Chifeng is obligated to sell such oil on behalf of the Company.  Chifeng is  obligated to pay the Company for such oil at the same price as the oil is sold  by Chifeng to a third party;

· The funds paid by the Company to Chifeng under the Chifeng Agreement shall be the total cost to be paid to Chifeng for carrying out the drilling and other operations for a period of 20 years;

· All cost overruns in carrying out the work under the Chifeng Agreement are required to be borne by Chifeng. This is a turnkey contract with a guaranteed cost;

· The Company will continue to receive the revenues from the production of such wells for a term of 20 years from the date that each well is determined to be successful; and

· Chifeng is responsible for all health and safety matters, and for obtaining insurance covering personnel and equipment.

Pursuant to the Chifeng Agreement, drilling operations commenced in October 2006.  The first well drilled by Chifeng discovered oil and has been completed as a producing well, but production operations were suspended in 2007 pending receipt of a production license from the Chinese government. The Company is pursuing a combination of strategies to have such production license awarded, including a possible renegotiation of the Chifeng Agreement with the goal of increasing the financial incentives to all the parties involved, and the Company is also pursuing a strategy focused on entering into negotiations with respect to an opportunity to acquire the existing production from the 22 sq. km. Kerqing Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance the Chifeng Agreement in scale and value.  If this Production License is not issued, the opportunities to drill additional long-term production wells under the contract, including future production from this first well, will be at risk.

Chifeng has accounted for the Company’s share of the production revenue from the first producing well in the form of a credit, which will be allocated to the Company retroactively when and if the Production License is issued. Operations are anticipated to resume when and if the Production License is received. To date, the total production from the well has been approximately 400 tons of crude oil (all of which has been sold) and total producing revenues credited to the Company (after costs and royalties) were approximately $135,000. If a Production License is not received, the Company will seek, but is not contractually guaranteed, reimbursement from Chifeng for the Company’s outstanding costs.

The Company has entered into asset transfer agreements with ChevronTexaco and BHP to acquire rights to coalbed methane resources in China.

In September 2007, the Company entered into the Chevron Agreements with ChevronTexaco for the purchase by the Company of participating interests held by ChevronTexaco in production sharing contracts in respect of four CBM and tight gas sand resource blocks located in the Shanxi Province of China with an aggregate contract area of approximately 1.5 million acres, for an aggregate base purchase price of $61,000,000, adjusted in April 2008 to $50,000,000.  Due to delays in receipt of required Chinese government approvals of these transfers, coupled with renewal terms proposed by ChevronTexaco that were not acceptable to the Company, in December 2008 the Company exercised its right to terminate three of the four Chevron Agreements and received its full deposit amounts back from ChevronTexaco with respect to these three terminated Chevron Agreements. The Company and ChevronTexaco remain parties to that certain ChevronTexaco ATA, which relates to the purchase by the Company of ChevronTexaco’s 35.7142% participating interest held by ChevronTexaco in the Baode PSC relating to a total area of approximately 160,000 acres in the “Baode Block”.  The base purchase price under the ChevronTexaco ATA is $2,000,000, subject to upward adjustment to account for ChevronTexaco’s cash flow payments and operating costs paid with respect to the interests from June 30, 2007 (the “Effective Date”) through the closing date, and downward adjustment to account for ChevronTexaco’s receipt of revenues derived from the interests from the Effective Date through the closing date.  The Company has paid to ChevronTexaco a $650,000 deposit toward the purchase price in 2007, which is refundable if the ChevronTexaco ATA is terminated under certain conditions.  Pursuant to the ChevronTexaco ATA and subject to closing, the Company will be responsible for and will indemnify

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ChevronTexaco with respect to liabilities associated with the interests and for all rehabilitation liabilities and obligations arising after the closing date related thereto, as well as for liability for income tax attributable to the interests arising after the closing date and any other taxes attributable to the interests arising following the effective date thereof. ChevronTexaco will be responsible for and will indemnify the Company for all liabilities associated with the interests which accrued, or relate to any period, before the closing date. Each party’s maximum aggregate liability to the other party under the ChevronTexaco ATA is limited to an amount equal to the base purchase price plus any interest accrued, and neither party is liable to the other party in an action initiated by one against the other for special, indirect or consequential damages resulting from or arising out of the ChevronTexaco ATA.

The closing of the asset transfer contemplated pursuant to the ChevronTexaco ATA is contingent upon a number of conditions precedent, including approval of certain related agreements by the PRC Ministry of Land and Natural Resources and the assignment of ChevronTexaco’s participating interest by the PRC Ministry of Commerce.

The Chinese government approvals and assignments are currently under review by the Chinese government.

The following is a summary of the main provisions of the ChevronTexaco ATA:

· For a purchase price of $2,000,000, the Company acquires ChevronTexaco’s 35.7142% interest in the Baode PSC.

· The Company was required to make (and did make) a deposit to ChevronTexaco in the total amount of $650,000. This deposit is refundable in the event that certain conditions to closing are not satisfied.

· The parties are obligated to use their best efforts to accomplish the conditions to closing, including the securing of approvals from the Chinese government, including the Ministry of Commerce, the Ministry of Land and Natural Resources and the filing of corporate registration documents. ChevronTexaco and the Company each have the option to cancel the ChevronTexaco ATA since these approvals were not secured by November 7, 2008 (as amended).

· ChevronTexaco, until the closing, is obligated to continue to carry out all of its obligations under the applicable production sharing agreements in the ordinary course of business and seek the Company’s approval with respect to proposed work programs and budgets.

· In addition to the purchase price of $2,000,000, the Company is obligated to reimburse ChevronTexaco for all of the costs and expenses ChevronTexaco pays in carrying out work on each of the assets from July 1, 2007 until the closing.  After the closing, all costs and expenses are required to be paid by the Company.  As of October 31, 2008 these costs were estimated by ChevronTexaco to be $2.0 million.

· The Company has audit rights on the ChevronTexaco accounting books and records.

· Title passes at closing and ChevronTexaco is responsible for all prior activities and the Company is responsible for all activities post the closing. Both parties shall indemnify each other with respect to certain liabilities arising during these respective periods.

· At the closing, the Company will acquire all title and land rights to the assets belonging to ChevronTexaco under the ChevronTexaco ATA. This is not an acquisition of a business, but an acquisition of title to hydrocarbon natural resources under the surface of the land.  The transaction does not result in the acquiring of existing employees, revenues, or customers, and the assets are not presently capable of independent operations as a business.

· ChevronTexaco makes warranties that it has good title and rights to all the assets being sold and that they are free and clear of all encumbrances.

On March 29, 2008, the Company entered into the BHP ATA with BHP for the purchase by the Company of BHP’s 64.2858% participating interest held by BHP in the Baode PSC at a purchase price of $2,000,000, subject to upward adjustment to account for BHP’s cash flow payments and operating costs paid with respect to BHP’s participating interest from April 1, 2008 through the closing date, and downward adjustment to account for BHP’s receipt of revenues derived from its participating interest from that date through the closing date. The Company has paid to BHP a $500,000 deposit toward the purchase price, which is refundable if the BHP ATA is terminated under certain

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conditions.  Upon closing, the Company will assume BHP’s operator obligations related to the Baode PSC.  The aggregate costs and expenses paid by BHP in carrying out work on the assets from April 1, 2008 to October 31, 2008 were estimated by it to be $623,365.

The closing of the BHP ATA is contingent upon a number of conditions precedent, including approval of certain related agreements by the PRC Ministry of Land and Natural Resources and the assignment of BHP’s participating interest by the PRC Ministry of Commerce.

Assuming all conditions precedent to closing of each of the ChevronTexaco ATA and BHP ATA are satisfied, upon closing of both the ChevronTexaco ATA and the BHP ATA, the Company will acquire a 100% participating interest in the Baode PSC.  Pursuant to the terms of the Baode PSC, the Chinese government is entitled to acquire up to a 30% participating interest in the Baode PSC from the then-current parties to the Baode PSC upon certain conditions and in exchange for certain payments to such parties.  Assuming the Company consummates one or both of the ChevronTexaco ATA and the BHP ATA, such asset acquisitions will not constitute the acquisition of a business, but the acquisition of title to hydrocarbon natural resources under the surface of the land.  These assets are not presently capable of independent operation as a business, and no employees, revenues, or customers will be acquired.

The Company is pursuing other oil exploration, production, development and related opportunities in China with Well Lead.

On September 30, 2008, the Company entered into an AOC with Well Lead, pursuant to which the parties agreed to use reasonable efforts to negotiate and enter into a mutually acceptable Sale and Purchase Agreement for purchase by the Company of up to 39% of the WL Interest in Northeast Oil.  Northeast Oil owns a 95% interest in the WL Oil Blocks located in the Fulaerjiqu Oilfield in Qiqihar City, Heilongjiang Province in the People’s Republic of China.  The proposed transaction is subject to due diligence review of the WL Interest, the WL Oil Blocks and other matters.  Under the proposed transaction, the Company would acquire a 25% interest in Northeast Oil for a purchase price of $9.8 million, comprised of $5.0 million cash (one-half paid at closing and the remainder in five equal monthly installments commencing eight months after closing) and the issuance of Company Common Stock valued at $4.8 million.  In addition, at closing, the Company would have the option to purchase an additional 14% interest in Northeast Oil for an additional $5.5 million in cash payable at closing.  In accordance with the AOC, the Company paid Well Lead a nonrefundable payment of $50,000 in cash for the right of exclusive negotiations for the acquisition of the Interest through November 30, 2008, which exclusive term has expired.

After completing the initial phase of due diligence on Well Lead, the WL Interest and the WL Oil Blocks, the Company has commenced additional negotiations with Well Lead and other related parties to expand the potential acquisition to include other Well Lead interests and related parties.  These additional Well Lead interests and related parties include additional producing oilfields in China, a Well Lead-affiliated technology company that has been applying its intellectual property to successfully enhance production in the WL Oil Blocks, (and other oilfields in China) and certain Well Lead-related venture companies. The Company now seeks to acquire a 51% participating interest in all these Well Lead assets and related parties, and the Company and Well Lead have reached a verbal agreement in principle with respect thereto.  The Company anticipates that the total purchase price for all Well Lead interests to be acquired by the Company will be less than the amounts originally provided for in the AOC for the WL Oil Blocks alone.  The Company has commenced phase two of its due diligence review with a goal to conclude such review and negotiate, sign and consummate a definitive acquisition agreement by April 30, 2009.  However, the Company can make no assurances that it will be able to successfully consummate any transaction with Well Lead on terms and conditions satisfactory to the Company, or at all.

The Company is pursuing acquisition of ownership in a gas distribution network.

The Company entered into a Letter of Intent in November 2008 to possibly acquire a 51% ownership interest in the Handan Changyuan Gas Co., Ltd. (HCG) from the Beijing Tai He Sheng Ye Investment Company Limited. HCG owns and operates gas distribution assets in and around Handan City, China. HCG was founded in May 2001, and is the primary gas distributer in Handan City, which is located 250 miles south of Beijing, in the Hebei Province of the People’s Republic of China. HCG has over 300,000 customers and owns 35 miles of a main gas pipeline, and more than 450 miles of delivery gas pipelines, with a delivery capacity of 300 million cubic meters per day.  HCG also owns an 80,000 sq. ft. field distribution facility. Gas is being supplied by Sinopec and PetroChina from two separate

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sources.  Revenues for HCG have been increasing at an average rate of over 40% per year over the last 3 years. The Company will continue its final legal and financial due diligence, along with identifying a partner to join the Company with an objective of entering into a mutually agreed final sale and purchase agreement by the end of the second quarter of 2009.

Geophysical Services and Development Opportunities

The Company has signed an Agreement on Joint Cooperation, dated May 31, 2007, with Sino Geophysical Co., Ltd (“SINOGEO”), the largest private geophysical services company in China. Under this agreement, SINOGEO and the Company agreed:

· To establish a mutually acceptable procedure to keep each other informed of projects they are pursuing which they respectively believe would meet the financial and operational objectives and expectations for the other party;

· That the Company would use the services of SINOGEO for its seismic acquisition and processing operations, provided that SINOGEO’s terms are competitive with respect to price, technology and quality and that mutually acceptable terms can be negotiated;

· That SINOGEO would provide the Company with the opportunity to participate in oil and gas exploration and development projects that it is pursuing, or acquires, subject to agreement on mutually acceptable terms;

· That in the event the Company receives a proposal along with information and data from SINOGEO on a particular opportunity which SINOGEO has not received earlier from another source, then if the Company decides to participate in such opportunity, the Company shall be required to work exclusively with SINOGEO to acquire such interest cooperatively with SINOGEO pursuant to mutually acceptable terms, and specific dividends for each party shall be apportioned according to each party’s proportionate interest in such project; and

· For projects where SINOGEO and the Company jointly cooperate, and where SINOGEO has devoted considerable effort and research, and such work reduces the risks in exploration and development and improves the rate of return on investment, that some form of compensation shall be negotiated and given to SINOGEO in recognition of such intangible contributions.

Competitive Business Conditions and the Company’s Competitive Position

The Company anticipates that it will be competing with numerous large international oil companies and smaller oil companies that target opportunities in markets similar to the Company’s, including the CBM, natural gas and petroleum markets. Many of these companies have far greater economic, political and material resources at their disposal than the Company.  The Company believes that its management team’s prior experience in the fields of petroleum engineering, geology, field development and production, operations, international business development, and finance, together with its prior experience in management and executive positions with Texaco Inc. and prior experience managing energy projects in China and elsewhere in Asia, may provide the Company with a competitive advantage over some of its competitors active in the region, particularly with respect to relatively small opportunities that tend to be bypassed by larger companies. Nevertheless, the market in which we plan to operate is highly competitive and the Company may not be able to compete successfully against its current and future competitors.  See “Part I, Item 1A. “Risks Related to the Company’s Industry” for risk factors associated with competition in the oil and gas industry.

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Regulation

China’s oil and gas industry is subject to extensive regulation by the Chinese government with respect to a number of aspects of exploration, production, transmission and marketing of crude oil and natural gas as well as production, transportation and marketing of refined products and chemical products. The following is a list of the primary Chinese central government authorities that exercise control over various aspects of China’s oil and gas industry:

· The Ministry of Land and Resources, which has the authority for granting, examining and approving oil and gas exploration and production licenses, the administration of registration and the transfer of exploration and production licenses.

· The Ministry of Commerce, which was established in March 2003 to consolidate the authorities and functions of the former State Economic and Trade Commission and the former Ministry of Foreign Trade and Economic Cooperation. Its responsibilities include:

· setting the import and export volume quotas for crude oil and refined products according to the overall supply and demand for crude oil and refined products in China as well as the World Trade Organization requirements for China;

· issuing import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and export quotas; and

· examining and approving production sharing contracts and Sino-foreign equity and cooperative joint venture contracts.

· The National Development and Reform Commission, which was established in March 2003 to consolidate the authorities and functions of the former State Development Planning Commission and the former State Economic and Trade Commission. Its responsibilities include:

· excercising industry administration and policy coordination authority over China’s oil and gas industry;

· determining mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertilizer producers;

· publishing guidance prices for natural gas and retail median guidance prices for certain refined products, including gasoline and diesel;

· approving significant petroleum, natural gas, oil refinery and chemical projects set forth under the Catalogues of Investment Projects Approved by the Central Government; and

· approving Sino-foreign equity and cooperative projects exceeding certain capital amounts.

Environmental Matters

China has adopted extensive environmental laws and regulations that affect the operation of its oil and gas industry. There are national and local standards applicable to emissions control, discharges to surface and subsurface water, and the generation, handling, storage, transportation, treatment and disposal of waste materials.

The environmental regulations require a company to register or file an environmental impact report with the relevant environmental bureau for approval before it undertakes any construction of a new production facility or any major expansion or renovation of an existing production facility. A new, expanded or renovated facility will not be permitted to operate unless the relevant environmental bureau has inspected it and is satisfied that all necessary equipment has been installed as required by applicable environmental protection requirements. A company that wishes to discharge pollutants, whether it is in the form of emission, water or materials, must submit a pollutant discharge declaration statement detailing the amount, type, location and method of treatment. After reviewing the pollutant discharge declaration, the relevant environmental bureau will determine the amount of discharge allowable under the law and will issue a pollutant discharge license for that amount of discharge subject to the payment of discharge fees. If a company discharges more than is permitted in the pollutant discharge license, the relevant

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environmental bureau can fine the company up to several times the discharge fees payable by the offending company for its allowable discharge, or require that the offending company cease operations until the problem is remediated.

Compliance and enforcement of environmental laws and regulations may cause the Company to incur significant expenditures and require resources which it may not have.  The Company cannot currently predict the extent of future capital expenditures, if any, required for compliance with environmental laws and regulations, which may include expenditures for environmental control facilities.

Long-Lived Assets

The Company’s long-lived assets (other than financial instruments) by geographic area were as follows.

As of December 31,	2008		2007
Property,  plant and equipment, net
United States	$	94,352	$	33,960
China		474,951		251,067
Total	$	569,303	$	285,027

Employees and Contractors

As of December 31, 2008 the Company had 18 full-time employees and 8 part-time contractors/employees employed as follows:

	Employees		Part-Time Contractors/ Employees
Administration		16		2
Research and Development/Technical Support		2		6

ITEM 1A.  RISK FACTORS

The Company’s operations and its securities are subject to a number of risks.  The Company has described below all the material risks that are known to the Company that could materially impact the Company’s financial results of operations or financial condition. If any of the following risks actually occur, the business, financial condition or operating results of the Company and the trading price or value of its securities could be materially adversely affected.

Risk Related to the Company’s Business

The Company’s limited operating history makes it difficult to predict future results and raises substantial doubt as to its ability to successfully develop profitable business operations.

The Company’s limited operating history makes it difficult to evaluate its current business and prospects or to accurately predict its future revenue or results of operations, and raises substantial doubt as to its ability to successfully develop profitable business operations. The Company’s revenue and income potential are unproven. As a result of its early stage of development, and to keep up with the frequent changes in the energy industry, it is necessary for the Company to analyze and revise its business strategy on an ongoing basis. Companies in early stages of development, particularly companies in new and rapidly evolving energy industry segments, are generally more vulnerable to risks, uncertainties, expenses and difficulties than more established companies.

The Company’s ability to diversify risks by participating in multiple projects and joint ventures depends upon its ability to raise capital and the availability of suitable prospects, and any failure to raise needed capital and secure suitable projects would negatively affect the Company’s ability to operate.

The Company’s business strategy includes spreading the risk of oil and natural gas exploration, development and drilling, and ownership of interests in oil and natural gas properties, by participating in multiple projects and joint ventures, in particular with major Chinese government-owned oil and gas companies as joint venture partners. If the Company is unable to secure sufficient attractive projects as a result of its inability to raise sufficient capital or otherwise, the average quality of the projects and joint venture opportunities may decline and the risk of the Company’s overall operations could increase.

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The loss of key employees could adversely affect the Company’s ability to operate.

The Company believes that its success depends on the continued service of its key employees, as well as the Company’s ability to hire additional key employees, when and as needed. Each of Frank C. Ingriselli, the Company’s President and Chief Executive Officer, Stephen F. Groth, its Vice President and Chief Financial Officer, and Richard Grigg, the Company’s Senior Vice President and Managing Director, has the right to terminate his employment at any time without penalty under his employment agreement. The unexpected loss of the services of either Mr. Ingriselli, Mr. Groth, Mr. Grigg, or any other key employee, or the Company’s failure to find suitable replacements within a reasonable period of time thereafter, could have a material adverse effect on the Company’s ability to execute its business plan and therefore, on its financial condition and results of operations.

The Company may not be able to raise the additional capital necessary to execute its business strategy, which could result in the curtailment or cessation of the Company’s operations.

The Company will need to raise substantial additional funds to fully fund its existing operations, consummate all of its current asset transfer and acquisition opportunities currently contemplated with ChevronTexaco, BHP and Well Lead, and for the development, production, trading and expansion of its business. On December 31, 2008, the Company had positive working capital of approximately $11.2 million (including $10.5 million in cash and cash equivalents).  The Company has no current arrangements with respect to sources of additional financing and the needed additional financing may not be available on commercially reasonable terms on a timely basis, or at all. The inability to obtain additional financing, when needed, would have a negative effect on the Company, including possibly requiring it to curtail or cease operations. If any future financing involves the sale of the Company’s equity securities, the shares of common stock held by its stockholders could be substantially diluted. If the Company borrows money or issues debt securities, it will be subject to the risks associated with indebtedness, including the risk that interest rates may fluctuate and the possibility that it may not be able to pay principal and interest on the indebtedness when due.

Insufficient funds will prevent the Company from implementing its business plan and will require it to delay, scale back, or eliminate certain of its programs or to license to third parties rights to commercialize rights in fields that it would otherwise seek to develop itself.

Failure by the Company to generate sufficient cash flow from operations could eventually result in the cessation of the Company’s operations and require the Company to seek outside financing or discontinue operations.

The Company’s business activities require substantial capital from outside sources as well as from internally-generated sources. The Company’s ability to finance a portion of its working capital and capital expenditure requirements with cash flow from operations will be subject to a number of variables, such as:

· the level of production of existing wells;

· prices of oil and natural gas;

· the success and timing of development of proved undeveloped reserves;

· cost overruns;

· remedial work to improve a well’s producing capability;

· direct costs and general and administrative expenses of operations;

· reserves, including a reserve for the estimated costs of eventually plugging and abandoning the wells;

· indemnification obligations of the Company for losses or liabilities incurred in connection with the Company’s activities; and

· general economic, financial, competitive, legislative, regulatory and other factors beyond the Company’s control.

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The Company might not generate or sustain cash flow at sufficient levels to finance its business activities. When and if the Company generates revenues, if such revenues were to decrease due to lower oil and natural gas prices, decreased production or other factors, and if the Company were unable to obtain capital through reasonable financing arrangements, such as a credit line, or otherwise, its ability to execute its business plan would be limited and it could be required to discontinue operations.

The Company’s failure to capitalize on its two existing definitive production agreements, to consummate the transactions contemplated by the ChevronTexaco ATA, BHP ATA or AOC with Well Lead, and/or enter into additional agreements, would likely result in its inability to generate sufficient revenues and continue operations.

The Company’s only definitive production contracts that have been secured to date are the Contract for Cooperation and Joint Development with Chifeng covering an oil field in Inner Mongolia and the Zijinshan PSC related to coalbed methane and tight gas sand production in China. The Company has also entered into asset transfer agreements with ChevronTexaco and BHP and an AOC with Well Lead, the consummation of which remains dependent upon a number of closing conditions, many of which are beyond the Company’s control. The Company has not entered into definitive agreements with respect to any other ventures that it is currently pursuing, and the Company’s ability to secure one or more of these additional ventures is subject to, among other things, (i) the amount of capital the Company raises in the future; (ii) the availability of land for exploration and development in the geographical regions in which the Company’s business is focused; (iii) the nature and number of competitive offers for the same projects on which the Company is bidding; and (iv) approval by government and industry officials. The Company may not be successful in executing definitive agreements in connection with any other ventures, or otherwise be able to secure any additional ventures it pursues in the future. Failure of the Company to capitalize on its existing contracts and/or to secure one or more additional business opportunities would have a material adverse effect on the Company’s business and results of operations, and would, in all likelihood, result in the cessation of the Company’s business operations.

The Company’s oil and gas operations will involve many operating risks that can cause substantial losses.

The Company expects to produce, transport and market potentially toxic materials, and purchase, handle and dispose of other potentially toxic materials in the course of its business. The Company’s operations will produce byproducts, which may be considered pollutants. Any of these activities could result in liability, either as a result of an accidental, unlawful discharge or as a result of new findings on the effects the Company’s operations on human health or the environment. Additionally, the Company’s oil and gas operations may also involve one or more of the following risks:

· fires;

· explosions;

· blow-outs;

· uncontrollable flows of oil, gas, formation water, or drilling fluids;

· natural disasters;

· pipe or cement failures;

· casing collapses;

· embedded oilfield drilling and service tools;

· abnormally pressured formations;

· damages caused by vandalism and terrorist acts; and

· environmental hazards such as oil spills, natural gas leaks, pipeline ruptures and discharges of toxic gases.

In the event that any of the foregoing events occur, the Company could incur substantial losses as a result of (i) injury or loss of life; (ii) severe damage or destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) investigatory and clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of its operations; or (vii) repairs to resume operations. If the Company experiences any of

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these problems, its ability to conduct operations could be adversely affected. Additionally, offshore operations are subject to a variety of operating risks, such as capsizing, collisions and damage or loss from typhoons or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production.

The Company is a development-stage company and expects to continue to incur losses for a significant period of time.

The Company is a development-stage company with minimal revenues to date.  As of December 31, 2008, the Company had an accumulated deficit of approximately $9.0 million. The Company expects to continue to incur significant expenses relating to its identification of new ventures and investment costs relating to these ventures. Additionally, fixed commitments, including salaries and fees for employees and consultants, rent and other contractual commitments may be substantial and are likely to increase as additional ventures are entered into and personnel are retained prior to the generation of significant revenue. Energy ventures, such as oil well drilling projects, generally require significant periods of time before they produce resources and in turn generate profits. The Company may not achieve or sustain profitability on a quarterly or annual basis, or at all.

The Company will be dependent upon others for the storage and transportation of oil and gas, which could result in significant operational costs to the COmpany and depletion of capital.

The Company does not own storage or transportation facilities and, therefore, will depend upon third parties to store and transport all of its oil and gas resources , when and if produced. The Company will likely be subject to price changes and termination provisions in any contracts it may enter into with these third-party service providers. The Company may not be able to identify such third-parties for any particular project. Even if such sources are initially identified, the Company may not be able to identify alternative storage and transportation providers in the event of contract price increases or termination. In the event the Company is unable to find acceptable third-party service providers, it would be required to contract for its own storage facilities and employees to transport the Company’s resources. The Company may not have sufficient capital available to assume these obligations, and its inability to do so could result in the cessation of its business.

The Company may not be able to manage its anticipated growth, which could result in the disruption of the Company’s operations and prevent the Company from generating meaningful revenue.

Subject to its receipt of additional capital, the Company plans to significantly expand operations to accommodate additional development projects and other opportunities. This expansion will likely strain its management, operations, systems and financial resources. To manage its recent growth and any future growth of its operations and personnel, the Company must improve and effectively utilize its existing operational, management and financial systems and successfully recruit, hire, train and manage personnel and maintain close coordination among its technical, finance, development and production staffs. The Company may need to hire additional personnel in certain operational and other areas during 2009. In addition, the Company may also need to increase the capacity of its software, hardware and telecommunications systems on short notice, and will need to manage an increasing number of complex relationships with strategic partners and other third parties. The failure to manage this growth could disrupt the Company’s operations and ultimately prevent the Company from generating meaningful revenue.

An interruption in the supply of materials, resources and services the Company plans to obtain from third party sources could limit the Company's operations and cause unprofitability.

Once it has identified, financed, and acquired projects, the Company will need to obtain other materials, resources and services, including, but not limited to, specialized chemicals and specialty muds and drilling fluids, pipe, drill-string, geological and geophysical mapping and interruption services. There may be only a limited number of manufacturers and suppliers of these materials, resources and services. These manufacturers and suppliers may experience difficulty in supplying such materials, resources and services to the Company sufficient to meet its needs or may terminate or fail to renew contracts for supplying these materials, resources or services on terms the Company finds acceptable including, without limitation, acceptable pricing terms. Any significant interruption in the supply of any of these materials, resources or services, or significant increases in the amounts the Company is required to pay for these materials, resources or services, could result in a lack of profitability, or the cessation of its operations, if it is unable to replace any material sources in a reasonable period of time.

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The Company does not have a plan to carry insurance policies in China and will be at risk of incurring personal injury claims for its employees and subcontractors, and incurring loss of business due to theft, accidents or natural disasters.

The Company does not carry, and does not plan to carry, any policies of insurance to cover any type of risk to its business in China, including, without limitation, the risks discussed above. In the event that the Company were to incur substantial liabilities with respect to one or more incidents, this could adversely affect its operations and it may not have the necessary capital to pay its portion of such costs and maintain business operations.

The Company is exposed to concentration of credit risk, which may result in losses in the future.

The Company is exposed to concentration of credit risk with respect to cash, cash equivalents, short-term investments and long-term advances.  As the Company chooses to maximize investment of its U.S. cash into higher yield investments rather than keeping the amounts in bank accounts, there is a high concentration of credit risk on remaining cash balances which are located principally in China.  At December 31, 2008, 78% ($975,681) of the Company’s total cash was on deposit in China at the Bank of China.  Also at that date, 48.7% ($4,514,167) of the Company’s total cash equivalents was invested in a single money market fund in the U.S. composed of securities of numerous issuers.  At December 31, 2007, 90% ($1,406,357) of the Company’s total cash was on deposit in China at the Bank of China.  Also at that date, the Company’s cash equivalents were invested in two money market funds, of which 54% ($348,561) was in a single fund; 18% ($2,000,000) and 15% ($1,650,000) of the Company’s U.S. short-term investments were invested in securities of two individual Moody’s Aaa-rated issuers.  At December 31, 2008 and December 31, 2007, 100% of the Company’s long-term advances ($386,415 in 2008, and $534,530 in 2007) were receivable as notes from a single borrower, BJHTC, an unaffiliated Chinese corporation and 3% owner of IMPCO Sunrise, a Chinese joint venture company which is owned 97% by IMPCO HK.  The Company recorded an impairment charge of $273,618 on these notes in 2008, reflecting principally the write-off of accrued interest income included in the principal balance of the notes.

Risks Related to the Company’s Industry

The Company may not be successful in finding petroleum resources or developing resources, and if it fails to do so, the Company will likely cease operations.

The Company will be operating primarily in the petroleum extractive business; therefore, if it is not successful in finding crude oil and natural gas sources with good prospects for future production, and exploiting such sources, its business will not be profitable and it may be forced to terminate its operations. Exploring and exploiting oil and gas or other sources of energy entails significant risks, which risks can only be partially mitigated by technology and experienced personnel. The Company or any ventures it acquires or participates in may not be successful in finding petroleum or other energy sources; or, if it is successful in doing so, the Company may not be successful in developing such resources and producing quantities that will be sufficient to permit the Company to conduct profitable operations. The Company’s future success will depend in large part on the success of its drilling programs and creating and maintaining an inventory of projects. Creating and maintaining an inventory of projects depends on many factors, including, among other things, obtaining rights to explore, develop and produce hydrocarbons in promising areas, drilling success, ability to bring long lead-time, capital intensive projects to completion on budget and schedule, and efficient and profitable operation of mature properties. The Company’s inability to successfully identify and exploit crude oil and natural gas sources would have a material adverse effect on its business and results of operations and would, in all likelihood, result in the cessation of its business operations.

In addition to the numerous operating risks described in more detail in this report, exploring and exploitation of energy sources involve the risk that no commercially productive oil or gas reservoirs will be discovered or, if discovered, that the cost or timing of drilling, completing and producing wells will not result in profitable operations. The Company’s drilling operations may be curtailed, delayed or abandoned as a result of a variety of factors, including:

· adverse weather conditions;

· unexpected drilling conditions;

· pressure or irregularities in formations;

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· equipment failures or accidents;

· inability to comply with governmental requirements;

· shortages or delays in the availability of drilling rigs and the delivery of equipment; and

· shortages or unavailability of qualified labor to complete the drilling programs according to the business plan schedule.

The energy market in which the Company plans to operate is highly competitive and the Company may not be able to compete successfully against its current and future competitors, which could seriously harm the Company’s business.

Competition in the oil and gas industry is intense, particularly with respect to access to drilling rigs and other services, the acquisition of properties and the hiring and retention of technical personnel. The Company expects competition in the market to remain intense because of the increasing global demand for energy, and that competition will increase significantly as new companies enter the market and current competitors continue to seek new sources of energy and leverage existing sources. Recently, higher commodity prices and stiff competition for acquisitions have significantly increased the cost of available properties. Many of the Company’s competitors, including large oil companies, have an established presence in Asia and the Pacific Rim countries and have longer operating histories, significantly greater financial, technical, marketing, development, extraction and other resources and greater name recognition than the Company does. As a result, they may be able to respond more quickly to new or emerging technologies, changes in regulations affecting the industry, newly discovered resources and exploration opportunities, as well as to large swings in oil and natural gas prices. In addition, increased competition could result in lower energy prices, and reduced margins and loss of market share, any of which could harm the Company’s business. Furthermore, increased competition may harm the Company’s ability to secure ventures on terms favorable to it and may lead to higher costs and reduced profitability, which may seriously harm its business.

The Company’s business depends on the level of activity in the oil and gas industry, which is significantly affected by volatile energy prices, which volatility could adversely affect its ability to operate profitably.

The Company’s business depends on the level of activity in the oil and gas exploration, development and production in markets worldwide. Oil and gas prices, market expectations of potential changes in these prices and a variety of political and economic and weather-related factors significantly affect this level of activity. Oil and gas prices are extremely volatile and are affected by numerous factors, including:

· the domestic and foreign supply of oil and natural gas;

· the ability of the Organization of Petroleum Exporting Countries, commonly called “OPEC,” to set and maintain production levels and pricing;

· the price and availability of alternative fuels;

· weather conditions;

· the level of consumer demand;

· global economic conditions;

· political conditions in oil and gas producing regions; and

· government regulations.

Within the past 12 months, light crude oil futures have ranged from below $40 per barrel to nearly $150 per barrel, and may continue to fluctuate significantly in the future. With respect to ventures in China, the prices the Company will receive for oil and gas, in connection with any of its production ventures, will likely be regulated and set by the government. As a result, these prices may be well below the market price established in world markets. Therefore, the Company may be subject to arbitrary changes in prices that may adversely affect its ability to operate profitably.

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If  the Company does not hedge its exposure to reductions in oil and gas prices, it may be subject to the risk of significant reductions in prices; alternatively, use by the Company of oil and gas price hedging contracts could limit future revenues from price increases.

To date, the Company has not entered into any hedging transactions but may do so in the future.  In the event that the Company chooses not to hedge its exposure to reductions in oil and gas prices by purchasing futures and by using other hedging strategies, it could be subject to significant reduction in prices which could have a material negative impact on its profitability. Alternatively, the Company may elect to use hedging transactions with respect to a portion of its oil and gas production to achieve more predictable cash flow and to reduce its exposure to price fluctuations. The use of hedging transactions could limit future revenues from price increases and could also expose the Company to adverse changes in basis risk, the relationship between the price of the specific oil or gas being hedged and the price of the commodity underlying the futures contracts or other instruments used in the hedging transaction. Hedging transactions also involve the risk that the counterparty does not satisfy its obligations.

The Company may be required to take non-cash asset write-downs if oil and natural gas prices decline, which could have a negative impact on the Company’s earnings.

Under applicable accounting rules, the Company may be required to write down the carrying value of oil and natural gas properties if oil and natural gas prices decline or if there are substantial downward adjustments to its estimated proved reserves, increases in its estimates of development costs or deterioration in its exploration results. Accounting standard FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires the Company to review its long-lived assets for possible impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable over time. In such cases, if the asset’s estimated undiscounted future cash flows are less than its carrying amount, impairment exists. Any impairment write-down, which would equal the excess of the carrying amount of the assets being written down over their fair value, would have a negative impact on the Company’s future earnings , which could be material.

Risks Related to Chinese and Other International Operations

The Company’s Chinese and other international operations will subject it to certain risks inherent in conducting business operations in China and other foreign countries, including political instability and foreign government regulation, which could significantly impact the Company’s ability to operate in such countries and impact the Company’s results of operations.

The Company conducts substantially all of its business in China.  The Company’s Chinese operations and anticipated operations in other foreign countries are, and will be, subject to risks generally associated with conducting businesses in foreign countries, such as:

· foreign laws and regulations that may be materially different from those of the United States;

· changes in applicable laws and regulations;

· challenges to, or failure of, title;

· labor and political unrest;

· foreign currency fluctuations;

· changes in foreign economic and political conditions;

· export and import restrictions;

· tariffs, customs, duties and other trade barriers;

· difficulties in staffing and managing foreign operations;

· longer time periods in collecting revenues;

· difficulties in collecting accounts receivable and enforcing agreements;

· possible loss of properties due to nationalization or expropriation; and

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· limitations on repatriation of income or capital.

Specifically, foreign governments may enact and enforce laws and regulations requiring increased ownership by businesses and/or state agencies in energy producing businesses and the facilities used by these businesses, which could adversely affect the Company’s ownership interests in then existing ventures. The Company’s ownership structure may not be adequate to accomplish the Company’s business objectives in China or in any other foreign jurisdiction where the Company may operate. Foreign governments also may impose additional taxes and/or royalties on the Company’s business, which would adversely affect the Company’s profitability. In certain locations, governments have imposed restrictions, controls and taxes, and in others, political conditions have existed that may threaten the safety of employees and the Company’s continued presence in those countries. Internal unrest, acts of violence or strained relations between a foreign government and the Company or other governments may adversely affect its operations. These developments may, at times, significantly affect the Company’s results of operations, and must be carefully considered by its management when evaluating the level of current and future activity in such countries.

Compliance and enforcement of environmental laws and regulations may cause the Company to incur significant expenditures and require resources, which it may not have.

Extensive national, regional and local environmental laws and regulations in China and other Pacific Rim countries are expected to have a significant impact on the Company’s operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality, which provide for user fees, penalties and other liabilities for the violation of these standards. As new environmental laws and regulations are enacted and existing laws are repealed, interpretation, application and enforcement of the laws may become inconsistent. Compliance with applicable local laws in the future could require significant expenditures, which may adversely effect the Company’s operations. The enactment of any such laws, rules or regulations in the future may have a negative impact on the Company’s projected growth, which could in turn decrease its projected revenues or increase its cost of doing business.

A foreign government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of the Company’s investment in that country.

The Company’s business is subject to significant political and economic uncertainties and may be adversely affected by political, economic and social developments in China or in any other foreign jurisdiction in which it operates. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity, foreign investment and greater economic decentralization. The Chinese government may not continue to pursue these policies or may significantly alter them to the Company’s detriment from time to time with little, if any, prior notice.

Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could even result in the loss of all or substantially all of the Company’s assets and in the total loss of your investment in the Company.

Because the Company plans to conduct substantially all of its business in China, fluctuations in exchange rates and restrictions on currency conversions could adversely affect the Company’s results of operations and financial condition.

The Company expects that it will conduct substantially all of its business in China, and its financial performance and condition will be measured in terms of the RMB.  It is difficult to assess whether a devaluation or revaluation (upwards valuation) of the RMB against the U.S. dollar would have an adverse effect on the Company’s financial performance and asset values when measured in terms of U.S. dollars. An increase in the RMB would raise the Company’s costs incurred in RMB; however, it is not clear whether the underlying cause of the revaluation would also cause an increase in the Company’s price received for oil or gas which would have the opposite effect of increasing the Company’s  margins and improving its  financial performance.

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The Company’s financial condition could also be adversely affected as a result of its inability to obtain the governmental approvals necessary for the conversion of RMB into U.S. dollars in certain transactions of capital, such as direct capital investments in Chinese companies by foreign investors.

Currently, there are few means and/or financial tools available in the open market for the Company to hedge its exchange risk against any possible revaluation or devaluation of RMB. Because the Company does not currently intend to engage in hedging activities to protect against foreign currency risks, future movements in the exchange rate of the RMB could have an adverse effect on its results of operations and financial condition.

If relations between the United States and China were to deteriorate, investors might be unwilling to hold or buy the Company’s stock and its stock price may decrease.

At various times during recent years, the United States and China have had significant disagreements over political, economic and security issues. Additional controversies may arise in the future between these two countries. Any political or trade controversies between these two countries, whether or not directly related to the Company’s  business, could adversely effect the market price of the Company’s Common Stock.

If the United States imposes trade sanctions on China due to its current currency policies, the Company’s operations could be materially and adversely affected.

Over the past few years, China has “pegged” its currency to the United States dollar. This means that each unit of Chinese currency has had a set ratio for which it may be exchanged for United States currency, as opposed to having a floating value like many other countries’ currencies. This policy has been under review by policy makers in the United States. Trade groups in the United States have blamed the cheap value of the Chinese currency for causing job losses in American factories, giving exporters an unfair advantage and making its imports expensive. Congress has been considering the enactment of legislation, with the view of imposing new tariffs on Chinese imports. Following increasing pressure for China to change its currency policies, in 2005, the People’s Bank of China announced its decision to strengthen the exchange rate of the Chinese currency to the U.S. dollar, revaluing the Chinese currency by 2.1% and to introduce a “managed floating exchange rate regime.” Since that time, the exchange rate of the Chinese currency has been allowed to float against a basket of currencies.

It is difficult to anticipate the reaction of the United States Congress to this reform. If Congress deems that China is still gaining a trade advantage from its exchange currency policy, and an additional tariff is imposed, it is possible that China-based companies will no longer maintain significant price advantages over U.S. and other foreign companies on their goods and services, and that the rapid growth of China’s economy would slow as a result. If the United States or other countries enact laws to penalize China for its currency policies, the Company’s business could be materially and adversely affected.

A lack of adequate remedies and impartiality under the Chinese legal system may adversely impact the Company’s ability to do business and to enforce the agreements to which it is a party.

The Company anticipates that it will be entering into numerous agreements governed by Chinese law. The Company’s business would be materially and adversely affected if these agreements were not enforced. In the event of a dispute, enforcement of these agreements in China could be extremely difficult. Unlike the United States, China has a civil law system based on written statutes in which judicial decisions have little precedential value. The government’s experience in implementing, interpreting and enforcing certain recently enacted laws and regulations is limited, and the Company’s ability to enforce commercial claims or to resolve commercial disputes is uncertain. Furthermore, enforcement of the laws and regulations may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. These uncertainties could limit the protections that are available to the Company.

The Company’s stockholders may not be able to enforce United States civil liabilities claims.

Many of the Company’s assets are expected to be located outside the United States and held through one or more wholly-owned subsidiaries incorporated under the laws of foreign jurisdictions, including Hong Kong and China. The Company’s operations are expected to be conducted in China and other Pacific Rim countries. In addition, some of the Company’s directors and officers, including directors and officers of its subsidiaries, may be residents of countries other than the United States. All or a substantial portion of the assets of these persons may be located outside the United States. As a result, it may be difficult for shareholders to effect service of process within the

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United States upon these persons. In addition, there is uncertainty as to whether the courts of China and other Pacific Rim countries would recognize or enforce judgments of United States courts obtained against the Company or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in these countries against the Company or such persons predicated upon the securities laws of the United States or any state thereof.

Risks Related to the Company’s Stock

The market price of the Company’s stock may be adversely affected by a number of factors related to the Company’s performance, the performance of other energy-related companies and the stock market in general.

The market prices of securities of energy companies are extremely volatile and sometimes reach unsustainable levels that bear no relationship to the past or present operating performance of such companies.

Factors that may contribute to the volatility of the trading price of the Company’s  Common Stock include, among others:

· the Company’s quarterly results of operations;

· the variance between the Company’s actual quarterly results of operations and predictions by stock analysts;

· financial predictions and recommendations by stock analysts concerning energy companies and companies competing in the Company’s market in general, and concerning the Company in particular;

· public announcements of regulatory changes or new ventures relating to the Company’s business, new products or services by the Company or its competitors, or acquisitions, joint ventures or strategic alliances by the Company or its competitors;

· public reports concerning the Company’s services or those of its competitors;

· the operating and stock price performance of other companies that investors or stock analysts may deem comparable to the Company;

· large purchases or sales of the Company’s Common Stock;

· investor perception of the Company’s business prospects or the oil and gas industry in general; and

· general economic and financial conditions.

In addition to the foregoing factors, the trading prices for equity securities in the stock market in general, and of energy-related companies in particular, have been subject to wide fluctuations that may be unrelated to the operating performance of the particular company affected by such fluctuations. Consequently, broad market fluctuations may have an adverse effect on the trading price of the Common Stock, regardless of the Company’s results of operations.

The limited market for the Company’s Common Stock may adversely affect trading prices or the ability of a shareholder to sell the Company’s  shares in the public market at or near ask prices or at all if a shareholder needs to liquidate its shares.

The Company’s Common Stock is traded on the OTC Bulletin Board (“OTCBB”) and there is a very limited market for the Common Stock that may not be maintained or broadened. The market price for shares of the Company’s Common Stock has been, and is expected to continue to be, very volatile.  Numerous factors beyond the Company’s control may have a significant effect on the market price for shares of the Company’s Common Stock, including the fact that the Company is a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume.  Even if we came to the attention of such persons, they tend to be risk-averse and may be reluctant to follow an unproven, early stage company such as the Company or purchase or recommend the purchase of its shares until such time as the Company  becomes more seasoned and viable. There may be periods of several days or more when trading activity in the Company’s  shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Due to these

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conditions, investors may not be able to sell their shares at or near ask prices or at all if investors need money or otherwise desire to liquidate their shares.

The Company’s securities are quoted on the OTC Bulletin Board, which may limit the liquidity and price of the Company’s securities more that if such securities were quoted or listed on the Nasdaq Stock Market or a national exchange.

The Company’s securities are currently quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included in the Nasdaq Stock Market.  Quotation of the Company’s securities on the OTC Bulletin Board may limit the liquidity and price of its securities more than if its securities were quoted or listed on The Nasdaq Stock Market or a national exchange.  Some investors may perceive the Company’s securities to be less attractive because they are traded in the over-the-counter market.  In addition, as an OTC Bulletin Board listed company, the Company does not attract the extensive analyst coverage companies listed on Nasdaq or other regional or national exchanges often receive.  Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded in the over-the-counter market. These factors may have an adverse impact on the trading and price of the Company’s securities.

Substantial sales of the Company’s Common Stock could cause the Company’s stock price to fall.

As of February 27, 2009, the Company had outstanding 40,061,785 shares of Common Stock, substantially all of which are eligible for sale under Rule 144. The Company has also entered into registration rights agreements with shareholders covering the resale of 23,678,957 of such shares. These registration rights agreements provide that if the Company becomes a publicly reporting company under the Exchange Act and successfully lists its shares for trading on a national securities exchange (the “Listing Date”), then the Company shall be required to use commercially reasonable efforts to prepare and file a registration statement under the Securities Act covering the resale of all the Registerable Securities (as defined in the registration rights agreements) within 60 days following the Listing Date and to use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC within 210 days after the Listing Date. In addition, the registration rights agreements entitle the holders to demand two registrations of their securities after the Company has effected a registered public offering of its Common Stock and unlimited number of piggy-back registrations. The possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company’s ability to raise capital through the sale of its equity securities.

The Company’s issuance of Preferred Stock could adversely affect the value of the Company’s Common Stock.

The Company’s Amended and Restated Certificate of Incorporation authorizes the issuance of up to 50 million shares of Preferred Stock, which shares constitute what is commonly referred to as “blank check” Preferred Stock. Approximately 26 million shares of Preferred Stock are currently available for issuance. This Preferred Stock may be issued by the Board of Directors from time to time on any number of occasions, without stockholder approval, as one or more separate series of shares comprised of any number of the authorized but unissued shares of Preferred Stock, designated by resolution of the Board of Directors, stating the name and number of shares of each series and setting forth separately for such series the relative rights, privileges and preferences thereof, including, if any, the: (i) rate of dividends payable thereon; (ii) price, terms and conditions of redemption; (iii) voluntary and involuntary liquidation preferences; (iv) provisions of a sinking fund for redemption or repurchase; (v) terms of conversion to Common Stock, including conversion price; and (vi) voting rights. The designation of such shares could be dilutive of the interest of the holders of our Common Stock. The ability to issue such Preferred Stock could also give the Company’s Board of Directors the ability to hinder or discourage any attempt to gain control of the Company by a merger, tender offer at a control premium price, proxy contest or otherwise.

The Common Stock may be deemed “penny stock” and therefore subject to special requirements that could make the trading of the Company’s Common Stock difficult.

The Company’s Common Stock may be deemed to be a “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stocks (i) with a price of less than five dollars per share; (ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of issuers with net tangible assets of less than $2,000,000 (if the issuer has been in continuous operation for at least

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three years) or $5,000,000 (if in continuous operation for less than three years), or with average revenues of less than $6,000,000 for the last three years.

Section 15(g) of the Exchange Act, and Rule 15g-2 promulgated thereunder, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 promulgated under the Exchange Act requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in the Common Stock to resell their shares to third parties or to otherwise dispose of them.

The Company’s executive officers, directors and major stockholders hold a substantial amount of the Company’s Common Stock and may be able to prevent other stockholders from influencing significant corporate decisions.

As of February 27, 2009, the executive officers, directors and holders of 5% or more of the outstanding Common Stock together beneficially owned approximately 33.0% of the outstanding Common Stock. These stockholders, if they were to act together, would likely be able to significantly influence all matters requiring approval by stockholders, including the election of Directors and the approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control and may make some transactions more difficult or impossible to complete without the support of these stockholders.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable

ITEM 2.  PROPERTIES

Part I, Item 1, Description of Business, contains a description of properties other than office facilities and is incorporated herein by reference.

The Company has two primary leased office facilities, one located in Hartsdale, New York (the “Hartsdale Facility”), and the other located in Beijing, China (the “Beijing Facility”).

The Hartsdale Facility is occupied under a lease which commenced on December 1, 2006, and was extended two additional years to November 30, 2010 under an amendment entered into in September 2008.  The rentable square feet of the Hartsdale Facility at December 31, 2008 were 1,978, and the rental expense for the Hartsdale Facility is currently $5,095 per month, plus a 7.96% share of operating expenses of the property.

The Beijing Facility is approximately 1,900 square feet of office space. The Beijing Facility is occupied under a tenancy agreement that commenced on August 16, 2007, and ends on August 15, 2009.  The Company’s combined rental and management expense for the Beijing Facility is currently $4,820 per month.

The Company believes that its current office facilities have the capacity to meet its needs for the foreseeable future.  It does not foresee significant difficulty in renewing or replacing the space leased in Beijing, under current market conditions.

ITEM 3.  LEGAL PROCEEDINGS

None.

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

No matters were submitted to the Company’s shareholders for a vote during the fourth quarter of the fiscal year covered by this Report.

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PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The information set forth under the “Quarterly Information and Stock Market Data” portion of Part II, Item 8. “Financial Statements and Supplementary Data” is incorporated herein by reference.

Recent Sales of Unregistered Securities

None.

Stock Repurchases

The Company did not repurchase any shares of its Common Stock during the quarter ending December 31, 2008.

Effective December 31, 2008, the Company rescinded the grants of an aggregate of 20,400 shares of the Company's restricted Common Stock previously issued under the Company's 2007 Stock Plan to the following individuals:  (i) 10,000 shares issued to Elizabeth P. Smith on December 17, 2007; (ii) 400 shares issued on December 17, 2007 to Louis Ruggio; and (iii) 10,000 shares issued on February 11, 2008 to Robert C. Stempel.  These rescissions were each consummated pursuant to a rescission agreement entered into by and between the Company and each individual.

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ITEM 6.  SELECTED FINANCIAL DATA

Financial Summary Data	For the year ended December 31, 2008			For the year ended December 31, 2007			For the year ended December 31, 2006			For the period from inception (August 25, 2005) through December 31, 2005			For the period from inception (August 25, 2005)  through December 31, 2008
Net Loss	$	(5,446,649	)	$	(2,383,684	)	$	(1,086,387	)	$	(51,344	)	$	(8,968,064	)
Net Loss per share of
common stock-basic and diluted	$	(.14	)	$	(.08	)	$	(.10	)	$	(.03	)
Cash Used in Operating Activities	$	3,208,017		$	2,060,887		$	814,024		$	10,071		$	6,092,999
Capital Expenditures	$	329,782		$	80,689		$	207,833		$	-		$	618,304
	As of December 31,
	2008			2007			2006			2005
Selected Balance Sheet Data
Working Capital	$	11,223,902		$	13,316,694		$	3,110,818		$	(39,344	)
Property, Plant and Equipment-Net	$	569,303		$	285,027		$	208,511		$	-
Total Assets	$	14,119,089		$	17,456,927		$	3,929,321		$	101,929

See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Part II, Item 8.  Financial Statements and Supplementary Data”  for further information regarding the comparability of the Selected Financial Data.

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Throughout this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “the Company,” and “our Company” refer to Pacific Asia Petroleum, Inc., a Delaware corporation, and its subsidiaries, including former subsidiaries Inner Mongolia Production Company LLC (“IMPCO”) (which merged into Pacific Asia Petroleum, Inc. in December 2007), and Advanced Drilling Services, LLC (“ADS”) (which merged into Pacific Asia Petroleum, Inc. in December 2007), and its current subsidiaries and joint ventures (i) Pacific Asia Petroleum (HK) Limited, (ii) Pacific Asia Petroleum, Limited, (iii) Inner Mongolia Production Company (HK) Limited, and (iv) Inner Mongolia Sunrise Petroleum JV Company (collectively, the “Company”). References to “PAP” refer to Pacific Asia Petroleum, Inc. prior to the Mergers of IMPCO and ADS into wholly-owned subsidiaries thereof, effective May 7, 2007.

As discussed in Note 1 and Note 2 of the consolidated financial statements, historical financial results presented herein are the results of IMPCO from inception on August 25, 2005 to May 6, 2007, and the consolidated entity Pacific Asia Petroleum, Inc. from May 7, 2007 forward, which is considered to be the continuation of IMPCO as Pacific Asia Petroleum, Inc.

You should read the information in this Item 7 together with our consolidated financial statements and notes thereto that appear elsewhere in this Report.

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report contains forward-looking statements, which reflect the views of our management with respect to future events and financial performance. These forward-looking statements are subject to a number of uncertainties and other factors that could cause actual results to differ materially from such statements. Forward-looking statements are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on the information available to management at this time and which speak only as of this date. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  For a discussion of some of the factors that may cause actual results to differ materially from those suggested by the forward-looking statements, please read carefully the information under “Risk Factors” included in this Annual Report.  The identification in this Annual Report of factors that may affect future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Our Business

The Company is a development stage company formed to develop new energy ventures, directly and through joint ventures and other partnerships in which it may participate.

Members of the Company’s senior management team have experience in the fields of international business development, and finance, petroleum engineering, geology, field development and production, and operations. Several members of the Company’s management team have held management and executive positions with Texaco Inc. and have managed energy projects in China, elsewhere in Asia and in other parts of the world. Members of the Company’s management team also have experience in oil drilling, operations, geological engineering and sales in China’s energy sector.

Pacific Asia Petroleum, Inc. is the successor company from a reverse merger involving the former Pacific East Advisors, Inc. and other entities on May 7, 2007. The Company was originally incorporated in Delaware on December 12, 1979 as Gemini Marketing Associates Inc.

Effective May 7, 2007, IMPCO and ADS merged (the “Mergers”) with and into wholly-owned subsidiaries of PAP pursuant to (i) an Agreement and Plan of Merger and Reorganization (the “ADS Merger Agreement”) with DrillCo Acquisition, LLC (“ADS Merger Sub”), a Delaware limited liability company and a wholly-owned subsidiary of PAP, and ADS, and (ii) an Agreement and Plan of Merger and Reorganization (the “IMPCO Merger Agreement,” and together with the ADS Merger Agreement, the “Merger Agreements”) with IMPCO Acquisition, LLC (“IMPCO Merger Sub”), a New York limited liability company and a wholly-owned subsidiary of PAP, and IMPCO. Under applicable accounting standards, IMPCO was defined as the acquiring company. Accordingly, the reportable results

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of operations for the Company through the merger date of May 7, 2007 are comprised only of the historical results of the former IMPCO. Therefore, for purposes of financial reporting, the inception of the Company is reflected as August 25, 2005, the inception date of IMPCO.

The cumulative net losses of the Company from inception through December 31, 2008 are $8,968,064. Our losses have resulted primarily from general and administrative expenditures associated with developing a new enterprise, and consulting, legal and accounting expenses. From inception through December 31, 2008, we did not generate revenues from operations.

The Company’s current operations commenced in 2005 through IMPCO, formed as a limited liability company under New York State law on August 25, 2005. These operations consist of the drilling of oil wells in recently discovered fields in Inner Mongolia, China, and exploration and development operations with respect to CBM opportunities in the Shanxi Province of China. We consider the Company to be a single line of business.

In the fourth quarter of 2006, pursuant to a joint development contract with Chifeng, a company incorporated in Inner Mongolia, China, the Company drilled its first oil well in Inner Mongolia. This well was producing during part of 2007 under an exploration and development license issued by the relevant Chinese authorities. However, no revenue or related depletion expense have been recognized to date due to uncertainty of realization of the revenue until a permanent production license is obtained.

The Company is pursuing a combination of strategies to have such production license awarded, including a possible renegotiation of the Chifeng Agreement increasing the financial incentives to all the parties involved and the Company is also pursuing a strategy focused on entering into negotiations with respect to an opportunity to acquire the existing production from the 22 sq. km. Kerqing Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance the Chifeng Agreement in scale and value.  If this Production License is not issued, the opportunities to drill additional long-term production wells under the contract, including future production from this first well, will be at risk.

Chifeng has accounted for our share of the production revenue in the form of a credit which will be allocated to the Company retroactively when and if the production license is issued. Operations from the well were suspended in 2007, and it is planned to resume operations when and if the production license is received. To date, the total production from the well has been approximately 400 tons of crude oil (all of which has been sold), and total producing revenues credited to the Company (after costs and royalties) were approximately $135,000.

In September 2007, the Company entered into the Chevron Agreements with ChevronTexaco for the purchase by the Company of participating interests held by ChevronTexaco in production sharing contracts in respect of four CBM and tight gas sand resource blocks located in the Shanxi Province of China with an aggregate contract area of approximately 1.5 million acres. The aggregate base purchase price for all of the participating interests was $61,000,000, adjusted in April 2008 to $50,000,000, and was subject to certain income and expense adjustments prior to closing. The Company paid to ChevronTexaco a $3,050,000 deposit toward the purchase price in 2007, which was refundable if the Chevron Agreements were terminated under certain conditions. The closing of the asset transfers contemplated pursuant to the Chevron Agreements was contingent upon a number of conditions precedent, including the approval of certain related agreements by the PRC Ministry of Land and Natural Resources and the assignment of ChevronTexaco’s participating interest by the PRC Ministry of Commerce.  On December 5, 2008, the Company exercised its right to terminate three of the four Chevron Agreements due to delays in receipt of required Chinese government approvals of the transfers, coupled with renewal terms proposed by ChevronTexaco that were not acceptable to the Company.  The remaining ChevronTexaco ATA to purchase ChevronTexaco’s 35.7142% interest in the Baode PSC for CBM at a purchase price of $2,000,000 and a deposit of $650,000 was retained and remains in effect.  Following termination by the Company of the three Chevron Agreements, ChevronTexaco returned $2,400,000 of prepaid deposits to the Company in December 2008 as required under the terminated Chevron Agreements.

On March 29, 2008, the Company entered into the BHP ATA with BHP for the purchase by the Company of BHP’s 64.2858% interest in the Baode PSC  for CBM.  The purchase price is $2,000,000, subject to upward adjustment to account for BHP’s cash flow payments and operating costs paid with respect to BHP’s interest in the Baode PSC from April 1, 2008 through the closing date, and downward adjustment to account for BHP’s receipt of revenues derived from BHP’s interest in the Baode PSC from that date through the closing date.  The Company has paid BHP

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a $500,000 deposit toward the purchase price, which is refundable if the BHP ATA is terminated under certain conditions.  Upon closing, the Company will assume BHP’s operating obligations related to the Baode PSC.

Assuming all conditions precedent to closing of each of the ChevronTexaco ATA and BHP ATA are satisfied, upon closing of both the ChevronTexaco ATA and the BHP ATA, the Company will acquire a 100% participating interest in the Baode PSC.  Pursuant to the terms of the Baode PSC, the Chinese government is entitled to acquire up to a 30% participating interest in the Baode PSC from the then-current parties to the Baode PSC upon certain conditions and in exchange for certain payments to such parties.  Assuming the Company consummates one or both of the ChevronTexaco ATA and the BHP ATA, such asset acquisitions will not constitute the acquisition of a business, but the acquisition of title to hydrocarbon natural resources under the surface of the land.  These assets are not presently capable of independent operation as a business, and no employees, revenues, or customers will be acquired.

On October 26, 2007, PAPL, a wholly-owned subsidiary of the Company, entered into the Zijinshan PSC with CUCBM for the exploitation of CBM resources in the Zijinshan block, which is located in the Shanxi Province in China. The Zijinshan PSC provides, among other things, that PAPL must drill three (3) exploration wells and carry out 50 km of 2-D seismic data acquisition (a minimum commitment for the first three (3) years with an estimated expenditure of $2.8 million) and drill four (4) pilot development wells during the next two (2) years at an estimated cost of $2 million (in each case subject to PAPL’s right  to terminate the Zijinshan PSC). During the development and production period, CUCBM will have the right to acquire a 40% participating interest and work jointly to develop and produce CBM under the Zijinshan PSC. The Zijinshan PSC has a term of thirty (30) years. The Zijinshan PSC was approved in 2008 by the Ministry of Commerce of China. Pursuant to the Zijinshan PSC, all CBM resources (including all other related hydrocarbon resources) produced from the Zijinshan block is to be shared as follows: (i) 80% of production is provided to PAPL and CUCBM for recovery of all costs incurred; (ii) PAPL has the first right to recover all of its exploration costs from such 80% and then development costs are recovered by PAPL and CUCBM pursuant to their respective participating interests; and (iii) the remainder of the production is split by CUCBM and PAPL receiving between 99% and 90% of such remainder depending on the actual producing rates (a sliding scale) and the balance of the remainder (between 1% and 10%) is provided to the Government of China. On December 9, 2008 the Company and CUCBM finalized a mutually agreed work program pursuant to which the Company may immediately commence development operations under the PSC.

On September 30, 2008, the Company entered into an AOC with Well Lead, pursuant to which the parties agreed to use reasonable efforts to negotiate and enter into a mutually acceptable Sale and Purchase Agreement for purchase by the Company of up to 39% of the WL Interest in Northeast Oil.  Northeast Oil owns a 95% interest in the WL Oil Blocks located in the Fulaerjiqu Oilfield in Qiqihar City, Heilongjiang Province in the People’s Republic of China.  The proposed transaction is subject to due diligence review of the WL Interest, the WL Oil Blocks and other due diligence.  Under the proposed transaction, the Company would acquire a 25% interest in Northeast Oil for a purchase price of $9.8 million, composed of $5 million cash (one-half paid at closing and the remainder in five equal monthly installments commencing eight months after closing) and the issuance of Company Common Stock valued at $4.8 million.  In addition, at closing, the Company would have the option to purchase an additional 14% interest in Northeast Oil for $5.5 million in cash payable at closing.  In accordance with the AOC, the Company paid Well Lead a nonrefundable payment of $50,000 in cash for the right of exclusive negotiations for the acquisition of the Interest through November 30, 2008, which exclusive term has expired.

After completing the initial phase of due diligence on Well Lead, the WL Interest and the WL Oil Blocks, the Company has commenced additional negotiations with Well Lead and other related parties to expand the potential acquisition to include other Well Lead interests and related parties.  These additional Well Lead interests and related parties include additional producing oilfields in China, a Well Lead-affiliated technology company that has been applying its intellectual property to successfully enhance production in the WL Oil Blocks, and certain Well Lead-related venture companies. The Company now seeks to acquire a 51% participating interest in all these Well Lead assets and related parties, and the Company and Well Lead have reached a verbal agreement in principle with respect thereto.  The Company anticipates that the total purchase price for all Well Lead interests to be acquired by the Company will be less than the amounts originally provided for in the AOC for the WL Oil Blocks alone.  The Company has commenced phase two of its due diligence review with a goal to conclude such review and negotiate, sign and consummate a definitive acquisition agreement by April 30, 2009;  however, the Company can make no assurances that it will be able to successfully consummate any transaction with Well Lead on terms and conditions satisfactory to the Company, or at all.

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In order to fully implement its business strategy, including development and production required under the Zijinshan PSC, ongoing production under the Chifeng Agreement, consummation of the asset transfers contemplated pursuant to the ChevronTexaco ATA and the BHP ATA and development and production under the Baode PSC,  thereafter, as well as other transactions contemplated with Well Lead, and the Beijing Tai He Sheng Ye Investment Company Limited, the Company will need to raise significant additional capital. In the event the Company is unable to raise such capital on satisfactory terms or in a timely manner, the Company would be required to revise its business plan and possibly cease operations completely.

Plan of Operation

The following describes in general terms the Company’s plan of operation and development strategy for the twelve-month period ending December 31, 2009 (the “Next Year”). During the Next Year, the Company plans to focus its efforts on commencing operations under the Zijinshan PSC in the area in the Shanxi Province of China referred to as the Zijinshan Block (the “CUCBM Contract Area”), drilling activities under its agreement with Chifeng, and consummating the purchase of the participating interests under the Baode PSC from ChevronTexaco and BHP, as well as developing additional enhanced oil production opportunities in China through potential acquisitions from Well Lead and other parties and pursuit of the gas distribution venture with Handan Changyuan Gas Co., Ltd. (“HCG”).

In addition to these opportunities, the Company plans to continue to identify other opportunities in the energy sectors in China and the Pacific Rim, particularly with respect to oil and gas exploration, development, production, refining and trading. Since we are a development stage company, we are limited in our ability to grow by the availability of capital for our businesses and each project. The Company’s ability to successfully consummate any of its projects, including the projects described above, is contingent upon the making of any required deposits, obtaining the necessary governmental approvals and executing binding agreements to obtain the rights we seek within limited timeframes.

The Company has assembled a management team with experience in the fields of international business development, petroleum and geologic engineering, geology, petroleum field development and production, petroleum operations and finance. Members of the Company’s management team previously held positions in similar oil and gas development, and screening roles at Texaco Inc., and will seek to utilize their contacts in Asia to provide us with access to a variety of energy projects. Among the strategies that we plan to use are:

· Focusing on projects that play to the expertise of our management team;

· Leveraging our productive asset base and capabilities to develop value;

· Actively managing our assets and ongoing operations while attempting to limit capital exposure;

· Enlisting external resources and talent as necessary to operate/manage our properties during peak operations; and

· Implementing an exit strategy with respect to each project with a view to maximizing asset values and returns.

Product Research and Development

The Company has not engaged in any product research or development and does not anticipate engaging in product research or development during the Next Year.

Liquidity and Capital Resources

The Company has sufficient funds to fund all of its current operations for the Next Year provided, however, that if the conditions precedent to the closing are satisfied and the Company elects to consummate the purchase of the ChevronTexaco and BHP participating interests in the Baode PSC, as well as consummate the transactions currently contemplated with Well Lead, the Company will be required to raise additional capital to fund  ongoing operational expenses related to the participating interests to be purchased from ChevronTexaco and BHP, and those operational expenses related to the interests of Well Lead. The remaining discussion considers the Company’s ability to fund its other operations and overhead expenses, exclusive of the funding necessary for the aforementioned purchases, except insofar as that the deposit required for those agreements has reduced our liquidity.

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As of December 31, 2008, the Company had net working capital of $11,223,902 and cash, including  cash equivalents of $10,515,657 and short-term investments of  $1,260,000. The Company also has deposited $650,000 with ChevronTexaco as required under the ChevronTexaco ATA, and $500,000 with BHP as required under the BHP ATA. For the year ended December 31, 2008, the Company incurred a net loss of $5,446,649. As a result of our operating losses from our inception through December 31, 2008, we generated a cash flow deficit of $6,092,999 from operating activities during this period. Cash flows used in investing activities - net were $3,128,538 during the period from inception (August 25, 2005) through December 31, 2008, comprised of net purchases of $1,260,000 of short-term investments, the acquisition of $618,304 of property and equipment and an increase of $1,250,234 in deferred charges. We met our cash requirements during this period through net proceeds of $19,699,092 from the private placement of the Company’s restricted equity securities.

As of December 31, 2008, the Company had short-term development commitments (within the next 12 months) of approximately $1.3 million to fund drilling activities under our agreement with Chifeng, and approximately $2.9 million to fund operations under our agreement with CUCBM.  In the event the conditions precedent to the closing of the ChevronTexaco ATA and the BHP ATA are satisfied, the Company will be required to pay $1.35 million and $1.5 million, respectively, for the unpaid base purchase prices and other costs detailed in Part I, Item 1, “Description of Business,” under these agreements, as well as additional capital to fund ongoing operational expenses related to the participating interests purchased from ChevronTexaco and BHP under the Baode PSC, which have been estimated by them to be $2.6 million.

Net cash used in operating activities was $3,208,017 in 2008 compared to $2,060,887 in 2007 and $814,024 in 2006.  The increases in 2008 versus 2007 and in 2007 versus 2006 were principally due to increases in expenses paid, most of which were also incurred in the same respective years.  The cash effect of net changes in current assets and liabilities was a significant factor in the 2008 versus 2007 comparative period due to accrued liabilities for expenses. For the 2007 versus 2006 comparative period it was not a significant factor.

Net cash provided by investing activities was $11,511,505 in 2008 compared to net cash used in investing activities of $13,040,176 in 2007 and $1,599,867 in 2006.  The net change in 2008 versus 2007 was principally due to  net sales of  $9,940,000 of available-for-sale short-term securities and a decrease in deferred charges of $1,905,824 from deposits and other costs related to pending asset purchases under asset purchase agreements.  This was partially offset by an increase in additions to property, plant and equipment in 2008 versus 2007.  The net change in 2007 versus 2006 was principally due to an increase of $9,800,000 in net purchases of short-term investments.

Net cash used in financing activities was $2,513 in 2008 compared to net cash provided by financing activities of $15,421,002 in 2007 and $4,162,526 in 2006. The net change in 2008 versus 2007 was due to a lack of financing activity in 2008 versus financing activity in 2007 conducted in connection with the Mergers.  The net increase in 2007 versus 2006 was principally due to the equity financing conducted in connection with the Mergers of May 7, 2007, which was significantly larger than the equity financing conducted in 2006 as IMPCO. Also affecting the increase in 2007 versus 2006 was a decrease in notes payable repaid and an increase in net cash flow from minority interest investment and advances activity.

Based on expenditures for development and operations included above (excluding the closing of the ChevronTexaco ATA and BHP ATA, and the transactions contemplated with Well Lead) of $4.2 million in total over 12 months, there would be $7.0 million available to fund expenses at $3.5 million per year for 2.0 years.

Our available working capital and capital requirements will depend upon numerous factors, including progress of our exploration and development programs, including under our agreements with Chifeng and CUCBM, closing of the ChevronTexaco ATA and BHP ATA and purchase of the ChevronTexaco and BHP participating interests, in the Baode PSC, consummation of the transactions contemplated with Well Lead and Beijing Tai He Sheng Ye Investment Company Limited, market developments and the status of our competitors. Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing and strategic alliances. Such additional funds may not become available on acceptable terms, if at all, and any additional funding obtained may not be sufficient to meet our needs in the long term. Through December 31, 2008, virtually all of our financing has been raised through private placements of equity instruments.  The Company at December 31, 2008 had no credit lines for financing and no short-term or long-term debt.

We intend to continue to fund operations from cash on hand and through the similar sources of capital previously described for the foreseeable future. Any additional capital that we are able to obtain may not be sufficient to meet

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our needs. We believe that we will continue to incur net losses and negative cash flows from operating activities for the next 1-2 years. Based on the resources available to us on December 31, 2008, we can sustain operations at the present “burn rate” for more than one year. We will need additional equity or debt financing to expand our operations through 2009 and we may need additional financing thereafter.

By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet our projected cash flow deficits. However, if during the Next Year or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity, and financial condition.

To the extent the Company acquires additional CBM, tight gas sand and other energy-related rights consistent with its business plan, including the participating interests from ChevronTexaco and BHP, and the consummation of the transactions contemplated with Well Lead and Beijing Tai He Sheng Ye Investment Company Limited, the Company will need to raise additional funds for development of such projects.

Employees

As of December 31, 2008, we had 18 full-time employees and 8 part-time employees/contractors. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. During the Next Year, the Company may need to hire additional personnel in certain operational and other areas as required for its expansion efforts, and to maintain focus on its then-existing and new projects. The number and skill sets of individual employees will be primarily dependent on the relative rates of growth of the Company’s different projects, and the extent to which operations and development are executed internally or contracted to outside parties. Subject to the availability of sufficient working capital and assuming initiation of additional projects, the Company currently plans to increase full-time staffing to over twenty people during the Next Year, although such hiring may not occur or may be inadequate to execute the Company’s growth plans. As we continue to expand, we will incur additional cost for personnel.

Results of Operations

The Company is in the development stage and to date has not generated any significant revenues. During the fiscal year 2006, the Company focused its efforts on developing onshore development and production opportunities in China as a means of generating cash flow. Accordingly, the Company signed a contract for the development of the Shaogen Contract Area in August of 2006 with Chifeng.

Pursuant to the Chifeng Agreement, drilling operations commenced in October 2006.  The first well drilled by Chifeng discovered oil and has been completed as a producing well, but production operations were suspended in 2007 pending receipt of a production license from the Chinese government. The Company is pursuing a combination of strategies to have such production license awarded, including a possible renegotiation of the Chifeng Agreement with a goal of increasing the financial incentives to all the parties involved, and the Company is also pursuing a strategy focused on entering into negotiations with respect to an opportunity to acquire the existing production from the 22 sq. km. Kerqing Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance the Chifeng Agreement in scale and value.  If this Production License is not issued, the opportunities to drill additional long-term production wells under the contract, including future production from this first well, will be at risk.

If the license is issued, the Company expects to spend $1.3 million in 2009 in connection with drilling activities under the contract.

In November 2006, the Company signed an Agreement for Joint Cooperation with the CUCBM covering the CUCBM Contract Area. This was converted to the Zijinshan PSC on October 26, 2007. This is an opportunity to explore for and develop CBM resources (including all other related hydrocarbon resources). In 2008 the Company spent about $0.2 million for this project.  Expenditures for this project to are expected to be approximately $2.7 million in 2009.

In September 2007, the Company entered into the four Chevron Agreements with ChevronTexaco for the purchase by the Company of participating interests held by ChevronTexaco in production sharing contracts in respect of four CBM and tight gas sand resource blocks located in the Shanxi Province of China with an aggregate contract area of approximately 1.5 million acres. The aggregate base purchase price for all of the participating interests was

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$61,000,000, adjusted in April 2008 to $50,000,000, and was subject to certain income and expense adjustments prior to closing. The Company paid to ChevronTexaco a $3,050,000 deposit toward the purchase price, which was refundable if the Chevron Agreements were terminated under certain conditions. On December 5, 2008, the Company exercised its right to terminate three of the four Chevron Agreements, retaining the ChevronTexaco ATA related to the Baode PSC for CBM with a purchase price of $2,000,000 and a deposit retained by ChevronTexaco of $650,000.  The deposit amount of $2,400,000 previously paid by the Company to ChevronTexaco with respect to the three terminated Chevron Agreements was returned to the Company in December 2008 as a result of the terminations.

In March 2008, the Company entered into the BHP ATA with BHP for the purchase of the remainder of the participating interest in the Baode PSC not held by ChevronTexaco that the Company plans to acquire under the ChevronTexaco ATA. The Company paid BHP a deposit of $500,000 toward the $2,000,000 purchase price, which is refundable if the BHP ATA is terminated under certain conditions.

The Company is also actively pursuing other opportunities for which no definitive agreements are in place, including the Well Lead opportunity and the Handan Gas Distribution Venture.

In the year ended December 31, 2007, the Company generated $12,289 in miscellaneous revenues from services.  These revenues, which have been recorded as “Other Income,” were from a single consulting engagement and are not at this point expected to be repeated as the Company is not in the consulting business and has increasing demands placed on its staff in developing its own business enterprise. Even though the Company has earned these nominal revenues, it still considers itself a development stage enterprise as it has been since its inception on August 25, 2005.

As a development stage company, we have yet to earn revenues from operations. We may experience fluctuations in operating results in future periods due to a variety of factors, including our ability to obtain additional financing in a timely manner and on terms favorable to us, our ability to successfully develop our business model, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements, and strategic alliances, and general economic conditions specific to our industry.

As a result of limited capital resources and no revenues from operations from the date of inception as IMPCO on August 25, 2005, the Company has relied on the issuance of equity securities as a means of compensating employees and non-employees for services. The Company enters into equity compensation agreements with non-employees if it is in the best interest of the Company and in accordance with applicable federal and state securities laws. In order to conserve its limited operating capital resources, the Company anticipates continuing to compensate employees and non-employees partially with equity compensation for services during the Next Year. This policy may have a material effect on the Company’s results of operations during the Next Year.

Revenues

We have generated no revenues from operations since inception as IMPCO on August 25, 2005. We hope to begin generating revenues from operations in 2009 from actual operations as the Company transitions from a development stage company to that of an active growth stage company.

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 Expenses

	Years ended December 31,
Description	2008		2007		2006
Salaries	$	1,672,694	$	898,875	$	62,300
Consulting		505,248		803,485		770,633
Legal and professional fees		503,830		300,228		25,051
Accounting and audit fees		169,368		135,305		30,624
Other operating contract work		249,440		-		-
Travel		295,621		194,071		138,354
Stock-based compensation		1,355,590		195,442		29,065
Impairment of assets		273,618		-		-
All other operating expenses		758,411		454,841		130,986
Total Operating Expenses	$	5,783,820	$	2,982,247	$	1,187,013

For the fiscal year 2008, total operating expenses before income taxes were $5,783,820 as compared to $2,982,247 in 2007 and $1,187,013 in 2006. The increase each year in operating expenses reflects the increase in financing-related activities, the expenses associated with the Mergers and increased efforts in identifying, negotiating for the acquisition of potential oil and gas opportunities and the start of operations in Zijinshan.  The major components of expense differences are as follows.

Year 2008 versus Year 2007

· Salaries:  The increase in 2008 over 2007 of $773,819 resulted from an increase in the number of employees.

· Consulting:  The decrease in 2008 over 2007 of $298,237 was due to a decrease of $197,312 in consulting fees paid as vested equity compensation, an increase of $124,776 in cash consulting fees related to Sarbanes-Oxley compliance work, and a decrease of $225,701 in other cash consulting fees. The decreases were principally due to non-recurring costs in 2007 relative to merger negotiation assistance and contractual obligations for assistance in the raising of equity funds prior to the Mergers.

· Legal and professional fees:  The increase in 2008 over 2007 of $203,602 was due to the increase in the Company’s activities, the legal requirements to prepare SEC filings, and assistance in compliance with Sarbanes-Oxley Act requirements.

· Accounting and audit fees: The increase in 2008 over 2007 of $34,063 was principally due to increased auditor involvement as a result of the change to a public company through the Mergers in May 2007.

· Other operating contract work: The activity in 2008 versus no prior activity reflects the 2008 start of activity for exploration toward development of operations with respect to a CBM project in China.

· Travel:  The increase of $101,550 in 2008 over 2007 was due to increased travel related to possible acquisitions and financing activities.

· Stock-based compensation:  The increase of $1,160,148 reflects a larger value of restricted stock and stock option awards subject to amortization in 2008 versus 2007.

· Impairment of assets:  The activity in 2008 versus no activity in prior years reflects the 2008 write-down of the notes receivable relative to the minority interest investment in a China subsidiary company that has had no revenues to date.

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Year 2007 versus Year 2006

· Salaries: The increase in 2007 over 2006 of $836,575 resulted from the increase in employees from two at the end of 2006 to nine (including the officers) at the end of 2007 and the change of two Company officers from consultants in 2006 to salaried employees in late 2006 and early 2007.

· Consulting: The increase in 2007 over 2006 of $32,852 was due to an increase of $146,732 in non-cash fees paid as equity, principally from increased activity involving potential oil and gas opportunities; partially offset by a decrease of $113,880 in cash fees primarily due to change of two Company officers from consultants to salaried employees in late 2006 and early 2007.

· Legal and professional fees: The increase in 2007 over 2006 of $275,177 was largely due to the legal requirements to complete the Mergers, preparation of government filings and the general increase in the Company’s activities.

· Accounting and audit fees: The increase in 2007 over 2006 of $104,681 was due to the increased requirements for SEC filings subsequent to the Merger in May 2007.

· Travel: The increase in 2007 over 2006 of $55,717 was due to increased travel to China by the Company’s officers and technical staff to review potential oil and gas opportunities as well as establishing a permanent Company office in Beijing in August 2007.

· Stock-based compensation: The increase in 2007 over 2006 of $166,377 was due to additional awards in 2007 and a full year’s expense for 2006 awards in 2007 versus three months expense in 2006.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Inflation

It is the opinion of the Company that inflation has not had a material effect on its operations.

Tabular Disclosure of Contractual Obligations

The following table summarizes the Company’s significant contractual obligations:

	Payments Due By Period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating Lease Obligations	$	156,584	$	98,284	$	58,300	$	-	$	-

Critical Accounting Policies and Estimates

The discussion and analysis of our plan and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets, liabilities and proved oil and gas reserves. Some accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. Actual results and timing may differ from the estimates and assumptions used in the preparation of our consolidated financial statements. Described below are the most significant policies we apply, or intend to apply, in preparing our consolidated financial statements, some of which are subject to alternative

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treatments under accounting principles generally accepted in the United States of America. We also describe the most significant estimates and assumptions we make in applying these policies.

Oil and Gas Activities

Accounting for oil and gas activities is subject to special, unique rules. Two generally accepted methods of accounting for oil and gas activities are available — successful efforts and full cost. The most significant differences between these two methods are the treatment of exploration costs and the manner in which the carrying value of oil and gas properties are amortized and evaluated for impairment. The successful efforts method requires exploration costs to be expensed as they are incurred while the full cost method provides for the capitalization of these costs. Both methods generally provide for the periodic amortization of capitalized costs based on proved reserve quantities. Impairment of oil and gas properties under the successful efforts method is based on an evaluation of the carrying value of individual oil and gas properties against their estimated fair value, while impairment under the full cost method requires an evaluation of the carrying value of oil and gas properties included in a cost center against the net present value of future cash flows from the related proved reserves, using period-end prices and costs and a 10% discount rate.

The Company at present reports no proved oil and gas reserves as we are a development stage company.  Management, in making investment decisions regarding the acquisition and development of oil and gas properties, performs economic and technical evaluations including assessment of commerciality based upon estimates and assumptions that it believes are reasonable.  In order to recognize new proved reserves, the positive technical assessment of producibility, our financial capability for development, and management commitment for capital expenditures must be demonstrated to ensure that the reserves will be developed and are producible under existing economic and operating conditions.

Successful Efforts Method

We use the successful efforts method of accounting for our oil and gas activities. Under this method, costs of drilling successful wells are capitalized. Costs of drilling exploratory wells not placed into production are charged to expense. Geological and geophysical costs are charged to expense as incurred.

Depreciation, Depletion and Amortization

The quantities of estimated proved oil and gas reserves are expected to be a significant component of our calculation of future depreciation and depletion expense related to oil and gas properties and equipment, and revisions in such estimates may alter the rate of future expense. Holding all other factors constant, if reserves are revised upward, earnings would increase due to lower depletion expense. Likewise, if reserves are revised downward, earnings would decrease due to higher depletion expense.

Future Development and Abandonment Costs

Future development costs include costs incurred to obtain access to proved reserves such as drilling costs and the installation of production equipment. Future abandonment costs include costs to dismantle and relocate or dispose of our production platforms, gathering systems and related structures and restoration costs of land and seabed. Our operators develop estimates of these costs for each of our properties based upon their geographic location, type of production structure, well depth, currently available procedures and ongoing consultations with construction and engineering consultants. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make judgments that are subject to future revisions based upon numerous factors, including changing technology and the political and regulatory environment. We review our assumptions and estimates of future development and future abandonment costs on an annual basis.

The accounting for future abandonment costs is based upon SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard requires that a liability for the discounted fair value of an asset retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Holding all other factors constant, if our estimate of future abandonment and development costs is revised upward, earnings would decrease due to higher depreciation, depletion and amortization (“DD&A”) expense. Likewise, if these estimates are revised downward, earnings would increase due to lower DD&A expense.

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Consolidation

The financial statements include Pacific Asia Petroleum, Inc. (successor company to IMPCO) and its majority owned direct and indirect subsidiaries in the respective periods.  Periods prior to the Merger date of May 7, 2007 included in the 2007 and prior year financial statements include only the results of IMPCO and IMPCO’s subsidiaries.

Allocation of Purchase Price in Business Combinations

As part of our business strategy, we actively pursue the acquisition of oil and gas properties. The purchase price in an acquisition is allocated to the assets acquired and liabilities assumed based on their relative fair values as of the acquisition date, which may occur many months after the announcement date. Therefore, while the consideration to be paid may be fixed, the fair value of the assets acquired and liabilities assumed is subject to change during the period between the announcement date and the acquisition date. Our most significant estimates in our allocation typically relate to the value assigned to future recoverable oil and gas reserves and unproved properties. As the allocation of the purchase price is subject to significant estimates and subjective judgments, the accuracy of this assessment is inherently uncertain.

Revenue Recognition

We will recognize revenue when crude oil and natural gas quantities are delivered to or collected by the respective purchaser. As of December 31, 2008, we did not have recordable sales. Title to the produced quantities transfers to the purchaser at the time the purchaser collects or receives the quantities. Prices for such production will be defined in sales contracts.

Short-Term Investments

The Company applies the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”  Debt and equity securities are classified into one of three categories: held-to-maturity, available-for-sale, or trading.  Securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity.  Trading securities are defined as those bought and held principally for the purpose of selling them in the near term.  All other securities are classified as available-for-sale.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  The Company’s short-term investments are classified as available-for-sale.

Foreign Currency Translation

The Company uses both the U.S. dollar and local currency as functional currencies based upon the principal currency of operation of each subsidiary. The functional currency for operations in China (other than Hong Kong) is the local currency.  The Company at present expects that the future revenues from its operations in China will be in local currency.  Balance sheet translation effects from translating local functional currency into U.S. dollars (the reporting currency) are recorded directly to other comprehensive income in accordance with SFAS No.130, “Reporting Comprehensive Income.”

Stock-based Compensation

The Company accounts for stock-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment.”  The Company made no stock-based compensation grants before 2006, and therefore the transition provisions of SFAS No. 123 (R) pertaining to pre-2006 grants do not apply.  The Company values its stock options awarded on or after January 1, 2006 at the fair value at grant date using the Black-Scholes option pricing model.  Compensation expense for stock options and restricted stock awards is recorded over the vesting periods on a straight line basis for each award group. Compensation paid in stock fully vested at award date is valued at fair value at that date and charged to expense at that time.

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Recently Issued Accounting Standards Not Yet Adopted

Information on accounting standards not yet adopted is contained in Note 5 to the consolidated financial statements in this Form 10-K.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company may be  exposed to certain market risks related to changes in foreign currency exchange and interest rates.

Foreign Currency Exchange Risk

In addition to the U.S. dollar, the Company conducts its business in RMB and therefore is subject to foreign currency exchange risk on cash flows related to expenses and investing transactions. The Company does not expect to generate meaningful revenue from activities in China prior to 2010. Prior to July 2005, the exchange rate between the U.S. dollar and the Chinese RMB was fixed, and, consequently, there were no fluctuations in the value of goods and services we purchased in China because of currency exchange.

In July 2005, the Chinese government began to permit the RMB to float against the U.S. dollar. All of our costs to operate our Chinese office and operations are paid in RMB. Our exploration costs in China may be incurred under contracts denominated in RMB or U.S. dollars.  To date the Company has not engaged in hedging activities to hedge our foreign currency exposure. In the future, the Company may enter into hedging instruments to manage its foreign currency exchange risk or continue to be subject to exchange rate risk.

The Company currently holds notes carried at $386,415 as of December 31, 2008 after impairment adjustment. The notes are denominated and receivable in RMB and are held by Inner Mongolia Production Company (HK) Limited, which recognizes appreciation and depreciation of the RMB note.   A 20% appreciation of the RMB would result in a gain of approximately $77,000.  A 20% decline of the RMB would result in a loss of approximately $77,000.

Interest Rate Risk

See Note 6 to the financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” for information regarding our financial instruments.  At December 31, 2008 and 2007 the Company had no investments in financial instruments subject to interest rate risk affecting fair value. Changes in interest rates on these short-term securities will result in less interest income if interest rates decline, but no loss of principal.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following index lists the financial statements of Pacific Asia Petroleum, Inc. that are included in this report:

	Page
Report of Independent Registered Public Accounting Firm		44
Financial Statements:
Consolidated Balance Sheets –
December 31, 2008 and 2007		45
Consolidated Statements of Operations –
For the years ended December 31, 2008, 2007 and 2006, and for the period from inception (August 25, 2005) through December 31, 2008		46
Consolidated Statement of Stockholders’ Equity (Deficiency) –
For the period from inception (August 25, 2005) through December 31, 2008		47
Consolidated Statement of Cash Flows –
For the years ended December 31, 2008, 2007 and 2006, and the period from inception (August 25, 2005) through December 31, 2008		48
Notes to Consolidated Financial Statements		49

Schedules other than those listed above have been omitted since they are either not required, are not applicable or the required information is shown in the financial statements or the related notes.

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 RBSM LLP

CERTIFIED PUBLIC ACCOUNTANTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Pacific Asia Petroleum, Inc.

Hartsdale, NY

              We have audited the accompanying consolidated balance sheets of Pacific Asia Petroleum, Inc. and its subsidiaries (the “Company”) (a development stage company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008 and the period August 25, 2005 (date of inception) through December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based upon our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific Asia Petroleum, Inc. and its subsidiaries (a development stage company) as of December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 and the period August 25, 2005 (date of inception) through December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

            /s/ RBSM LLP

New York, New York

February 27, 2009

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AUDITED FINANCIAL STATEMENTS	Pacific Asia Petroleum, Inc. and Subsidiaries
	(A Development Stage Company)
Consolidated Balance Sheets
As of December 31,	2008			2007
Assets
Current assets
Cash and cash equivalents	$	10,515,657		$	2,208,969
Short-term investments (note 6)		1,260,000			11,200,000
Income tax refunds receivable		8,500			-
Prepaid expenses		90,657			46,247
Deposits		37,556			22,954
Advances		383			2,758
Total current assets		11,912,753			13,480,928
Non-current assets
Property, plant and equipment at cost - (note 7) (net of accumulated depreciation:
2008- $88,577:  2007- $20,779)		569,303			285,027
Intangible assets		384			384
Long-term advances (note 6)		386,415			534,530
Deferred charges		1,250,234			3,156,058
Total Assets	$	14,119,089		$	17,456,927
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	25,446		$	2,739
Income taxes payable		5,148			38,791
Accrued contracting and development fees		294,020			-
Accrued bonuses and vacations		158,473			31,366
Accrued and other liabilities		205,764			91,338
Total current liabilities		688,851			164,234
Minority interest in subsidiaries		386,415			395,094
Stockholders' equity
Common stock:
Authorized - 300,000,000 shares at $.001 par value; Issued and outstanding -
40,061,785 as of December 31, 2008;  39,931,109 as of December 31, 2007		40,062			39,931
Preferred stock:
Authorized - 50,000,000 shares at $.001 par value;
Issued - 23,708,952 as of December 31, 2008 and December 31, 2007
Outstanding - none as of December 31, 2008 and December 31, 2007		-			-
Paid-in capital		21,741,965			20,251,022
Other comprehensive income - currency translation adjustment		229,860			128,061
Deficit accumulated during the development stage		(8,968,064	)		(3,521,415	)
Total stockholders' equity		13,043,823			16,897,599
Total Liabilities and Stockholders' Equity	$	14,119,089		$	17,456,927
The accompanying notes to the consolidated financial statements are an integral part of this statement.

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AUDITED FINANCIAL STATEMENTS	Pacific Asia Petroleum, Inc. and Subsidiaries
	(A Development Stage Company)
Consolidated Statement of Operations
	For the years ended December 31, 2008, 2007 and 2006, and for the period from inception (August 25, 2005) to December 31, 2008
										For the period
										from inception
										(August 25, 2005)
										through
	2008			2007			2006			December 31, 2008
Operating Expenses
Depreciation	$	66,769		$	18,850		$	1,740		$	87,359
All other operating expenses		5,717,051			2,963,397			1,185,273			9,917,065
Total Operating Expenses		(5,783,820	)		(2,982,247	)		(1,187,013	)		(10,004,424	)
Operating Loss		(5,783,820	)		(2,982,247	)		(1,187,013	)		(10,004,424	)
Other Income (Expense)
Interest Income		323,762			618,089			99,406			1,041,257
Other Income		14,695			12,937			-			27,632
Other Expense		(172	)		(714	)		-			(886	)
Total Other Income		338,285			630,312			99,406			1,068,003
Net loss before income taxes and
minority interest		(5,445,535	)		(2,351,935	)		(1,087,607	)		(8,936,421	)
Income tax (expense) benefit		(13,082	)		(38,826	)		-			(51,908	)
Net loss before minority interest		(5,458,617	)		(2,390,761	)		(1,087,607	)		(8,988,329	)
Minority interest		11,968			7,077			1,220			20,265
Net Loss		(5,446,649	)		(2,383,684	)		(1,086,387	)		(8,968,064	)
Other Comprehensive Income (Loss),
Net of Tax:
Foreign currency translation adjustment		101,799			108,833			19,228			229,860
Comprehensive income (Loss)	$	(5,344,850	)	$	(2,274,851	)	$	(1,067,159	)	$	(8,738,204	)
Net Loss per Share of Common Stock -
Basic and Diluted	$	(0.14	)	$	(0.08	)	$	(0.10	)
Weighted Average Number of Shares Outstanding		39,992,512			31,564,121			11,248,938
The accompanying notes to the consolidated financial statements are an integral part of this statement.

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AUDITED FINANCIAL STATEMENTS	Pacific Asia Petroleum, Inc. and Subsidiaries
	(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficiency)	For the period from inception (August 25, 2005) to December 31, 2008

																			Other
																			Comprehensive		Deficit
	No. of									No. of									Income (Loss)-		Accumulated			Total
	Common									Preferred									Foreign		During the			Stockholders'
	Shares			Common			Subscriptions			Shares			Preferred			Paid-in			Currency		Development			Equity
	$.001 par value			Stock			Receivable			$.001 par value			Stock			Capital			Translation		Stage			(Deficiency)
Balance - August 25, 2005		-		$	-		$	-			-		$	-		$	-		$	-	$	-		$	-
Issued for cash		1,852,320			1,852			-			-			-			10,148			-		-			12,000
Subscriptions		3,451,680			3,452			(28,000	)		-			-			24,548			-		-			-
Net loss		-			-			-			-			-			-			-		(51,344	)		(51,344	)
Balance - December 31, 2005		5,304,000			5,304			(28,000	)		-			-			34,696			-		(51,344	)		(39,344	)
Subscriptions paid		-			-			28,000			-			-			-			-		-			28,000
Issued for fees and services		-			-			-			1,829,421			1,829			195,776			-		-			197,605
Issued for cash		-			-			-			8,161,802			8,162			4,215,262			-		-			4,223,424
Amortization of options fair value		-			-			-			-			-			29,065			-		-			29,065
Currency translation		-			-			-			-			-			-			19,228		-			19,228
Net loss		-			-			-			-			-			-			-		(1,086,387	)		(1,086,387	)
Balance - December 31, 2006		5,304,000			5,304			-			9,991,223			9,991			4,474,799			19,228		(1,137,731	)		3,371,591
Issued for services - pre-merger		600,032			600			-			117,729			118			334,594			-		-			335,312
Shares retained by Pacific Asia Petroleum original
stockholders in merger - 5/7/07		468,125			468			-			-			-			83,323			-		-			83,791
Shares issued to ADS members in merger - 5/7/07		9,850,000			9,850			-			13,600,000			13,600			15,453,957			-		-			15,477,407
Post-merger acquisition costs and adjustments		-			-			-			-			-			(291,093	)		-		-			(291,093	)
Automatic conversion of Preferred Shares - 6/5/07		23,708,952			23,709			-			(23,708,952	)		(23,709	)		-			-		-			-
Issued for services, compensation cost of stock options
and restricted stock		-			-			-			-			-			195,442			-		-			195,442
Currency translation		-			-			-			-			-			-			108,833		-			108,833
Net loss		-			-			-			-			-			-			-		(2,383,684	)		(2,383,684	)
Balance - December 31, 2007		39,931,109			39,931			-			-			-			20,251,022			128,061		(3,521,415	)		16,897,599
Issued on exercise of warrants		79,671			80			-			-			-			(83	)		-		-			(3	)
Vesting of restricted stock		76,400			76			-			-			-			(76	)		-		-			-
Cancellation of vested restricted stock		(10,400	)		(10	)		-			-			-			10			-		-			-
Compensation cost of stock options and restricted stock		-			-			-			-			-			1,355,590			-		-			1,355,590
Issued for services		15,000			15			-			-			-			137,985			-		-			138,000
Issued for acquisition of Navitas Corporation		450,005			450			-			-			-			8,176,141			-		-			8,176,591
Acquired on acquisition of Navitas Corporation		(480,000	)		(480	)		-			-			-			(8,178,624	)		-		-			(8,179,104	)
Currency translation		-			-			-			-			-			-			101,799		-			101,799
Net loss		-			-			-			-			-			-			-		(5,446,649	)		(5,446,649	)
Balance - December 31, 2008		40,061,785		$	40,062		$	-			-		$	-		$	21,741,965		$	229,860	$	(8,968,064	)	$	13,043,823

The accompanying notes to the consolidated financial statements are an integral part of this statement.

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AUDITED FINANCIAL STATEMENTS	Pacific Asia Petroleum, Inc. and Subsidiaries
	(A Development Stage Company)
Consolidated Statement of Cash Flows	For the years ended December 31, 2008, 2007 and 2006,
	and for the period from inception (August 25, 2005) to December 31, 2008
										For the period
										from inception
										(August 25, 2005)
										through
	2008			2007			2006			December 31, 2008
Cash flows from operating activities
Net loss	$	(5,446,649	)	$	(2,383,684	)	$	(1,086,387	)	$	(8,968,064	)
Adjustments to reconcile net loss to cash
used in operating activities:
Interest income on long-term advances		(88,440	)		(90,602	)		(9,945	)		(188,987	)
Currency transaction loss		41,047			43,444			-			84,491
Stock and options compensation expense		1,493,590			530,754			226,670			2,251,014
Minority interest in net loss		(11,969	)		(7,077	)		(1,220	)		(20,266	)
Depreciation expense		66,769			18,850			1,740			87,359
Impairment of assets adjustment		273,618			-			-			273,618
Changes in current assets and current
liabilities:
(Increase) in income tax refunds receivable		(8,500	)		-			-			(8,500	)
(Increase) decrease in advances		2,375			(2,758	)		-			(383	)
(Increase) in deposits		(14,602	)		(11,456	)		(11,498	)		(37,556	)
(Increase) in prepaid expenses		(44,410	)		(14,761	)		(31,486	)		(90,657	)
Increase (decrease) in accounts payable		22,707			(55,638	)		43,226			10,295
Increase (decrease) in income tax and accrued liabilities		506,447			(87,959	)		54,876			514,637
Net cash used in operating activities		(3,208,017	)		(2,060,887	)		(814,024	)		(6,092,999	)
Cash flows from investing activities
Net sales (purchases) of short-term investments		9,940,000			(9,800,000	)		(1,400,000	)		(1,260,000	)
(Increase) decrease in deferred charges		1,905,824			(3,156,058	)		-			(1,250,234	)
Additions to property, plant and equipment		(334,319	)		(84,118	)		(199,867	)		(618,304	)
Net cash provided by (used in) investing activities		11,511,505			(13,040,176	)		(1,599,867	)		(3,128,538	)
Cash flows from financing activities
Payment and proceeds of notes payable		-			(5,000	)		(100,000	)		(5,000	)
Increase in minority interest investment		-			40,020			359,410			399,430
Increase in long-term advances to minority shareholder		-			-			(400,507	)		(400,507	)
Decrease in subscriptions receivable		-			-			28,000			28,000
Issuance of common stock net of issuance costs		(2,513	)		15,385,982			4,275,623			19,671,092
Net cash provided by (used in) financing activities		(2,513	)		15,421,002			4,162,526			19,693,015
Effect of exchange rate changes on cash		5,713			21,656			16,810			44,179
Net increase in cash and cash equivalents		8,306,688			341,595			1,765,445			10,515,657
Cash and cash equivalents at beginning of period		2,208,969			1,867,374			101,929			-
Cash and cash equivalents at end of period	$	10,515,657		$	2,208,969		$	1,867,374		$	10,515,657
Supplemental disclosures of cash flow information
Interest paid	$	-		$	-		$	-		$	-
Income taxes paid	$	48,832		$	35		$	-		$	48,867
Supplemental schedule of non-cash investing and financing activities
Common and preferred stock issued for services and fees	$	138,000		$	335,312		$	197,605		$	670,917
Issuance costs paid as warrants issued	$	-		$	868,238		$	61,239		$	929,477
Increase in fixed assets accrued in liabilities	$	-		$	4,537		$	7,966		$	-
Increase in issuance costs accrued in liabilities	$	-		$	-		$	52,199		$	-
Warrants exercised for common stock	$	(3	)	$	-		$	-		$	(3	)

The accompanying notes to consolidated financial statements are an integral part of this statement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. --- DESCRIPTION OF BUSINESS

Pacific Asia Petroleum, Inc. (the “Company”) is the successor company from a reverse merger involving the former Pacific East Advisors, Inc. and other entities on May 7, 2007.  The details of this merger are discussed in Note 2. – Merger and Recapitalization.

The Company’s activities commenced in 2005 through Inner Mongolia Production Company, LLC (“IMPCO”), a limited liability company formed under New York State law on August 25, 2005.  The Company’s business plan is to engage in the business of oil and gas exploration, development and production in Asia and the Pacific Rim countries.

The Company has entered into a production sharing contract to explore for coalbed methane resources in China.

 In November 2006, the Company entered into an Agreement for Joint Cooperation (the “Cooperation Agreement”), with China United Coalbed Methane Co. (“CUCBM”), with respect to coalbed methane (“CBM”) production covering an area in the Shanxi Province of China referred to as the Zijinshan Block (the “CUCBM Contract Area”). On October 26, 2007 Pacific Asia Petroleum, Ltd. (“PAPL”), a wholly-owned subsidiary of the Company, entered into a production sharing contract (“PSC”) with CUCBM covering the CUCBM Contract Area.  During the development and production period, CUCBM will have the right to acquire a 40% participating interest and work jointly to develop and produce CBM under the PSC.  The PSC has a term of 30 years and was approved by the Ministry of Commerce of China in 2008.

The Company is pursuing an oil development opportunity in Inner Mongolia.

In 2006 a subsidiary of the Company entered into a joint development contract with Chifeng Zhongtong Oil and Natural Gas Co., Ltd., (“Chifeng”), a company incorporated in Inner Mongolia, China.  Pursuant to the Chifeng Agreement, drilling operations commenced in October 2006.  The first well drilled by Chifeng discovered oil and has been completed as a producing well, but production operations were suspended in 2007 pending receipt of a production license from the Chinese government. The Company is pursuing a combination of strategies to have such production license awarded, including a possible renegotiation of the Chifeng Agreement with the goal of increasing the financial incentives to all the parties involved, and the Company is also pursuing a strategy focused on entering into negotiations with respect to an opportunity to acquire the existing production from the 22 sq. km. Kerqing Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance the Chifeng Agreement in scale and value.  If this Production License is not issued, the opportunities to drill additional long-term production wells under the contract, including future production from this first well, will be at risk.  No revenue or related depletion expense have been recognized to date due to uncertainty of realization of the revenue until a permanent production license is obtained.

The Company has agreed to purchase exploration, development and production opportunities involving coalbed methane areas in China.

In September 2007, the Company entered into four asset transfer agreements (the “Chevron Agreements”) with ChevronTexaco China Energy Company (“ChevronTexaco”) for the purchase by the Company of participating interests held by ChevronTexaco in production sharing contracts in respect of four CBM and tight gas sand resource blocks located in the Shanxi Province of China with an aggregate contract area of approximately 1.5 million acres. The aggregate base purchase price for all of the participating interests was $61,000,000, subject to certain income and expense adjustments prior to closing, adjusted in April 2008 to $50,000,000. The Company elected to terminate three of the four agreements in December 2008. The remaining contract is for the acquisition of ChevronTexaco’s interest in the Baode production sharing contract area for CBM. The purchase price of $2 million, which is subject to upward and downward adjustment based on ChevronTexaco’s net cash flows related to the property from June 30, 2007. The Company has paid to ChevronTexaco a $650,000 deposit toward the purchase price of the remaining agreement, which is refundable if the agreement is terminated under certain conditions. The closing of the asset

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transfer is contingent upon a number of conditions precedent, including the approval of certain related agreements by the PRC Ministry of Land and Natural Resources, and the assignment of ChevronTexaco’s participating interest by the PRC Ministry of Commerce.

In March 2008, the Company entered into an Asset Transfer Agreement (the “ATA”) with BHP Billiton World Exploration Inc. (“BHP”) for the purchase by the Company of BHP’s interest in the Baode production sharing contract area (the “Baode PSC”) in the Shanxi Province of China with respect with respect to CBM. The purchase price is $2,000,000, which subject to upward and downward adjustment based on BHP’s net cash flows related to the property from April 1, 2008.  The closing is contingent upon a number of conditions precedent, including approval of certain related agreements by the PRC Ministry of Land and Natural Resources, and the assignment of BHP’s participating interest by the PRC Ministry of Commerce. The Company has paid BHP a deposit of $500,000 toward the purchase price, which is refundable under certain conditions. Upon closing of both this contract and the above-referenced ChevronTexaco contract, the Company will acquire a 100% interest in the Baode PSC.

The Company is pursuing other oil exploration, production, development and related opportunities in China.

The Company in September 2008 entered into an Agreement on Cooperation (the “AOC”) with Well Lead Group Limited (“Well Lead”) with regard to negotiating to purchase indirect participating interests in two oil fields in Heilongjiang Province in the People’s Republic of China.  Since that time, further negotiations have occurred that expanded the scope of the potential acquisition to include other interests and other related parties.  The parties have verbally agreed upon a revised purchase transaction that contemplates the Company obtaining a 51% participating interest in Well Lead and certain of its related entities, including interests in a number of producing oilfields in China, a technology company involved with the successful enhancement of production in these oilfields, and related venture companies. The parties are now conducting further due diligence with the objective of achieving a closing in the first quarter of 2009.

The Company is pursuing a gas distribution opportunity.

The Company entered into a Letter of Intent in November 2008 to possibly acquire a 51% ownership interest in the Handan Changyuan Gas Co., Ltd. (“HCG”) from the Beijing Tai He Sheng Ye Investment Company Limited. HCG owns and operates gas distribution assets in and around Handan City, China. HCG was founded in May 2001, and is the primary gas distributer in Handan City, which is located 250 miles south of Beijing, in the Hebei Province of the People’s Republic of China. HCG has over 300,000 customers and owns 35 miles of a main gas pipeline, and more than 450 miles of delivery gas pipelines, with a delivery capacity of 300 million cubic meters per day.  HCG also owns an 80,000 sq. ft. field distribution facility. Gas is being supplied by Sinopec and PetroChina from two separate sources.  Revenues for HCG have been increasing at an average rate of over 40% per year over the last 3 years. The Company will continue its final legal and financial due diligence, along with identifying a partner to join the Company, with an objective of entering into a mutually agreed final sale and purchase agreement by the end of the second quarter of 2009.

The Company’s business plan is concentrated in the People’s Republic of China.

As set forth above, the Company’s business plan is concentrated in the People’s Republic of China.  The recent  history of foreign investment in the PRC began with oil companies investing in China in the 1980s. This activity has continued and grown. The Company believes that any restriction on foreign investment activity in China is unlikely to significantly hamper our plans.  Although the Company presently has significant capital that has not yet been deployed in China, it is the Company’s intention to deploy almost all of its capital there.

NOTE 2.  --- MERGER AND RECAPITALIZATION

On May 7, 2007, Pacific East Advisors, Inc. (“PEA”), a publicly traded company,  merged with Inner Mongolia Production Company LLC (“IMPCO”) and Advanced Drilling Services LLC (“ADS”) via merger subsidiaries of PEA created for this transaction.  The transaction has been accounted for as a reverse merger, with IMPCO being the acquiring company on the basis that IMPCO’s senior management became the entire senior management of the

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merged entity and there was a change of control of PEA. In accordance with SFAS No. 141, “Accounting for Business Combinations,” IMPCO was the acquiring entity for accounting purposes. While the transaction was accounted for using the purchase method of accounting, in substance the transaction was a recapitalization of IMPCO’s capital structure.

PEA changed its name to Pacific Asia Petroleum, Inc. (the “Company”) as of the merger date and continued the business of IMPCO under the new name following the merger. The Company did not recognize goodwill in connection with the transaction. From August 8, 2001 when PEA emerged from bankruptcy until the date of the transaction, PEA was an inactive corporation with no significant assets and liabilities.

In connection with the merger, PEA issued 5,904,032 shares of Common Stock to holders of IMPCO Class A Units, 10,108,952 shares of Series A Convertible Preferred Stock to holders of IMPCO Class B Units, 9,850,000 shares of Common Stock to holders of ADS Class A Interests, and 13,600,000 shares of Series A Convertible Preferred Stock to holders of ADS Class B Interests in return for all the equity units of those entities.  The Series A Convertible Preferred Stock was automatically converted into Common Shares on June 5, 2007 on a 1 to 1 basis.  When issued, the Series A Convertible Preferred Stock was entitled to receive dividends when, as and if declared by the Board of Directors at the dividend rate (8%) in preference and priority to any declaration or payment of any distribution on Common Stock in such calendar year.  The right to receive dividends was not cumulative and no right to such dividends accrued. The shares of Common Stock outstanding for the Company at September 30, 2007 were 39,931,109 including shares held by existing owners prior to the merger.  The value of the stock that was issued to IMPCO’s equity holders was the historical cost of the Company's net tangible assets, which did not differ materially from their fair value.

See also Note 9. – Related Party Transactions, regarding offering costs and merger-related expenses paid to related parties.

NOTE 3. --- BASIS OF PRESENTATION

The Company’s financial statements are prepared on a consolidated basis.  All significant intercompany transactions and balances have been eliminated in consolidation. The financial statements include Pacific Asia Petroleum, Inc. (successor company to IMPCO) and its majority-owned direct and indirect subsidiaries in the respective periods. Net income for 2007 excludes the results of PEA and ADS prior to May 7, 2007.  For year 2006 prior data, the financial statements include only IMPCO and its subsidiaries Inner Mongolia Production Company (HK) Limited (100% owned) and Inner Mongolia Sunrise Petroleum JV Company (97% owned).

The Company’s financial statements are prepared under U.S. Generally Accepted Accounting Principles as a development stage company.  Certain reclassifications have been made in prior years’ financial statements to conform to classifications used in the current year with respect to common stock, preferred stock and paid-in capital.

NOTE 4.  --- LIQUIDITY AND CAPITAL RESOURCES

During the period from its inception (August 25, 2005) to December 31, 2006, the Company was able to fund its expenses through member equity contributions and member loans.  In 2006 the Company sold equity units in the private market in exchange for consideration totaling $4,561,000, and received $28,000 from collection of subscriptions on equity units subscribed for in 2005.  Proceeds from the equity offering were used to repay $240,000 of notes payable ($100,000 with an officer) outstanding from loans incurred in late 2005 and the first quarter of 2006.

In May 2007, immediately prior to the merger, ADS issued equity units for cash of $17,000,000, of which net proceeds were $15,497,773 after offering costs. The proceeds were invested in temporary investments and were available for operations of the Company after the merger date.

To date the Company has incurred expenses and sustained losses and has not generated any revenue from operations. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise. The

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Company will require significant financing in excess of its December 31, 2008 available cash, cash equivalents and short-term investments in order to achieve its business plan. It is not certain that this amount of financing will be successfully obtained.

NOTE 5. --- SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates – Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.  Those estimates and assumptions affect the reported amounts of assets and liabilities, disclosures of contingencies, and reported revenues and expenses.  Actual results could vary from those estimates.

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, demand deposits and short-term investments with initial maturities of three months or less.

Short-term Investments – The Company applies the provisions ofSFASNo. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading. These security classifications may be modified after acquisition only under certain specified conditions. Securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

The securities held as of December 31, 2007 were temporary investments of funds available for operations in marketable securities with maturities in excess of three months but having variable interest rates, thus no principal risk due to interest rate fluctuations.  The Company invested in financial instruments having interest rate reset periods of either seven days or 28 days.  If the Company decided not to accept a reset of the rate, the bond or preferred stock investment was readily marketable for sale at original purchase cost of par value.  These investments are classified as available-for-sale and are carried at fair value.  Fair value excluding accrued interest is equivalent to cost.  In 2008 the Company discontinued investing in this type of security and liquidated its portfolio of these items.

Inventories – The Company had no inventories at the balance sheet dates, and has not decided the inventory accounting method to be utilized should inventories occur.

Property, Plant and Equipment – For oil and gas properties, the successful efforts method of accounting is used.  Costs of drilling successful wells are capitalized.  Costs of drilling exploratory wells not placed into production are charged to expense. Geological and geophysical costs are charged to expense as incurred.  For depreciable tangible property, the minimum capitalization threshold is $1,000.

Leaseholds—The Company initially capitalizes the costs of acquiring leaseholds on productive and prospective oil and gas properties.  Capitalized leasehold costs for productive properties are amortized as part of the cost of oil and gas produced.  Capitalized leasehold costs on both proven and unproven properties are periodically assessed for impairment and an impairment loss is recorded when necessary.

Depreciation, depletion and amortization for oil and gas related property is recorded on a unit-of-production basis.  For other depreciable property, depreciation is recorded on a straight line basis based on depreciable lives of five years for office furniture and three years for computer related equipment. Repairs and maintenance costs are charged to expense as incurred.

Reserves for Uncollectible Advances and Loans – The Company reviews its advances and loans receivable for possible impairment and records reserves for possible losses on amounts believed to be uncollectible.  This includes the recording of impairment on debt securities classified as held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” when impairment is deemed to be other than temporary.

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Impairment of Long-Lived Assets – The Company reviews its long-lived assets in property, plant and equipment for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  Review for impairment of long-lived assets occurs whenever changes in circumstances indicate that the carrying amount of assets in property, plant and equipment may not be fully recoverable.  An impairment loss is recognized for assets to be held and used when the estimated undiscounted future cash flows expected to result from the asset including ultimate disposition are less than its carrying amount.   Impairment is measured by the excess of carrying amount over the fair value of the assets. As of December 31, 2008, and 2007 no impairment adjustments were required.

Asset Retirement Obligations – The Company accounts for asset retirement obligations in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” as amended by FIN No. 47, “Accounting for Conditional Asset Retirement Obligations.” The Company at December 31, 2008, and 2007 had no long-lived assets subject to significant asset retirement obligations.  The nature or amount of any asset retirement obligations which the Company may become subject to from its future operations is not determinable at this time and will be assessed as significant operations and development efforts begin.

Revenues – The Company presently has no direct sales revenues from customers. The Company records revenues for which it deems that collection is reasonably assured and the earnings process is complete, which is generally when crude oil and natural gas quantities are delivered to or collected by the respective purchaser.  Title to the produced quantities transfers to the purchaser at the time the purchaser collects or receives the quantities.  Prices for such production will be defined in sales contracts.

Income Taxes – Commencing May 7, 2007, the Company became subject to taxation as a corporation but at December 31, 2008 was in an operating loss position for U.S. income tax purposes. Therefore, the Company does not accrue U.S. current income taxes. Deferred income taxes are provided using the asset and liability method for financial reporting purposes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for temporary differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes and for operating loss and tax credit carry forwards. 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 removed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. For dates prior to May 7, 2007, the Company was an LLC pass-through entity treated similar to a partnership for income tax purposes in the United States, and therefore did not accrue or pay income taxes.

Foreign Currency Translation – The functional currency of the Hong Kong subsidiary is the U.S. dollar.   The functional currency of the China subsidiary is the local currency.  Balance sheet translation effects from translating local functional currency into U.S. dollars (the reporting currency) are recorded directly to other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income.”

Stock Based Compensation – The Company accounts for stock based compensation in accordance with SFAS No.123(R), “Share-Based Payment,” which specifies the revised accounting alternative requirements for pre-2006 stock based compensation grants existing at January 1, 2006 and the required accounting for new grants starting January 1, 2006.

The Company made no stock based compensation grants before 2006. Accordingly, the provisions of SFAS No.123(R) pertaining to pre-2006 grants do not apply.   The Company values its stock options awarded on or after January 1, 2006 at the fair value at grant date using the Black-Scholes option pricing model. Compensation expense for stock options is recorded over the vesting period on a straight line basis. Compensation paid in vested stock is valued at the fair value at the applicable measurement date and charged to expense at that date.  Compensation paid in restricted stock is valued at fair value at the award date and is charged to expense over the vesting period.

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Net Income (Loss) Per Common Share –The Company computes earnings per share under SFAS No. 128, “Earnings Per Share.” Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's stock options, unvested restricted stock,  and warrants (calculated using the treasury stock method).

New Accounting Pronouncements – As of the balance sheet date, there were no new accounting pronouncements not yet adopted that are expected to materially affect the Company in the foreseeable future.  However, the following pronouncements may have some effect on the Company.

SFAS No. 141(R), “Business Combinations” — This statement includes a number of changes in the accounting and disclosure requirements for new business combinations occurring after its effective date.  The changes in accounting requirements include: acquisition costs will be expensed as incurred; noncontrolling (minority) interests will be valued at fair value; acquired contingent liabilities will be recorded at fair value; acquired research and development costs will be recorded at fair value as an intangible asset with indefinite life; restructuring costs will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and changes in income tax uncertainties after the acquisition date will generally affect income tax expense.  The statement is effective for new business combinations occurring on or after the first reporting period beginning on or after December 15, 2008.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements:  An Amendment of ARB No. 51” —  This statement changes the accounting and reporting for noncontrolling (minority) interests in subsidiaries and for deconsolidation of a subsidiary.  Under the revised basis, the noncontrolling interest will be shown in the balance sheet as a separate line in equity instead of as a liability.  In the income statement, separate totals will be shown for consolidated net income including noncontrolling interest, noncontrolling interest as a deduction, and consolidated net income attributable to the controlling interest. In addition, changes in ownership interests in a subsidiary that do not result in deconsolidation are equity transactions if a controlling financial interest is retained. If a subsidiary is deconsolidated, the parent company will now recognize gain or loss to net income based on fair value of the noncontrolling equity at that date. The statement is effective prospectively for fiscal years and interim periods beginning on or after December 15, 2008, but upon adoption will require restatement of prior periods to the revised bases of balance sheet and net income presentation.

SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” –   This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States.  This is defined as the GAAP hierarchy.  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  As  SFAS No. 162 does not result in any specific changes to GAAP, the Company does not expect that its effectiveness will  have any material effect on the Company’s Financial Statements.

SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts” – This statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration occurred in an insured financial obligation.  SFAS No. 163 also clarifies how Statement 60 applies to financial guarantee insurance contracts.  SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  As the Company does not engage in the types of transactions covered by this statement, the effectiveness of this statement will have no effect on our consolidated financial statements.

In January 2009, the Securities and Exchange Commission (SEC) approved Release No, 33 – 8895 “Modernization of Oil and Gas Reporting,” which becomes effective January 1, 2010. The new rules are intended to provide investors with more meaningful information on which to base their evaluations of the relative values of oil and gas companies, taking into account the significant technological advances that have been made since the initial rules were issued.

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Significantly, Release 33 – 8895 eliminates the term “proved reserves” and replaces it with the terms “developed oil and gas reserves” and “undeveloped oil and gas reserves.”  This broadening of disclosure is anticipated to provide oil and gas companies the opportunity to report additional volumes of resources that were previously not allowed to be included in filings with the SEC.

While we are still in the process of reviewing all the details of Release 33 – 8895, we expect that the revised rules will prove beneficial to the Company, if and when we begin reporting reserves.

 NOTE 6. --- FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments – The carrying amounts of the Company’s financial instruments, which include cash equivalents, short-term investments, deposits, long-term advances, accounts payable, accrued expenses, and notes payable, approximate fair value at December 31, 2008, and 2007. The aggregate fair value of securities classified as available for sale was $1,260,000 at December 31, 2008 and $11,200,000 at December 31, 2007.

Long-Term Advances - At December 31, 2008, and December 31, 2007, 100% of the Company’s long-term advances ($386,415 in 2008, and $534,530 in 2007) were comprised of a note receivable from a single borrower. In 2006, IMPCO HK advanced $400,507 to Beijing Jinrun Hongda Technology Co., Ltd. (“BJHTC”), which then invested that amount in IMPCO Sunrise. The notes are repayable in RMB.  As of December 31, 2008 no repayments have been made.  The balance of $386,415 at December 31, 2008 reflects an impairment loss recorded in 2008, as described further below.   As of December 31, 2007 IMPCO HK had accrued $100,547 in interest and $33,476 in currency gains on the notes, for a total balance of $534,530.   BJHTC is obligated to apply any remittances received from IMPCO Sunrise directly to IMPCO HK. IMPCO Sunrise is authorized to pay these remittances directly to IMPCO HK on BJHTC’s behalf, until the debt is satisfied.  The stated interest rate on the note is 20% compounded daily.  The note matures November 14, 2014.  BJHTC is only responsible to make payments under the note for the share of profits it receives from IMPCO Sunrise.

Under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the BJHTC note has been accounted for as “held-to-maturity” based on an intent and ability to hold to maturity. SFAS No. 115 also provides that such securities are to be assessed for declines in value that are other than temporary.  In addition, we considered the guidance in FSP FPS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.”  Based upon the delay in achieving net income in IMPCO Sunrise,  the impact of the significant decline in the price of oil in the second half of 2008, the amount of uncollected interest on the note, and the required date for repayment, it was determined in the fourth quarter of 2008 that the note was impaired.  Additionally the recording of interest income on the note was discontinued effective October 1, 2008.  An impairment loss of $273,618 was recorded in 2008 operating expenses to reduce the carrying amount of the note to the recorded amount of the BJHTC-related minority interest liability in the consolidated balance sheet as of December 31, 2008. As IMPCO Sunrise presently has no positive cash flows from operations, projections of future potential positive cash flows at several rates of return were utilized to determine that the revised carrying amount is realistic based upon the rate of return inherent in that amount. The difference between the impairment adjustment and the net change in carrying amount from December 31, 2007 represents interest income and currency transaction adjustments recorded during 2008 prior to recording the impairment.  In accordance with SFAS No. 157, “Fair Value Measurements,” and FSP FAS 157-3, the calculation of impairment was based upon a “level 3” unobservable input because there are no direct or indirect observable inputs of  fair value available for this note given that it is not publicly traded and is not comparable to publicly traded securities.  It is not comparable to publicly traded securities because by its terms the note is repayable only from the minority interest owned by the debtor in which the debtor has no at risk cash investment and no active involvement in the management of the entity.

Concentration of Credit Risk – The Company is exposed to concentration of credit risk with respect to cash, cash equivalents, short-term investments and long-term advances.  The Company chooses to maximize investment of its U.S. cash into higher yield investments rather than keeping the amounts in bank accounts. Early in 2008, the Company liquidated its short-term investments in order to increase liquidity and reduce exposure to risk of loss given market conditions at that time.  As a result of this action, the total cash and cash equivalents balances increased significantly in the U.S. during 2008.  At December 31, 2008, 78% ($975,681) of the Company’s total cash was on

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deposit in China at the Bank of China.  Also at that date, 48.7% ($4,514,167) of the Company’s total cash equivalents was invested in a single money market fund in the U.S. composed of securities of numerous issuers.  At December 31, 2007, 90% ($1,406,357) of the Company’s total cash was on deposit in China at the Bank of China.  Also at that date, the Company’s cash equivalents were invested in two money market funds, of which 54% ($348,561) was in a single fund; 18% ($2,000,000) and 15% ($1,650,000) of the Company’s U.S. short-term investments were invested in securities of two individual Moody’s Aaa-rated issuers.

NOTE 7. --- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment by type of property were as follows at December 31, 2008 and December 31, 2007:

December 31, 2008	Gross			Accumulated Depreciation			Net
Oil and gas wells		$	371,805		$	-		$	371,805
Office and computer equipment			244,595			59,894			184,701
Leasehold improvements			41,480			28,683			12,797
Total		$	657,880		$	88,577		$	569,303
December 31, 2007
Oil and gas wells		$	205,084		$	-		$	205,084
Office and computer equipment			64,324			13,720			50,604
Leasehold improvements			36,398			7,059			29,339
Total		$	305,806		$	20,779		$	285,027

Depreciation expense for the years ended December 31, 2008, 2007 and 2006 respectively was $66,769, $18,850 and $1,740.

No interest expense has been capitalized through December 31, 2008.

NOTE 8. --- INCOME TAXES

Income tax expense was as follows for the respective periods:

	2008			2007		2006
Current:
U.S. Federal	$	(19,044	)	$	19,085	$	-
State		32,126			19,741		-
Total	$	13,082		$	38,826	$	-

The Company’s subsidiaries outside the United States did not have any undistributed net earnings at December 31, 2008, due to accumulated net losses.

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Following is a reconciliation of the expected statutory U.S. Federal income tax provision to the actual income tax expense for the respective periods:

	2008			2007			2006
Net (loss) before income tax expense	$	(5,433,567	)	$	(2,344,858	)	$	(1,086,387	)
Expected income tax provision at statutory rate of 35%, assuming U.S. Federal filing as a corporation	$	(1,901,748	)	$	(820,700	)	$	(380,235	)
Increase (decrease) due to:
Foreign-incorporated subsidiaries		433,577			40,011			11,886
U.S. Federal filing as a partnership during LLC periods		-			315,254			368,349
State income tax		32,126			19,741			-
Net losses not realizable currently for U.S. tax purposes		1,468,171			465,435			-
Penalties and miscellaneous		(19,044	)		19,085			-
Total income tax expense	$	13,082		$	38,826		$	-

The Company records interest and penalties related to income taxes as income tax expense.

The Company records zero net deferred income tax assets and liabilities on the balance sheet on the basis that its overall net deferred income tax asset position is required to be fully offset by a valuation allowance due to its net losses since inception for both book basis and tax basis.

Deferred income tax assets by category are as follows as of December 31:

	2008			2007			2006
Tax basis operating loss carryovers	$	1,746,203		$	444,756		$	-
Stock compensation		402,323			24,156			-
Depreciation		3,712			-			-
		2,152,238			468,912			-
Valuation allowance		(2,152,238	)		(468,912	)		-
Net deferred income tax asset	$	-		$	-		$	-

The Company’s total tax basis loss carryovers at December 31, 2008 were $5,150,491.  Of this amount, $448,457 has no expiration date.  The remainder expires from 2011 to 2028.

NOTE 9. --- RELATED PARTY TRANSACTIONS

Consulting Agreements and Employment Contracts

Effective December 15, 2005 the Company entered into two-year consulting agreements with three key personnel who were also IMPCO members (shareholders of the Company following the Mergers). The agreements provided for the performance of specified services by the personnel in return for a fixed rate per month. The agreements were subject to termination by either party on 90 days notice. If the agreement is terminated by the Company, the consultant was entitled to receive the balance of payments that would have been payable through the original term. The Company’s commitments under these contracts were $33,350 per month, which increased to $34,350 per month in July 2006. In September 2006, new executive employment agreements were entered into between the Company and two IMPCO members to replace two of the three existing consulting agreements.  The agreements have no expiration date, and either party may terminate at will. The minimum commitment under these contracts is a total of $618,000 per year.   In the event of termination by the Company other than for cause or disability, multi-year severance payments are required. However, the operable effective date for the compensation rates under these agreements was delayed subject to the Company achieving certain financial benchmarks.  Therefore, payments

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continued at the rates set forth under the consulting agreements through March 31, 2007.  The new agreements became fully effective at the contracted rates on April 1, 2007.  These agreements are with Frank C. Ingriselli, President and Chief Executive Officer, and Stephen F. Groth, Vice President and Chief Financial Officer.

On August 1, 2008, the Company entered into an Employment Agreement with Richard Grigg, the Company’s Senior Vice President and Managing Director (the “Grigg Agreement”).  The Grigg Agreement, which superseded the prior employment agreement the Company entered into with Mr. Grigg in March 2008, had a three year term, and provided for a base salary of 1,650,000 RMB (approximately $241,000) per year and an annual performance-based bonus award targeted at between 30% and 40% of his then-current annual base salary awardable in the discretion of the Company’s Board of Directors.  Mr. Grigg was also entitled to reimbursement of certain accommodation expenses in Beijing, China, medical insurance, annual leave expenses, and certain other transportation fees and expenses.  In addition, in the event the Company terminated Mr. Grigg’s employment without Cause (as defined in the Grigg Agreement), the Company would have been required to pay to Mr. Grigg a lump sum amount equal to 50% of Mr. Grigg’s then-current annual base salary.  However, on January 27, 2009, the Company revised the terms of its employment relationship with Richard Grigg by entering into an Amended and Restated Employment Agreement with Mr. Grigg (the “Amended Employment Agreement”) and a Contract of Engagement (“Contract of Engagement”) with KKSH Holdings Ltd., a company registered in the British Virgin Islands(“KKSH”). Mr. Grigg is a minority shareholder and member of the board of directors of KKSH.  The Amended Employment Agreement superseded the Grigg Agreement and now governs the employment of Mr. Grigg in the capacity of Managing Director of the Company for a period of three years.  The Amended Employment Agreement provides for a base salary of 990,000 RMB (approximately $144,000) per year and the reimbursement of certain accommodation expenses in Beijing, China, annual leave expenses, and certain other transportation and expenses of Mr. Grigg.  In addition, in the event the Company terminates Mr. Grigg’s employment without Cause (as defined in the Amended Employment Agreement), the Company must pay to Mr. Grigg a lump sum amount equal to 50% of Mr. Grigg’s then-current annual base salary.  The Contract of Engagement governs the engagement of KKSH for a period of three years to provide the services of Mr. Grigg through KKSH as Senior Vice President of the Company strictly with respect to the development and management of business opportunities for the Company outside of the People’s Republic of China.  The basic fee for the services provided under the Contract of Engagement is 919,000 (approximately $134,000) RMB per year, to be prorated and paid monthly and subject to annual review and increase upon mutual agreement by the Company and KKSH.  Pursuant to the Contract of Engagement, the Company shall also provide Mr. Grigg with medical benefits and life insurance coverage, and an annual performance-based bonus award targeted at between 54% and 72% of the basic fee, awardable in the discretion of the Company’s Board of Directors.  In addition, in the event the Company terminates the Contract of Engagement without Cause (as defined in the Contract of Engagement), the Company must pay to KKSH a lump sum amount equal to 215% of the then-current annual basic fee.

Management Service Contracts

In connection with the merger on May 7, 2007, the Company assumed an Advisory Agreement, dated December 1, 2006, by and between ADS and Cagan McAfee Capital Partners, LLC (“CMCP”), pursuant to which CMCP agreed to provide certain financial advisory and management consulting services to the Company. Pursuant to the Advisory Agreement, CMCP is entitled to receive a monthly advisory fee of $9,500 for management work commencing on December 11, 2006 and continuing until December 11, 2009.  The Company has been receiving services from CMCP under this agreement since the Mergers.   Laird Q. Cagan, the Managing Director and 50% owner of CMCP, currently serves as a member of the Company’s Board of Directors.  During 2007, the Company paid $114,000 in fees under this contract, including an amount due for 2006.  During 2008, the Company paid $123,500 in fees under this contract, including an amount due for 2007.

Merger-Related Transactions

In connection with the Mergers on May 7, 2007, the Company assumed the obligation of ADS to pay Chadbourn Securities, Inc., a NASD licensed broker-dealer for which Mr. Laird Cagan (a director and significant shareholder of the Company) serves as a registered representative and Managing Director, $1,195,430 in placement fees and expense reimbursements relative to the previous securities offering of ADS. This amount has been paid in full.

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Immediately prior to the Mergers, ADS issued to its placement agents 1,860,001 warrants to purchase Class B membership units of ADS. Included were (i) warrants to purchase 3,825 Class B membership units of ADS issued to Michael McTeigue, an executive officer of ADS, (ii) warrants to purchase 83,354 Class B membership units of ADS issued to Chadbourn Securities, Inc., a NASD licensed broker-dealer for which Laird Q. Cagan serves as a registered representative and Managing Director, and (iii) warrants to purchase 696,094 Class B membership units of ADS issued to Laird Q. Cagan, a member of the Company’s Board of Directors and beneficial owner of  7.7% of the Company’s Common Stock. These warrants were exchanged in the Mergers for warrants exercisable for 1,860,001 shares of Common Stock of the Company. The Company has accounted for this as an offering cost applicable to paid-in capital and therefore will not record any compensation expense on these warrants. At December 31, 2008, 1,772,147 warrants remained unexercised, at a weighted average exercise price of $1.28 per share of Common Stock, and expire May 7, 2012.

NOTE 10. --- OTHER COMMITMENTS

Consulting Agreements

In September 2006 the Company entered into a consulting agreement with Morningside Development LLC superseding a prior agreement which was terminated.  The new agreement provided for payments of $12,000 per month, for which the remaining payments were $96,000 at December 31, 2006.  The contract was terminated in February 2007 for a final payment of $70,000.

Lease Commitments

At December 31, 2008 the Company had non-cancelable lease commitments for two operating leases on office facilities. Future minimum lease rentals by year are as follows:

2009 - $ 98,284

2010 - $ 58,300

Rental expense for the years ended December 31, 2008, 2007 and 2006 was $110,013, $78,183 and $28,499, respectively.

NOTE 11. --- CAPITALIZATION

The Company’s equity capital prior to the Mergers in May 2007 was composed of equity units of IMPCO.  At May 7, 2007 there were 347,296 Class A Units (“’A’ Units”) and 594,644 Class B Units (“’B’ Units”) outstanding immediately prior to the Mergers.   At December 31, 2006 there were 312,000 “A” Units and 587,719 “B” Units outstanding.

In addition, prior to the Mergers in May 2007, ADS issued 9,850,000 Class A interests and 13,600,000 Class B interests as equity units. The capitalization of ADS prior to the Mergers is not included in the Company’s financial statements for 2006.

The authorized capital stock of the Company consists of 300,000,000 shares of Common Stock, $0.001 par value per share, and 50,000,000 shares of Preferred Stock, $0.001 par value per share, of which 30,000,000 shares have been designated as “Series A Convertible Preferred Stock.”  6,291,048 shares of Series A Convertible Preferred Stock remain unissued following the automatic conversion of 23,708,952 shares of the Company’s Series A Convertible Preferred Stock into Common Stock of the Company on June 5, 2007.

The Company’s capitalization at December 31, 2008 was 40,061,785 shares of Common Stock issued and outstanding, and 23,708,952 shares of Series A Convertible Preferred Stock issued but none outstanding following the June 5, 2007 automatic conversion into Common Stock.  The Company’s capitalization at December 31, 2007 was 39,931,109 shares of Common Stock issued and outstanding, and 23,708,952 shares of Series A Convertible Preferred Stock issued but none outstanding following the June 5, 2007 automatic conversion into Common Stock.  At December 31, 2006, there were 5,304,000 shares of Common Stock issued and outstanding, and 9,991,223 shares of Series A Convertible Preferred Stock issued and outstanding (reflecting 312,000 “A” Units and 587,719 “B” Units issued and outstanding in IMPCO prior to the exchange of such units on a one-for-seventeen basis into

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Common Stock and Series A Convertible Preferred Stock of the Company, respectively, in the May 2007 Mergers).  At December 31, 2005 there were 5,304,000 shares of Common Stock issued and outstanding (reflecting 312,000 “A” Units issued and outstanding in IMPCO prior to the exchange of such units on a one-for-seventeen basis into Common Stock of the Company in the May 2007 Mergers).

In 2006 the Company (as IMPCO) issued 6,453 warrants to underwriters for purchase of “B” Units at an exercise price of $0.01 per share with a term of 10 years. The warrants were valued at $61,239 ($9.49 per warrant). This valuation was on the basis that due to the nominal exercise price of the warrant, the warrants were in substance equivalent to restricted equity units that vest at any time based on election of the holder. No expense was recorded on this transaction as this was considered part of offering costs applied to paid-in capital.  These warrants were exercised in early 2007, and the units were exchanged for shares of Common Stock of the Company in the May 2007 Mergers.

NOTE 12.  ---  NAVITAS ACQUISITION

On July 1, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with (i) Navitas Corporation, a Nevada corporation (“Navitas”), whose primary assets at the time of merger were comprised of 480,000 shares of Common Stock of the Company and certain deferred tax assets, and (ii) Navitas LLC, a Nevada limited liability company affiliated with Navitas and whose members consisted of Navitas shareholders. The shareholders of Navitas received a total of 450,005 shares of Company Common Stock in return for 100% of the shares of Navitas.  The merger was effective July 2, 2008.  At that date, Navitas was merged into the Company, and Navitas ceased to exist as a separate corporation.  The transaction resulted in a net decrease of 29,995 shares of the Company’s outstanding Common Stock.

A majority of interest of Navitas’ and Navitas LLC’s shareholders and members, respectively, were shareholders of the Company prior to the merger.  In addition, Adam McAfee, the President of Navitas and Managing Director of Navitas, LLC, is the brother of Eric A. McAfee, beneficial owner of approximately 5.6% of the Company’s Common Stock and 50% owner of Cagan McAfee Capital Partners, LLC, a fund owned 50% by Mr. Laird Q. Cagan, a member of the Company’s Board of Directors and beneficial owner of approximately 7.2% of the Company’s Common Stock.

The acquisition was accounted for as a merger involving treasury stock and immaterial net working capital.  No value was assigned to deferred tax assets acquired.  The purchase price paid of 450,005 shares of Common Stock of the Company was valued at $18.17 per share based on a seven-day weighted average related to the measurement date.  No gain was recognized on the net reduction of 29,995 shares outstanding of the Company’s capital stock.  The total absolute dollar amounts recorded for shares issued and shares acquired were the same except for certain transaction costs recorded as additional cost of shares acquired.  No cash consideration was paid by the Company in the merger.

NOTE 13.  --- STOCK-BASED COMPENSATION PLANS

Stock Options

In 2006 the Company (as IMPCO) issued equity unit options to purchase “B” equity units. These options were exchanged for Common Stock options of the Company at the merger date of May 7, 2007.

Under the Company’s 2007 Stock Plan, the Company may issue stock or options not to exceed an aggregate of 4,000,000 shares of Common Stock. Options awarded expire 10 years from date of grant.  In 2008, the Company issued a total of 1,192,000 stock options on December 9, 2008 with vesting periods from one to four years. The approximate percentages of the 2008 awards vesting by year is as follows: at one year – 50%; at two years – 20%; at three years – 20%; at four years – 10%.

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The following is a table showing options activity:

	Number of Shares Underlying Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term(Years)
Granted during 2006 and
outstanding at December 31, 2006	836,400		$	0.56	9.75
Granted in 2007	180,000		$	6.00	9.96
Outstanding at December 31, 2007	1,016,400		$	1.52	8.96
Granted in 2008	1,192,000		$	.64	9.94
Forfeited in 2008	(71,200	)	$	1.32
Outstanding at December 31, 2008	2,137,200		$	1.04	9.07
Expected to vest	2,137,200		$	1.04	9.07
Exercisable at December 31, 2008	556,442		$	1.29	7.91

The total intrinsic values of options at December 31, 2008 were $81,688 for options outstanding and expected to vest and $43,330 for options that were exercisable at that date.

The Company recorded compensation expense relative to stock options in 2008, 2007 and 2006 of $378,025, $167,325 and $29,065 respectively.

During the year, the Company issued 15,000 shares of common stock for fees and services valued at $138,000.

The fair values of stock options used in recording compensation expense are computed using the Black-Scholes option pricing model.  The table below shows the weighted average amounts for the assumptions used in the model for options awarded in each year.

		2008	2007				2006
Expected price volatility (basket of comparable public companies)		65.60%			55.80%			64.60%
Risk-free interest rate (U.S. Treasury bonds)		2.04%			4.09%			4.58%
Expected annual dividend rate		0.00%			0.00%			0.00%
Expected option term – weighted average		5.95 yrs.			5.98 yrs.			5.95	yrs.
Grant date fair value per common share-weighted average	$	.39		$	3.38	$			.35

Stock Options and Restricted Shares

The total grant date fair value of shares vested during 2008, 2007 and 2006 were $763,510, $173,441 and zero, respectively.

The weighted average grant date fair value of stock options and restricted shares issued during the years 2008, 2007 and 2006 were $1,478,080, $1,660,800, and $292,740, respectively.

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Restricted Stock

	Number Of Grants			Weighted Average Grant Date Fair Value
Granted during 2007 and
outstanding at December 31, 2007		175,400		$	6.00
Granted in 2008		745,000		$	1.36
Vested in 2008		(76,400	)	$	6.43
Cancelled in 2008 prior to vesting		(10,000	)	$	9.25
Outstanding at December 31, 2008		834,000		$	1.78

The Company recorded compensation expense relative to restricted stock in years 2008 and 2007 of $977,565 and $28,117 respectively.  At December 31, 2008, the remaining future compensation expense to be recorded on unvested stock options and restricted stock was $1,790,148, to be recognized over a weighted average period of 1.83 years, assuming that no forfeitures occur.

NOTE 14. --- POTENTIALLY DILUTIVE SECURITIES

Warrants, options and restricted stock described in the immediately preceding notes are potentially dilutive in future periods if the Company has net income. They have been anti-dilutive for all periods to date because the Company has been in a loss position.

NOTE 15. --- PENSION AND POSTRETIREMENT PLANS

In 2007 the Company adopted a defined contribution 401(k) plan for its employees.   The plan provides for Company matching of 200% on up to the first 3% of salary contributed by employees. The plan includes the option for employee contributions to be made from either pre-tax or after-tax basis income as elected by the employee. Company contributions are immediately vested to the employee.  In 2008, the Company contributions were $50,989 under this plan including third party administration fees.

NOTE 16. --- LITIGATION AND CONTINGENCIES

The Company at December 31, 2008 had no litigation, actual or potential, of which it was aware and which could have a material effect on its financial position.

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Quarterly Information and Stock Market Data (unaudited)

The table below presents unaudited quarterly data for the years ended December 31, 2008, December 31, 2007 and December 31, 2006:

	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
2008
Operating Loss	$	(1,085,980	)	$	(1,265,498	)	$	(1,250,923	)	$	(2,181,419	)
Net Loss	$	(950,008	)	$	(1,201,002	)	$	(1,157,980	)	$	(2,137,659	)
Basic and diluted net loss per common share	$	(.02	)	$	(.03	)	$	(.03	)	$	(.05	)
Common stock price  range
High	$	17.00		$	22.00		$	17.05		$	1.93
Low	$	7.50		$	14.50		$	1.82		$	.45
2007
Operating Loss	$	(785,744	)	$	(653,914	)	$	(588,735	)	$	(953,854	)
Net Loss	$	(748,241	)	$	(499,731	)	$	(353,024	)	$	(782,688	)
Basic and diluted net loss per common share	$	(0.05	)	$	(0.02	)	$	(0.01	)	$	(0.02	)
Common stock price  range
High	$	3.50		$	13.00		$	11.50		$	15.75
Low	$	2.50		$	2.90		$	5.00		$	5.00

The 2008 fourth quarter operating loss exceeded the third quarter loss by $930,496, which mostly consisted of increased salaries resulting from year-end bonuses that exceeded amounts accrued in prior quarters by $196,191,  increased stock based compensation of $29,887, operating contract work first initiated in the fourth quarter of $249,940, impairment of assets of $273,618, consulting costs mostly consisting of the write-off of capitalized consulting costs related to the three terminated Asset Transfer Agreements and Sarbanes-Oxley fees of $107,147 and accrued vacation of $21,405.

The 2007 fourth quarter operating loss exceeded the third quarter loss by $365,119, which mostly consisted of increased salaries resulting from year-end bonuses that exceeded amounts accrued in prior quarters by $102,519,  increased stock based compensation of $93,334, consulting costs of $87,337 mostly consisting of the provisional hiring of the managing director in Beijing and accrued vacation of $31,366.

The Common Stock is currently quoted for trading on the OTC Bulletin Board under the symbol “PFAP.OB.” Prior to its commencement of trading on the OTC Bulletin Board on May 8, 2008, the Common Stock was quoted for trading on the Pink Sheets under the symbol “PFAP.PK.” The above table sets forth the high and low last bid prices for the Common Stock for each fiscal quarter during the past two fiscal years as reported by Pink Sheets LLC and adjusted for the 100:1 reverse split on January 11, 2007. These prices do not reflect retail mark-ups, markdowns or commissions and may not represent actual transactions.

The last bid price on February 26, 2009 reported on the OTC Bulletin Board was $0.51 per share of Common Stock.

As of February 27, 2009, the Company had warrants outstanding to purchase (i) an aggregate of 1,532,147 shares of Common Stock at a price per share of $1.25; (ii) an aggregate of 120,000 shares of Common Stock at a price per share of $1.375; and (iii) an aggregate of 120,000 shares of Common Stock at a price per share of $1.50.

As of February 27, 2009, an aggregate of 2,137,200 shares of Common Stock were issuable upon exercise of outstanding stock options.

Holders

As of February 27, 2009, the Company had 137 shareholders of record of Common Stock.

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Dividends

The Company has not, to date, paid any cash dividends on its Common Stock. The Company has no current plans to pay dividends on its Common Stock and intends to retain earnings, if any, for working capital purposes. Any future determination as to the payment of dividends on the Common Stock will depend upon the results of operations, capital requirements, the financial condition of the Company and other relevant factors.

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Management of the Company, with the participation of its CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluation, as of the end of the period covered by this Form 10-K, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective.

Management’s Report On Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and is effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:

• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets,

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based on this assessment, management, including the Company’s CEO and CFO, concluded that our internal control over financial reporting was effective as of December 31, 2008.

RBSM LLP, the independent registered public accounting firm that has audited the financial statements included in this Report, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2008 which is given below.

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RBSM LLP

CERTIFIED PUBLIC ACCOUNTANTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Pacific Asia Petroleum, Inc.

Hartsdale, NY

We have audited Pacific Asia Petroleum, Inc. and its subsidiaries (the "Company") (a development stage company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Pacific Asia Petroleum, Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balances sheets of Pacific Asia Petroleum, Inc. and its subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008 and for the period August 25, 2005 (date of inception) through December 31, 2008 and our report dated February 27, 2009 expressed an unqualified opinion.

            /s/ RBSM LLP

New York, New York

February 27, 2009

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Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.   OTHER INFORMATION

None.

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PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

Executive Officers and Directors

The directors and executive officers of the Company are as follows:

Name	Age	Position
Frank C. Ingriselli	55	President, Chief Executive Officer, Secretary and Director
Stephen F. Groth	56	Vice President and Chief Financial Officer
Richard Grigg	55	Senior Vice President and Managing Director
Jamie Tseng	55	Executive Vice President
Laird Q. Cagan	51	Director
James F. Link, Jr.	64	Director
Elizabeth P. Smith	59	Director
Robert C. Stempel	75	Director

Directors are elected at each annual meeting of stockholders, and each executive officer serves until his resignation, death, or removal by the Board of Directors.

Frank C. Ingriselli, Chief Executive Officer, President, Secretary and Director

Mr. Ingriselli has served as the President, Chief Executive Officer, Secretary and a member of the Board of Directors of the Company since May 2007.  Mr. Ingriselli has over 29 years experience in the energy industry. Mr. Ingriselli began his career at Texaco, Inc. (“Texaco”) in 1979 and held management positions in Texaco’s Producing-Eastern Hemisphere Department, Middle East/Far East Division, and Texaco’s International Exploration Company. While at Texaco, Mr. Ingriselli negotiated a successful foreign oil development investment contract in China in 1983. In 1992, Mr. Ingriselli was named President of Texaco International Operations Inc. and over the next several years directed Texaco’s global initiatives in exploration and development. In 1996, he was appointed President and CEO of the Timan Pechora Company, a Houston, Texas headquartered company owned by affiliates of Texaco, Exxon, Amoco and Norsk Hydro, which was developing a large international investment in Russia. In 1998, Mr. Ingriselli returned to Texaco’s Executive Department with responsibilities for Texaco’s power and gas operations, merger and acquisition activities, pipeline operations and corporate development. In August 2000, Mr. Ingriselli was appointed President of Texaco Technology Ventures, which was responsible for all of Texaco’s global technology initiatives and investments. In 2001, Mr. Ingriselli retired from Texaco after its merger with Chevron, and founded Global Venture Investments LLC (“GVI”), an energy consulting firm, for which Mr. Ingriselli served as the President and Chief Executive Officer. Mr. Ingriselli is no longer active with GVI. In 2005, Mr. Ingriselli co-founded Inner Mongolia Production Company, LLC (“IMPCO”) with Mr. Tseng and Mr. Groth,

and served as the President, Chief Executive Officer and a Manager of IMPCO prior to the May 2007 merger of IMPCO into the Company.

From 2000 to 2006, Mr. Ingriselli sat on the Board of the Electric Drive Transportation Association (where he was also Treasurer) and the Angelino Group, and was an officer of several subsidiaries of Energy Conversion Devices Inc., a U.S. public corporation engaged in the development and commercialization of environmental energy technologies. From 2001 to 2006, he was a Director and Officer of General Energy Technologies Inc., a “technology facilitator” to Chinese industry serving the critical need for advanced energy technology and the growing demand for low-cost high quality components, and Eletra Ltd, a Brazilian hybrid electric bus developer.  Mr. Ingriselli currently sits on the Advisory Board of the Eurasia Foundation, a Washington D.C.-based non-profit that funds programs that build democratic and free market institutions in the new independent states of the former Soviet

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Union. Since 2006, Mr. Ingriselli has also served on the Board of Directors and as an executive officer of Brightening Lives Foundation Inc., a New York charitable foundation headquartered in San Ramon, California.

Mr. Ingriselli graduated from Boston University in 1975 with a Bachelor of Science degree in Business Administration. He also earned a Master of Business Administration degree from New York University in both Finance and International Finance in 1977 and a Juris Doctor degree from Fordham University School of Law in 1979.

Stephen F. Groth, Vice President and Chief Financial Officer

Mr. Groth has served as the Vice President and Chief Financial Officer of the Company since May 2007. Mr. Groth brings to the Company more than 30 years experience in the energy industry providing financial analysis, financial modeling, corporate reporting and financial reporting system expertise. Mr. Groth joined Texaco in 1979 and held various positions in financial groups at Texaco, and from 1999 to 2001 held a position in the corporate executive group at Texaco with the responsibility of reviewing all of its investments and divestments (capital expenditures, acquisitions, and divestitures) greater than $10 million. From 2001 until May 2007, Mr. Groth served as Vice President of GVI. In his roles at both Texaco and GVI, Mr. Groth reviewed numerous transactions, assuring that evaluations were done in accordance with appropriate corporate standards and that the assumptions underlying the economic valuations were valid, and regularly advised client operating departments on appropriate ways to evaluate investment alternatives, providing support for the negotiation of major acquisitions and divestitures. In 2005, Mr. Groth co-founded IMPCO with Mr. Ingriselli and Mr. Tseng, and served as the Vice President, Chief Financial Officer and Manager of IMPCO prior to the May 2007 merger of IMPCO into the Company.

Mr. Groth received his Bachelor of Arts in Philosophy in 1975 from Fordham University and his MBA in Accounting from New York University in 1977. Before joining Texaco in 1979, he worked as an auditor for Price Waterhouse, and as an internal auditor for American Airlines.

Richard Grigg, Senior Vice President and Managing Director

Richard Grigg was promoted to the position of Senior Vice President and Managing Director of the Company, effective August 1, 2008. Mr. Grigg has served as the Company’s Managing Director of its Beijing office since October 2007, and has 38 years experience in the petroleum and resource industries, with broad experience in both the operating and service sectors of the petroleum industry as well as extensive management and operational experience.  Prior to joining the Company,Mr. Grigg was the Chief Operating Officer for Sino Gas & Energy Limited (“SGE”) based in Beijing and responsible from 2005 to October 2007 for all activities of the company within China and in particular for negotiating SGE’s operatorship of, and farm into, the Chevron owned Linxing, San Jiao Bei and Shenfu production sharing contracts, and the subsequent exploration and appraisal operations in those areas. Prior to joining SGE, from 2000 through 2005 Mr. Grigg served as a consultant to various Australian-based coalbed methane (“CBM”) operators where he was involved in managing the project development of some of the largest Australian CBM commercialization projects including the Moranbah Gas Project in North Central Queensland for CH4 Ltd (now Arrow Energy Limited).  In 1987, Mr. Grigg founded Surtron Technologies, taking it to leadership within the resources industry in Australia and the Asia Pacific region before selling the company in 1997 to publicly listed Imdex Limited. From 1992 to 1998, Mr. Grigg was also involved in a technology transfer venture in Vietnam and other countries in the Asia Pacific region.

Prior to 1987, Mr. Grigg worked with many of the largest multinational oilfield service companies where he gained broad ranging experience across the areas of drilling, reservoir engineering, petroleum engineering and production. These companies included Sperry Sun (now part of the Halliburton Group), Core Laboratories (NYSE:CLB), Dowell Schlumberger (now Anadrill and part of the Schlumberger Group), and Eastman Whipstock (now BH/Inteq and part of the Baker Hughes Group).

Mr. Grigg started his career in 1970 with West Australian Petroleum (WAPET) – owned at the time by Texaco Inc. and Chevron Corporation – and worked on the Barrow Island oilfield development gaining valuable grass roots experience in all aspects of bringing an oilfield to full commercialization.

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Jamie Tseng, Executive Vice President

Mr. Tseng has served as the Company’s Executive Vice President since May 2007. Mr. Tseng brings to the Company more that 25 years of financial management and operations experience in the People’s Republic of China, the Republic of China and the United States. In 2005, Mr. Tseng co-founded IMPCO with Mr. Ingriselli and Mr. Groth, and served as the Executive Vice President and Manager of IMPCO prior to the May 2007 Merger of IMPCO into the Company.  From February 2000 to August 2005, Mr. Tseng served as Chief Financial Officer of General Energy Technologies Inc., a “technology facilitator” to Chinese industry serving the critical need for advanced energy technology and the growing demand for low cost high quality components. From 1998 to February 2000, Mr. Tseng served as Chief Financial Officer of Multa Communications Corporation, a California-based Internet service provider focusing on China. From 1980 until 1998, he held management positions with Collins Company, Hilton International, China Airlines and Tatung Company of America. Mr. Tseng is fluent in Chinese Mandarin.  He has a BD degree in Accounting from Soochow University in Taiwan.

Laird Q. Cagan, Director

Mr. Cagan has served as a Director of the Company since May 2007. Mr. Cagan is a co-founder and, since 2001, has been Managing Director of Cagan McAfee Capital Partners, LLC (“CMCP”), a merchant bank based in Cupertino, California. Since 2004, Mr. Cagan has also been a Managing Director of Chadbourn Securities, Inc., a FINRA licensed broker-dealer. In 2009 Chadbourn merged into Colorado Financial Service Corp., a FINRA-licensed broker-dealer, whereupon Chadbourn relinquished its broker-dealer license. He also continues to serve as President of Cagan Capital, LLC, a merchant bank he formed in 1990, the operation of which transitioned into CMCP. Mr. Cagan has served or serves on the Board of Directors of the following companies: Evolution Petroleum Corporation, a Houston-based public company involved in the acquisition, exploitation, development, and production of crude oil and natural gas resources (since 2004, where Mr. Cagan is also a co-founder and Chairman); AE Biofuels, Inc., a bio-fuels company headquartered in Cupertino, California (from 2006 to 2008, where Mr. Cagan is also a co-founder); Real Foundations, Inc., a real estate-focused consulting firm (from 2000 to 2004); Burstein Technologies, a development stage medical devices company (from 2005 to 2006); WorldSage, Inc. (recently renamed Career College Holding Company, Inc.), a California-based public company that purchased a $4M revenue, for-profit college in Switzerland in October 2007 and subsequently sold that college in 2008 (since 2006); Fortes Financial Corporation, an Irvine, California-based mortgage bank (since 2007); and TWL Corporation, a Carrollton, Texas-based publicly-traded workplace training and education company (from 2007 to 2008).

Mr. Cagan has been involved over the past 25 years as a venture capitalist, investment banker and principal, in a wide variety of financings, mergers, acquisitions and investments of high growth companies in a wide variety of industries. At Goldman, Sachs & Co. and Drexel Burnham Lambert, Mr. Cagan was involved in numerous transactions. Mr. Cagan attended M.I.T. and received his BS and MS degree in engineering, and his MBA, all from Stanford University. He is a member of the Stanford University Athletic Board and past Chairman of the SF Bay Chapter of the Young Presidents’ Organization.

James F. Link, Jr., Director

Mr. Link has served on the Company’s Board of Directors since July 2008.  Mr. Link retired from the position of Vice President of Finance and Risk Management of Texaco Inc. upon its merger with Chevron Inc. in 2001.  He earned a bachelor of Business Administration degree in Accounting in 1966 and a Master of Business Administration degree in 1968, both from University of Memphis.  Mr. Link served from 1969 to 1971 as a Lieutenant in the U.S. Army Finance Corps.  He joined the Comptroller’s Department of Texaco in New York in 1971.  Mr. Link was named Manager of Texaco’s Corporate Financial Reporting Office in 1979.  In 1984 he was named Assistant to the Senior Vice President and Chief Financial Officer of Texaco.  He was named as Texaco’s Director of Corporate Finance in the Finance Department in 1986.  He was appointed Assistant Treasurer of Texaco in 1989 and was named Senior Assistant Treasurer in 1991.  Mr. Link assumed in 1993 the responsibilities of Fiscal Director and Comptroller of Texaco U.S.A. headquartered in Houston, Texas.  In 1995, Mr. Link was elected Treasurer of Texaco and, in 1999, he was elected Vice President of Finance and Risk Management.  He served as a Director of Caltex Corporation, Texaco’s refining, marketing joint venture with Chevron, which operated throughout Asia, Africa, the Middle East and Australia.  He also served as a Director of Equilon LLC, a refining, marketing joint venture with Shell Oil, operating primarily in the Western and Mid-Western United States.

Mr. Link is a Board Member of Nehemiah Commission, a not-for-profit social services agency providing services to at-risk children in Fairfield and New Haven counties in Connecticut.  He also is a Board Member of the Oak Hill School-CT Institute for the Blind Foundation, headquartered in Hartford, Connecticut which helps people with disabilities in communities throughout Connecticut.

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Elizabeth P. Smith, Director

Ms. Smith has served as a Director of the Company since May 2007.  Ms. Smith retired from Texaco Inc. as Vice President-Investor Relations and Shareholder Services in late 2001 following the company’s merger with Chevron Corp. Ms. Smith was also the Corporate Compliance Officer for Texaco and was a member of the Board of The Texaco Foundation. Ms. Smith joined Texaco’s Legal Department in 1976. As an attorney in the Legal Department, Ms. Smith handled administrative law matters and litigation. She served as Chairman of the American Petroleum Institute’s Subcommittee on Department of Energy Law for the 1983-1985 term.  Ms. Smith was appointed Director of Investor Relations for Texaco, Inc. in 1984, and was named Vice President of the Corporate Communications division in 1989. In 1992, Ms. Smith was elected a Vice President of Texaco Inc. and assumed additional responsibilities as head of that company’s Shareholder Services Group. In 1999, Ms. Smith was named Corporate Compliance Officer for Texaco.

Ms. Smith has served on the Board of Finance for Darien, Connecticut, since November 2007.  Since May 2007, Ms. Smith has served as a Board Member of the Community Fund of Darien, Connecticut, and from 1996 through 2006, Ms. Smith has served on the Board of Directors of INROADS/Fairfield Westchester Counties, Inc. From 2002 through 2005, she also served as a member of the Boards of Families With Children From China-Greater New York, and from 2004 through 2005 as a member of the Board of The Chinese Language School of Connecticut. While at Texaco, Ms. Smith was an active member in NIRI (National Investor Relations Institute) and the NIRI Senior Roundtable. She has been a member and past President of both the Investor Relations Association and the Petroleum Investor Relations Institute. Ms. Smith was a member of the Board of Trustees of Marymount College Tarrytown until 2001. She was also a member of the Board of The Education and Learning Foundation of Westchester and Putnam Counties from 1993 to 2002.

Ms. Smith graduated from Bucknell University in 1971 with a Bachelor of Arts degree, cum laude, and received a Doctor of Jurisprudence degree from Georgetown University Law Center in 1976.

Robert C. Stempel, Director

Mr. Stempel has served on the Company’s Board of Directors since February 2008.  Mr. Stempel was the former Chairman and CEO of General Motors Corporation and Energy Conversion Devices, Inc.  Mr. Stempel retired as Chairman and Chief Executive Officer from General Motors Corporation in November 1992.  He was named Chairman and CEO in August 1990.  Prior to serving as Chairman, he had been President and Chief Operating Officer of General Motors Corporation since September 1, 1987.  Mr. Stempel retired as Chief Executive Officer and Chairman of Energy Conversion Devices, Inc. effective, respectively, on August 31, 2007 and on December 11, 2007. Mr. Stempel became Chairman of Energy Conversion Devices, Inc. in December of 1995.

Mr. Stempel is a member of the National Academy of Engineering.  He is also a Fellow of the Society of Automotive Engineers and the Engineering Society of Detroit, and a Life Fellow of the American Society of Mechanical Engineers. In October 2001 he was awarded the Golden Omega Award for important contributions to technical progress in the electrical/electronics field.  In November 2001 he was awarded the Soichiro Honda Medal for significant engineering contributions in the field of personal transportation.  Mr. Stempel serves as Chairman of the Council of Great Lakes Industries supporting the industrial and environmental activities of the Council of Great Lakes Governors.

Committees

At its July 22, 2008 meeting, the Company’s Board of Directors approved and adopted charters for the newly formed Audit Committee, Compensation Committee and Nominating Committee.

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Audit Committee

On July 22, 2008, the Board of Directors selected James F. Link, Jr., Robert C. Stempel and Elizabeth P. Smith to serve on its Audit Committee.  The Board of Directors has determined that Mr. Link, Mr. Stempel and Ms. Smith are independent within the meaning of Rule 4200(a)(15) of the Nasdaq Stock Market, Inc. and Section 10A(m)(3) of the Securities Exchange Act of 1934 and applicable rules of the Securities and Exchange Commission.  Mr. Link was named acting Chairman of the Committee and also named as the “audit committee financial expert” under applicable Securities and Exchange Commission rules. 

Compensation Committee 

The Company’s Board of Directors formed a Compensation Committee on July 22, 2008. Board members Mr. Stempel, Ms. Smith and Mr. Link were named Committee members, with Ms. Smith named as Committee Chairperson. Each of the Compensation Committee members has been determined by the Board of Directors to be an “independent” director under American Stock Exchange listing standards.

Nominating Committee

On July 22, 2008, the Company’s Board of Directors appointed Board members Mr. Stempel, Ms. Smith and Mr. Link to serve on its Nominating Committee. Mr. Stempel was named acting Committee Chairman. Each of the Nominating Committee members has been determined by the Board of Directors to be an “independent” director under American Stock Exchange listing standards.

Code of Ethics

On August 15, 2007, the Company adopted a Code of Ethics and Business Conduct (the “Code”) applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other employees.  Among other provisions, the Code sets forth standards for honest and ethical conduct, full and fair disclosure in public filings and shareholder communications, compliance with laws, rules and regulations, reporting of code violations and accountability for adherence to the Code.  The text of the Code has been posted on the Company’s website (www.papetroleum.com).  A copy of the Code can be obtained free-of-charge upon written request to:

Corporate Secretary

Pacific Asia Petroleum, Inc.

250 East Hartsdale Ave., Suite 47

Hartsdale, New York 10530

If the Company makes any amendment to, or grant any waivers of, a provision of the Code that applies to our principal executive officer or principal financial officer and that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons for the amendment or waiver on our website.

Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Securities Exchange Act of 1934 and rules promulgated thereunder, the Company’s directors, executive officers, and any person holding beneficially more than 10% of the Company’s common stock are required to report their ownership of the Company’s securities and any changes in that ownership to the Securities and Exchange Commission and to file copies of the reports with the Company.   Specific due dates for these reports have been established, and the Company is required to report in this Annual Report on Form 10-K/A any failures to file by these dates during the last fiscal year.

Based upon a review of filings with the SEC and written representations that no other reports were required, the Company believes that all of its directors, executive officers and persons owning more than 10% of the Company’s common stock complied during the year ended December 31, 2008 with the reporting requirements of Section 16(a) of the Exchange Act, except that due to an administrative oversight, reports for each of Messers. Ingriselli, Groth, Grigg and Tseng covering equity awards granted to such persons on December 9, 2008 were filed on December 17, 2008.

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ITEM 11 -  EXECUTIVE COMPENSATION

Compensation Committee Interlocks and Insider Participation

On July 22, 2008, the Company’s Board of Directors appointed Board members Robert C. Stempel, Elizabeth P. Smith and James F. Link, Jr. to serve on its Compensation Committee. Prior to that date, the Company’s entire Board of Directors, comprised of Frank C. Ingriselli, Laird Q. Cagan, Ms. Smith, and Mr. Stempel, served as its

Compensation Committee.  None of the members of the Compensation Committee are or have ever been officers or employees of the Company except Mr. Ingriselli.  During the time period prior to July 22, 2008, Mr. Ingriselli was entitled as a Board member to participate in discussions and determinations related to his compensation.  However, Mr. Ingriselli had recused himself from participating in such discussions and determinations with respect to bonus and compensation matters involving himself.

None of our executive officers served as a member of:

· The compensation committee of another entity in which one of the executive officers of such entity served on our Compensation Committee;

· The board of directors of another entity, one of whose executive officers served on our Compensation Committee;  or

· The compensation committee of another entity in which one of the executive officers of such entity served as a member of our Board.

The Company is a party to an Advisory Agreement, effective December 1, 2006 (“Advisory Agreement”), with Cagan McAfee Capital Partners, LLC (“CMCP”), pursuant to which CMCP agreed to provide certain financial advisory and management consulting services to the Company. Pursuant to the Advisory Agreement, CMCP is entitled to receive a monthly advisory fee of $9,500 for management work commencing on December 1, 2006 and continuing until December 1, 2009.  In addition, the Advisory Agreement obligates the Company to indemnify CMCP against certain liabilities in connection with the engagement of CMCP under the Advisory Agreement.  Mr. Cagan, the Managing Director and 50% owner of CMCP, currently serves as a member of the Company’s Board of Directors.

Compensation Committee Report

The Company’s Compensation Committee, formed on July 22, 2008, has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Company’s Compensation Committee approved the inclusion of the Compensation Discussion and Analysis in this Annual Report on Form 10-K/A.

The members of the Company’s Compensation Committee are as follows:

James F. Link, Jr.

Elizabeth P. Smith

Robert C. Stempel

Compensation Discussion and Analysis

Overview of Compensation Program. The Company formed a Compensation Committee on July 22, 2008. The Compensation Committee has responsibility for establishing, implementing and continually monitoring adherence with the Company’s compensation philosophy. The Committee strives to ensure that the total compensation paid to the named executives is fair, reasonable and competitive. Generally, the types of compensation and benefits provided to the named executives are similar to those provided to executive officers serving in similar positions and with similar responsibilities in other U.S. publicly-traded energy companies.

Throughout this Annual Report on Form 10-K/A, the individuals who served as the Company’s Chief Executive Officer, Chief Financial Officer, Senior Vice President and Managing Director and Executive Vice President at the

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close of fiscal 2008 are referred to as the “named executive officers.”

Compensation Philosophy and Objectives.  In setting overall compensation for executive officers, the Compensation Committee strives to achieve and balance the following objectives:

· Hiring and retaining executive officers with the background and skills to help us achieve our Company’s objectives;

· Aligning the goals of executive officers with those of the stockholders of the Company;

· Motivating executive officers to achieve the Company’s key short, medium and long-term goals as determined from time to time by the Board;

· Conserving cash by setting cash compensation levels consistent with market conditions and supplementing it with equity compensation; and

· Providing sufficient ongoing cash compensation for our employees to meet their personal financial obligations.

The Board believes that specific executive’s compensation level and structure should be guided by the above objectives, and driven by the following principles:

· Compensation for our executive officers should be strongly linked to performance as measured by the Board from time to time;

· A portion of each executive’s compensation should include compensation that is at risk, contingent upon the Company’s performance and the success of the Company over time;

· Compensation should be fair and competitive in relation to the marketplace and the compensation offered at the Company’s peer companies;

· Employment security should be used to equalize our employment opportunities with those of more mature companies, if and as appropriate;

· Sense of ownership and long-term perspective should be reaffirmed through our compensation structure; and

· Outstanding individual achievement should be recognized.

Setting Executive Compensation.  Salaries and bonuses are our primary forms of cash compensation.  We strive to review employee compensation packages on an annual basis, and endeavor to set overall employee compensation competitively by utilizing benchmarks as reference points, using named executive officer compensation information gleaned from publicly-available compensation information for other U.S. publicly-traded energy companies, including Evolution Petroleum Corporation, Dune Energy, FX Energy Inc., Harken Energy Corporation, and Far East Energy Corporation.  We try to provide a reasonable amount of cash compensation to our employees to enable them to meet their personal financial obligations.  We provide short-term incentives by awarding annual cash bonuses determined by the Committee on a discretionary basis.  The bonuses reward achievement of short-term goals and allow us to recognize individual and team achievements.  The cash portion of our compensation structure consists of a higher percentage of salary as compared to bonus.  Bonuses and equity awards are our two forms of performance-based compensation.  We chose to use a mix of equity awards and cash awards for performance based compensation.  We provide long-term incentives through equity awards, consisting of stock options that vest over time and restricted stock subject to a Company repurchase option that lapses over time.  Equity awards are a non-cash form of compensation.  We believe equity awards are an effective way for us to reward achievement of long-term goals, conserve cash resources and create a sense of ownership in our executives.  Options become valuable only as long-term goals are achieved and our stock price rises.  They provide our executive officers with a personal stake in the performance of the Company's equity even before vesting.  Restricted stock awards that vest over time provide similar incentives.  A large percentage of the total compensation paid to our executive officers consists of equity awards because we believe this is consistent with our philosophy of paying for performance and requiring more compensation to be at risk for employees at the highest level.

The Company is a party to an Executive Employment Agreement, dated September 29, 2006, with each of Frank C. Ingriselli, its President and Chief Executive Officer, and Mr. Stephen F. Groth, its Vice President and Chief Financial Officer, each of which were assumed by the Company as a result of the merger of IMPCO into the Company in May 2007.  The Executive Employment Agreement entered into with Mr. Ingriselli (the “Ingriselli Agreement”) and Mr. Groth (the “Groth Agreement”) each were originally approved by the Board of Managers of IMPCO in September 2006.  These Executive Employment

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Agreements each provide for a set base salary, cash bonus ranges, grants of  equity options, and defined termination benefits, which we believe, in part, compensate for the relatively lower annual salary at our Company as compared to more mature companies by providing security.  As discussed further below, these Executive Employment Agreements include severance payment provisions that require the Company to continue Mr. Ingriselli’s and Mr. Groth’s salaries and benefits, respectively, for 36 months if employment is terminated without “Cause” or the executive resigns for “Good Reason,” as such terms are defined in the respective employment agreements, and to make a lump sum payment equal to 48 months salary and continue benefits for 48 months if such person is terminated within 12 months of a “Change in Control,” also as such term is defined in their respective employment agreements.  

The Company is also a party to two agreements pursuant to which Richard Grigg, the Company’s Senior Vice President and Managing Director, performs services to the Company:   (i) an Amended and Restated Employment Agreement, dated January 27, 2009 (the “Amended Employment Agreement”), entered into directly with Richard Grigg that governs the employment of Mr. Grigg in the capacity of Managing Director of the Company and covers services provided by Mr. Grigg to the Company within the PRC; and (ii) a Contract of Engagement, dated January 27, 2009 (“Contract of Engagement”), entered into with KKSH Holdings Ltd. (“KKSH”), a company registered in the British Virgin Islands in which Mr. Grigg holds a minority interest and on whose board of directors Mr. Grigg sits, which agreement governs the provision of services related to the development and management of business opportunities for the Company outside of the PRC by Mr. Grigg through KKSH.  The Amended Employment Agreement has a term of three years, and provides for a base salary of 990,000 RMB (approximately $145,000) per year and the reimbursement of certain accommodation expenses in Beijing, China, and certain other transportation and expenses of Mr. Grigg.  In addition, in the event the Company terminates Mr. Grigg’s employment without Cause (as defined in the Amended Employment Agreement), the Company must pay to Mr. Grigg a lump sum amount equal to 50% of Mr. Grigg’s then-current annual base salary.  The Contract of Engagement also has a term of three years, and provides for a basic fee for the services of 919,000 RMB (approximately $135,000)  per year, to be prorated and paid monthly and subject to annual review and increase upon mutual agreement by the Company and KKSH.  Pursuant to the Contract of Engagement, the Company shall also provide Mr. Grigg with medical benefits and life insurance coverage, and pay KKSH an annual performance-based bonus award targeted at between 54% and 72% of the basic fee, awardable in the discretion of the Company’s Board of Directors.  In addition, in the event the Company terminates the Contract of Engagement without Cause (as defined in the Contract of Engagement), the Company must pay to KKSH a lump sum amount equal to 215% of the then-current annual basic fee.

The Company is also a party to an Employment Agreement with Jamie Tseng, the Company’s Executive Vice President (the “Tseng Employment Agreement”), dated April 22, 2009 and effective January 1, 2009.  The Tseng Employment Agreement governs the employment of Mr. Tseng in the capacity of Executive Vice President of the Company through December 31, 2011, and provides for a base salary of $140,000 per year, and provides that, in the event the Company terminates Mr. Tseng’s employment without Cause (as defined in the Tseng Employment Agreement), the Company must pay to Mr. Tseng a lump sum amount equal to 50% of Mr. Tseng’s then-current annual base salary.

We believe the competitive compensation and the employment agreements entered into with Messrs. Ingriselli, Groth, Grigg and Tseng, and the contract entered into with KKSH, foster an environment of relative security within which we believe our executives will be able to focus on achieving Company goals.  For further discussion of the Company’s payment obligations to its named executive officers under these agreements, see “Post-Termination Benefits” below.

Prior to the consummation of the mergers of ADS and IMPCO into the Company in May 2007, at which point the Company became an operating entity, the Company (while operating under is former names “Big Smith Brands, Inc.” and, subsequently, “Pacific East Advisors, Inc.”) did not provide any significant compensation to its named executive officers since approximately 2001.  In evaluating the Company’s named executive officers’ performance in year-ended December 31, 2008 for purposes of determining incentive bonus compensation for 2008, and in evaluating their future compensation for year 2009, the Company’s management researched named executive officer compensation for the following U.S. publicly-traded energy companies:  Evolution Petroleum Corporation, FX Energy Inc., Harken Energy Corporation, Dune Energy, and Far East Energy Corporation.  The Company’s management compiled data regarding named executive officer compensation for these benchmark companies, and the Company’s Chief Executive Officer compared this data against the Company’s named executive officers’ then-current salaries, equity incentives and potential cash bonus payments, and presented the data to the Committee.  The Committee used this information, in part, to evaluate the named executive officers’ current and ongoing compensation packages and elements thereof as discussed below.

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Performance Objectives and Results.  The Compensation Committee established performance objectives for each executive officer for 2008 at the beginning of year 2008.  At that time, the Chief Executive Officer of the Company requested that each officer provide detailed quantitative and qualitative personal and Company objectives they would strive to achieve in 2008, and the Chief Executive Officer did so as well with respect to himself.

In accordance with the Compensation Committee Charter, at the end of 2008 the Compensation Committee held a series of meetings and discussions regarding the achievements that each individual officer made with respect to their objectives provided earlier in the year.  The Compensation Committee analyzed each officer’s performance review prepared by the Company’s Chief Executive Officer, and independently reviewed the performance of the Chief Executive Officer and each other executive officer against the officer’s personal performance objectives for the year without the Chief Executive Officer’s participation.  The Company’s Chief Executive Officer then provided compensation recommendations for each executive officer to the Compensation Committee, save for the Chief Executive Officer’s compensation, which was to be determined in the Compensation Committee’s sole discretion.  The Compensation Committee then determined each executive officer’s salary and bonus compensation in accordance with the Company’s compensation philosophy and objectives, and compared each officer’s compensation against compensation levels of appropriate officers in the benchmark group to determine their fairness and competiveness, which was confirmed.

Some of the principal quantitative and qualitative performance objectives and results evaluated by the Compensation Committee in its review of named executive officer performance in 2008 were as follows:

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Objective	Result
The Company’s successful implementation of its strategic plan and strategy through 2008 and meeting all its corporate timelines for governmental filings and contractual obligations.	All corporate obligations for 2008 were met and all government filings were timely made.
The Company’s acquisition of a coal bed methane asset in China.	The Company successfully negotiated the acquisition of a 100% interest in the Zijinshan production sharing agreement with China United Coal bed Methane Company (CUCBM).  The Company also guided and received Chinese Government approval of the Zijinshan contract, receiving the Chinese Government’s recognition that our Company was financially and technically qualified to be the “Operator” of that block.
Pursue the acquisition of certain coal bed methane assets from ChevronTexaco in China, and negotiate a reduced purchase price.	The Company successfully negotiated an extension to the 4 purchase agreements with ChevronTexaco, including an aggregate $11 million reduction in price
Acquire additional interest in the Baode coal bed methane block in China.	The Company successfully negotiated and signed agreement with BHP Billiton to acquire its interest in the Baode coal bed methane block and assume operatorship of the same.
Sign an onshore oil-producing contract.	The Company entered into an Agreement on Cooperation with Well Lead Group Limited relating to the possible acquisition of a participating interest in two onshore producing areas in the People’s Republic of China, and, further successfully re-negotiated the agreement resulting in several million dollars of reduced cash and stock consideration payable by the Company.
Management of the Company so that cash is conserved and liquidity is maintained.	The Company was able to survive and focus its strategy on a small group of prospects and used stock (instead of cash) as possible
Acquire a possible downstream asset.	Signed the Handan Gas Distribution Letter of Intent.
Bring the Company into complete compliance with Sarbanes Oxley (“SOX”) and establish a set of controls that will enable the Company to accurately reflect its compliance above and beyond those required by SOX	The Company engaged a SOX consulting firm and hired an in-house SOX expert, and achieved SOX compliance within the required timeframe and at a reasonable cost.  The Company received one of the highest audit integrity scores as rated for Accounting and Governance Risk (AGR) by Audit Integrity (Forbes Magazine's auditing partner in the "100 Most Trustworthy Companies," and a leading provider of accounting and governance risk analysis on public companies).
Have all audits conducted successfully and on time and within cost estimates.	The Company successfully completed all audits in a timely manner and was able to reduce the actual billings by our auditors for certain items. The Company received one of the highest audit integrity scores as rated for Accounting and Governance Risk (AGR) by Audit Integrity (Forbes Magazine's auditing partner in the "100 Most Trustworthy Companies," and a leading provider of accounting and governance risk analysis on public companies).
Begin the implementation of a new accounting system.	The Company started implementation of the new “Ideas” accounting system, on target for price and timeliness and potential to save money and time for the Company.
Implement an IT solution for linking the Company’s computer servers between the Company’s offices in China and the United States.	The Company successfully implemented this solution and achieved the desired IT links.
Review existing data and develop work program and budget for the Company’s Zijinshan coal bed methane (CBM) project.	The Company successfully obtained and reviewed existing data for the Zijinshan CBM project and developed a work program for 2008/09.
Negotiate a seismic contract for Zijinshan CBM project.	The Company evaluated contractors and negotiated and entered into a seismic contract for the Zijinshan CBM project work program at a significant dollar savings.
Bring in a potential joint venture partner, or farminee, to the Baode Block	The Company implemented and finalized a joint study of the Baode Pilot with Arrow Energy.

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Role of the Chief Executive Officers in Compensation Decisions. Since its formation on July 22, 2008, the Committee makes all compensation decisions for the named executive officers and approves recommendations regarding equity awards to other executives of the Company. Decisions regarding the non-equity compensation of other executives are made by the Chief Executive Officer in concert with the Committee. 

The Chief Executive Officer reviews the performance of various executives. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the Committee. The Committee can exercise its discretion in modifying any recommended adjustments or awards to executives.

Elements of Executive Compensation. Upon consummation of the mergers of IMPCO and ADS into the Company in May 2007, the named executive officers of IMPCO became named executive officers of the Company, and the Company assumed the Executive Employment Agreements entered into by and between IMPCO and each of Frank C. Ingriselli and Stephen F. Groth.  Accordingly, the Company continued to pay base salary to each of these named executive officers consistent with the level of base salary paid to each such officer at the time of the consummation of the mergers, and the Company continues to be bound by the terms of the Executive Employment Agreements which include provisions governing base salary, performance based cash incentive compensation payments, long-term equity incentive compensation and post-termination benefits described in greater detail below. Mr. Grigg became a named executive officer of the Company effective August 1, 2008, and the Company also has entered into an employment agreement with Mr. Grigg which includes provisions governing base salary, performance based cash incentive compensation payments, and post-termination benefits described in greater detail below.  Mr. Tseng became a named executive officer of the Company upon consummation of the mergers of IMPCO and ADS into the Company in May 2007, and the Company has entered into the Tseng Employment Agreement with Mr. Tseng which includes provisions governing base salary and post-termination benefits described in greater detail below. In evaluating the Company’s named executive officers’ performance in year-ended December 31, 2008 for purposes of determining incentive bonus compensation for 2008, and in evaluating their future compensation for year 2009, the Committee reviewed a combination of elements of the Company’s total compensation offering to each named executive officer as follows:

· Base salary

· performance-based cash incentive compensation;

· long-term equity incentive compensation;

· post-termination benefits; and

· other personal benefits.

Base Salary

The Company provides named executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. Base salary ranges for named executive officers are determined for each executive based on his or her position and responsibility by using data compiled from benchmark entities, and, as applicable, base salary as set forth in such officer’s employment agreement. The Company strives to maintain base salary ranges for its positions at between 75% and 125% of the midpoint of the base salary established for each range based on benchmark company data compiled by the Company.

During its review of base salaries for executives, the Committee primarily considers:

· data from benchmark entities;

· internal review of the executive’s compensation, both individually and relative to other executive officers within the Company; and

· individual performance of the executive.

Salary levels are typically considered annually as part of the Company’s performance review process as well as upon a promotion or other change in job responsibility. Merit based increases to salaries of named executives officers are based on the Committee’s assessment of the individual’s performance.

In December 2008, the Committee analyzed the compensation of each of the Company’s named executive officers.  Based on an analysis of benchmark company data, the Compensation Committee determined that all the Company’s named executive officers’ salaries fell within the 75%-125% salary range, with each executive in fact falling below the 100% mark.  However, the Compensation Committee determined that since the Company was a development stage company with limited cash, in order to conserve cash no salary increases would take place in 2008.  The Committee determined the following with respect to each named executive’s base salary based, in part, on the benchmarks described herein, each executive’s performance during the fiscal year, and the Company’s overarching compensation objectives and philosophy, as follows:

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· Chief Executive Officer:  Pursuant to the Ingriselli Agreement, Mr. Ingriselli’s base salary is $350,000.  The Committee’s review of benchmark companies indicated that his base salary was approximately 10% below the average base salary of the chief executive officers in the benchmark group. However, in Company management’s presentation to the Committee at its December 9, 2008 meeting, Company management recommended that the Committee not increase Mr. Ingriselli’s salary at that time, in part because of the economic environment and also to make the Company stand out from its peers.

· Chief Financial Officer:  Pursuant to the Groth Agreement, Mr. Groth’s annual base salary is $165,000.  The Committee’s review of benchmark companies indicated that his base salary was approximately 7% below the average annual base salary level of chief financial officers of the benchmark companies.  Despite Mr. Groth’s performance in fiscal year 2008 and his continued value to the Company, and after careful consideration, the Committee deemed it to be in the best interest of the Company and its stockholders, to not increase Mr. Groth’s base salary at this time, in part because of the economic environment and also to make the Company stand out from its peers.

· Senior Vice President and Managing Director: Mr. Grigg was promoted to his present position effective August 1, 2008, at which time he signed a three year employment agreement that set his initial annual salary at $240,000 and provided for an annual performance-based bonus award targeted at between 30% and 40% of his then-current annual base salary awardable in the discretion of the Board.  Mr. Grigg’s base salary was determined by the Committee to be approximately within the range of the average base salaries of his peers in the benchmark companies, although none of whom had an overseas assignment like Mr. Grigg, which  assignments typically demand a significant salary premium which Mr. Grigg does not receive.  Accordingly, Mr. Grigg’s annual base salary is 17% below the salaries of his peers in the benchmark group due to the lack of an overseas premium.  However, the Committee decided not to increase Mr. Grigg’s base salary at this time, in part because of the economic environment and also to make the Company stand out from its peers.

· Executive Vice President:   Pursuant to the Tseng Employment Agreement, Mr. Tseng’s annual base salary is $140,000.  The Committee’s review of benchmark companies indicated that his base salary was approximately 20% below the average base salary of his peers in the benchmark group.  In December 2008, the Committee decided not to increase Mr. Tseng’s base salary at that time, in part because of the economic environment and also to make the Company stand out from its peers.

Performance – Based Cash Incentive Compensation

In December 2008, the Committee also reviewed performance-based cash incentive compensation collected from the benchmark companies in its determination of whether, and to what extent, to award performance-based cash incentive compensation to the Company’s named executive officers.  The Committee determined as follows:

· Chief Executive Officer:  Pursuant to the Ingriselli Agreement, Mr. Ingriselli is entitled to an annual bonus of between 20 percent and 40 percent of his base salary, as determined by the Board, based on his performance, and the Company’s achievement of financial and other objectives established by the Board each year, provided, however, that his annual bonus may be less based on the Board’s assessment of his performance and the performance of the Company.   Based on the Committee’s assessment of Mr. Ingriselli’s achievements and performance during the year, bonus awards granted by benchmark companies and taking into consideration the Company’s bonus policies, philosophy and objectives, the Committee agreed to award Mr. Ingriselli a cash bonus of $140,000 in 2008.

· Chief Financial Officer:  Pursuant to the Groth Agreement, Mr. Groth is entitled to an annual bonus of between 20 percent and 30 percent of his base salary, as determined by the Board, based on his performance, and the Company’s achievement of financial and other objectives established by the Board each year, provided, however, that his annual bonus may be less based on the Board’s assessment of his performance and the performance of the Company.   The Committee agreed to award Mr. Groth a $50,000 cash bonus for 2008, based on his achievements and performance and taking into account the Company’s bonus policies, philosophy and objectives, as well as the bonuses awarded to comparable executives by benchmark companies.

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· Senior Vice President and Managing Director: Pursuant to Mr. Grigg’s Employment Agreement, he is entitled to an annual performance-based award targeted at between 30 percent and 40 percent of his then current base salary, awardable at the discretion of the Board.  The Committee awarded Mr. Grigg a 2008 cash bonus of $96,000 in recognition of his efforts to advance the Company’s interests in China.

· Executive Vice President:  The Company and Jamie Tseng did not have an employment agreement that entitled Mr. Tseng to any annual cash bonus awards as of December 31, 2008. However, after considering Mr. Tseng’s dedication to delivering shareholder value and maintaining transparency in operations in an ethical way, the Committee awarded Mr. Tseng a 2008 cash bonus of $20,000.

Long-term Equity Compensation

The Compensation Committee of the Company periodically reviews the performance of its executive officers, employees and consultants and grants long-term equity compensation to qualified individuals under its 2007 Stock Plan.  In December 2008, the Board reviewed long-term equity compensation for the Company’s named executive officers as follows:

· Chief Executive Officer: Under the Ingriselli Agreement, Mr. Ingriselli is eligible for long-term incentive compensation, such as restricted shares and options to purchase shares of the Company’s capital stock, on such terms as established by the Board. At its December 9, 2008 meeting, the Committee granted Mr. Ingriselli 20,000 shares of restricted stock having a grant date of December 9, 2008. The Committee also granted Mr. Ingriselli an additional award of 130,000 shares of restricted stock having a grant date of December 18, 2008. In the case of each grant, the awards vest 40 percent on the twelve month anniversary of the grant dates, 30 percent on the two year anniversary of the grant dates and the 30 percent balance on the three year anniversary of the grant dates, respectively. The Committee also awarded Mr. Ingriselli 350,000 stock options exercisable at $0.64 a share, which was the fair market value of the Company’s stock on the date of grant as determined by the Committee in accordance with the 2007 Stock Plan. The options have a ten year term and vest 50 percent on the twelve month anniversary of the grant date, 20 percent on the two year anniversary of the grant date, 20 percent on the three year anniversary of the grant date, and 10 percent on the four year anniversary of the grant date.

Furthermore, the Committee resolved that when and if the Board and Company’s stockholders approve an amendment to the 2007 Stock Plan to remove or revise the current restriction that provides that no eligible person shall be granted equity incentive grants under the 2007 Stock Plan during any 12-month period covering more than 500,000 shares (the “Annual Award Restriction”), then the Committee shall consider granting to Mr. Ingriselli an additional 200,000 shares of restricted stock under the 2007 Stock Plan to complete the grants of Equity Incentive Compensation as recommended by Company management and intended to be granted by the Committee to Mr. Ingriselli, but were limited in doing so given the Annual Award Restriction.

· Chief Financial Officer: Under the Groth Agreement, Mr. Groth is eligible for long-term incentive compensation, such as  restricted shares and options to purchase shares of the Company’s capital stock, on such terms as established by the Committee  At its December 9, 2008 meeting, the Committee granted Mr. Groth 165,000 shares of restricted stock in consideration for his accomplishments over year 2008, dedication to delivering shareholder value, maintaining transparency in operations and ethical standards. The award vests 40 percent on the twelve month anniversary of the grant date, 30 percent on the two year anniversary of the grant date and the 30 percent balance on the three year anniversary of the grant date. The Committee also awarded Mr. Groth 165,000 stock options exercisable at $0.64 a share, which was the fair market value of the Company’s stock on the date of grant as determined by the Committee in accordance with the 2007 Stock Plan. The options have a ten year term and vest 50 percent on the twelve month anniversary of the grant date, 20 percent on the two year anniversary of the grant date, 20 percent on the three year anniversary of the grant date, and 10 percent on the four year anniversary of the grant date.

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· Senior Vice President and Managing Director:  Pursuant to Mr. Grigg’s Employment Agreement signed on August 1, 2008, Mr. Grigg is entitled to an annual performance-based bonus award targeted at between 30 percent and 40 percent of his then current annual base salary, awardable at the discretion of the Committee. Based on Mr. Grigg’s dedication to delivering shareholder value, maintaining transparency in and safe and effective operations of the Company, and his ethical standards, the Committee awarded Mr. Grigg 150,000 shares of restricted stock having a grant date of December 9, 2008 and an  additional 90,000 shares of restricted stock having a grant date of December 18, 2008. The awards vest 40 percent on the twelve month anniversary of the grant dates, 30 percent on the two year anniversary of the grant dates and the 30 percent balance on the three year anniversary of the grant dates.  The Committee also awarded Mr. Grigg 240,000 stock options exercisable at $0.64 a share, which was the fair market value of the Company’s stock on the date of grant as determined by the Committee in accordance with the 2007 Stock Plan. The options have a ten year term and vest 50 percent on the twelve month anniversary of the grant date, 20 percent on the two year anniversary of the grant date, 20 percent on the three year anniversary of the grant date, and 10 percent on the four year anniversary of the grant date.

· Executive Vice President:  The Company and Mr. Tseng did not have an employment agreement that entitled Mr. Tseng to any annual performance-based equity incentive awards as of December 31, 2008.  However, in recognition of his performance and key role in developing relationships in China, and his support of Mr. Ingriselli in securing transactions in China, as well as to heighten Mr. Tseng’s sense of ownership in the Company and to motivate him to achieve the Company’s medium and long-term goals, the Committee awarded Mr. Tseng 85,000 shares of restricted stock with a grant date of December 9, 2008. The award vests 40 percent on the twelve month anniversary of the grant date, 30 percent on the two year anniversary of the grant date and the 30 percent balance on the three year anniversary of the grant date.   The Committee also awarded Mr. Tseng 85,000 stock options exercisable at $0.64 a share, which was the fair market value of the Company’s stock on the date of grant as determined by the Committee in accordance with the 2007 Stock Plan. The options have a ten year term and vest 50 percent on the twelve month anniversary of the grant date, 20 percent on the two year anniversary of the grant date, 20 percent on the three year anniversary of the grant date, and 10 percent on the four year anniversary of the grant date.

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Summary of Base Salary, Performance-Based Cash Incentive Bonus and Long-Term Equity Compensation Grants

With respect to base salary, performance-based cash incentive bonus, and long-term equity compensation grants to the name executive officers, the Compensation Committee concluded that the cash and non-cash compensation, including the cash bonuses and long-term equity compensation grants recommended by the Company’s Chief Executive Officer, were in all cases below the average of the benchmark companies as follows:

·   Chief Executive Officer:  Mr. Ingriselli’s base salary was approximately 10% below the average base salary of his peers in the benchmark group, and when combined with the $140,000 cash bonus granted by the Compensation Committee, was 20% below the average base salary plus cash bonus of his peers in the benchmark group.  A 100% of salary stock/option bonus amount was approximately 50% below the average stock/option bonus payment amount awarded to his peers in the benchmark group.

·   Chief Financial Officer:  Mr. Groth’s base salary was approximately 7% below the average base salary of his peers in the benchmark group, and when combined with the $50,000 cash bonus granted by the Compensation Committee, was 25% below the average base salary plus cash bonus of his peers in the benchmark group. The recommended stock/option bonus amount was approximately 15% below the average stock/option bonus payment amount awarded to his peers in the benchmark group.

·   Senior Vice President and Managing Director:  Mr. Grigg’s base salary was approximately equal to the average base salary of his peers in the benchmark group, however, none of his peers were in an overseas assignment, so Mr. Grigg’s salary, which already includes an overseas premium, places his base salary significantly below that of his peers.  Also, when combined with the $96,000 cash bonus granted by the Compensation Committee, was 17% below the average base salary plus cash bonus of his peers in the benchmark group. The recommended stock/option bonus amount was approximately 60% below the average stock/option bonus payment amount awarded to his peers in the benchmark group.

·   Executive Vice President:  Mr. Tseng’s base salary was approximately 20% below the average base salary of his peers in the benchmark group, and when combined with the $20,000 cash bonus granted by the Compensation Committee, was 37% below the average base salary plus cash bonus of his peers in the benchmark group. The recommended stock/option bonus amount was approximately 30% below the average stock/option bonus payment amount awarded to his peers in the benchmark group.

Accordingly, and in consideration of the various quantitative and qualitative performance factors and accomplishments detailed above and the Company’s compensation philosophy and objectives, the Compensation Committee determined to grant the performance-based cash incentive compensation and long-term equity compensation awards as detailed above.

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Post-Termination Benefits

The Company is a party to an Executive Employment Agreement, dated September 29, 2006, with each of Frank C. Ingriselli, its President and Chief Executive Officer, and Mr. Stephen F. Groth, its Vice President and Chief Financial Officer, which agreements were assumed by the Company as a result of the merger of IMPCO into the Company in May 2007.  These employment agreements contain, among other things, severance payment provisions that require the Company to continue Mr. Ingriselli’s and Mr. Groth’s salaries and benefits, respectively, for 36 months if employment is terminated without “Cause” or the executive resigns for “Good Reason,” as such terms are defined in the respective employment agreements, and to make a lump sum payment equal to 48 months salary and continue benefits for 48 months if such person is terminated within 12 months of a “Change in Control,” also as such term is defined in their respective employment agreements.  These agreements do not contain a definitive termination date, but both Mr. Ingriselli and Mr. Groth have the right to terminate his employment at any time without penalty.

“Cause” is defined in each of the Executive Employment Agreements to include, but is not be limited to:  (a) the executive’s refusal to follow lawful directions or the executive’s material failure to perform his duties (other than by reason of physical or mental illness, injury, or condition), in either case, after the executive has been given notice of his default and a reasonable opportunity to cure it; (b) the executive’s willful and continued failure to substantially comply with any material Company policy; (c) conviction of a felony or the entering of a plea of nolo contendere to a felony, in either case having significant adverse effect on the business and affairs of the Company; or (d) the executive’s acceptance of a position with another business enterprise or venture without the Company’s written consent at any time before the executive has resigned from the Company or been discharged.

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“Good Reason” is defined in each of the Executive Employment Agreements to mean the occurrence of one or more of the following events without the executive’s express written consent:  (i) the substantial and adverse diminution of the executive’s duties or responsibilities from those in effect immediately before the change in the executive’s position, other than merely as a result of the Company ceasing to be a public company, a change in the executive’s title, or the executive’s transfer to an affiliated company that assumes the Executive Employment Agreement; (ii) the reduction in the executive’s annual base salary, other than as part of across-the-board salary reductions affecting all executives of similar status employed by the Company or any entity in control of the Company; (iii) the Company’s failure to continue, or continue the executive’s participation in, any compensation plan in which the executive participated immediately before the event causing the executive’s resignation, which discontinuance is material to the executive’s total compensation, unless an equitable substitute arrangement has been adopted or made available on a basis not materially less favorable to  the executive than the plan in effect immediately before the event causing the executive’s resignation, both as to the benefits the executive receives and the executive’s level of participation relative to other participants; (iv) any failure of any Company successor to assume the Executive Employment Agreement; and (v) any other material breach of the Executive Employment Agreement by the Company that is either not committed in good faith or, even if committed in good faith, is not remedied by the Company promptly after receipt of notice thereof from the executive.

“Change in Control” is defined in each of the Executive Employment Agreements to mean (i) the acquisition of more than 50% of the outstanding voting securities of the Company by an individual person or an entity or a group of individuals or entities acting in concert, directly or indirectly, through one transaction or a series of related transactions; (ii) a merger or consolidation of the Company with or into another entity after which the stockholders of the Company immediately prior to such transaction hold less than 50% of the voting securities of the surviving entities; or (iii) a sale of all or substantially all of the assets of the Company.

Assuming that Messrs. Ingriselli and Groth were terminated without “Cause” on December 31, 2008, severance amounts payable would have been $1,050,000 and $495,000 for Messrs. Ingriselli and Groth, respectively.

Assuming that Messrs. Ingriselli and Groth were terminated within 12 months of a “Change in Control” on December 31, 2008, severance amounts payable would have been $1,400,000 and $660,000  for Messrs. Ingriselli and Groth, respectively.

In addition to the above severance amounts payable, all unvested options issued to each of Messrs. Ingriselli, Groth and Tseng that were granted to such persons on September 29, 2006, shall become 100% vested upon any termination of employment of such person without Cause, without Good Reason, or upon death or disability.

Pursuant to the Executive Employment Agreements entered into with each of Messrs. Ingriselli and Groth, each of Mr. Ingriselli and Groth are obligated for a period of 24 months after their respective agreement’s termination to (i) not solicit customers, suppliers or employees of the Company, and (ii) not engage in any employment or activity, without the written consent of the Board, if the loyal and complete fulfillment of his duties in such employment would inevitably require him to reveal or utilize confidential information of the Company, as reasonably determined by the Board.  Payment of the above severance amounts are not conditioned upon Messrs. Ingriselli’s and Groth’s satisfaction of their respective non-solicitation and non-competition obligations under their Executive Employment Agreements.

On August 1, 2008, the Company entered into an Employment Agreement with Richard Grigg under which Mr. Grigg was promoted to the position of Senior Vice President and Managing Director, which Agreement was amended effective January 27, 2009. The Agreement terminates on January 27, 2012. Among other stipulations, the Agreement provides that if Mr. Grigg is terminated by the Company without Cause on or after 120 days from the date of the Agreement, the Company shall pay Mr. Grigg a lump sum payment equal to 50 percent of his then current annual base salary.

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Under terms of  this Agreement, "Cause" means (i) Mr. Grigg's gross and willful misappropriation or theft of the Company's or its subsidiary's or affiliate's funds or property, (ii) Mr. Grigg's commission of any fraud, misappropriation, embezzlement or similar act, whether or not a punishable criminal offense, or Mr. Grigg's conviction of or entering of a plea of nolo contendere to a charge of any felony or crime involving dishonesty or moral turpitude, (iii) Mr. Grigg's engagement in any willful conduct that is injurious to the Company or its subsidiaries or affiliates, (iv) Mr. Grigg's material breach of the Agreement or failure to perform any of his material duties owed to the Company or its subsidiaries or affiliates, or (v) Mr. Grigg's commission of any act involving willful malfeasance or gross negligence or Mr. Grigg's failure to act involving material nonfeasance.

Assuming Mr. Grigg was terminated without “Cause” on December 31, 2008, under the then existing contract, Mr. Grigg would be entitled to $131, 940 in salary and bonus not yet paid as of that date.

The Company is also a party to a Contract of Engagement (“Contract of Engagement”) with KKSH Holdings Ltd., a company registered in the British Virgin Islands (“KKSH”), dated January 27, 2009. Mr. Grigg is a minority shareholder and member of the board of directors of KKSH.  The Contract of Engagement governs the engagement of KKSH for a period of three years to provide the services of Mr. Grigg through KKSH as Senior Vice President of the Company strictly with respect to the development and management of business opportunities for the Company outside of the People’s Republic of China.  Pursuant to the Contract of Engagement, in the event the Company terminates the Contract of Engagement without Cause, the Company must pay to KKSH a lump sum amount equal to 215% of the then-current annual basic fee.

Under terms of the Contract of Engagement, "Cause" means (i) Mr. Grigg's or KKSH’s gross and willful misappropriation or theft of the Company's or any of its subsidiaries’ or affiliates’ funds or property, (ii) Mr. Grigg's or KKSH’s commission of any fraud, misappropriation, embezzlement or similar act, whether or not a punishable criminal offense, or Mr. Grigg's or KKSH’s conviction of or entering of a plea of nolo contendere to a charge of any felony or crime involving dishonesty or moral turpitude, (iii) Mr. Grigg's or KKSH’s engagement in any willful conduct that is injurious to the Company or its subsidiaries or affiliates, (iv) Mr. Grigg's or KKSH’s material breach of the Agreement or failure to perform any of the material duties owed to the Company or its subsidiaries or affiliates, or (v) Mr. Grigg's or KKSH’s commission of any act involving willful malfeasance or gross negligence or Mr. Grigg's or KKSH’s failure to act involving material nonfeasance.

 If this Contract of Engagement had been effective at the time and was terminated without “Cause” on December 31, 2008, termination amounts payable would have been $72,218 to Mr. Grigg and $288,269 to KKSH.

The Company is also a party to an Employment Agreement with Jamie Tseng, the Company’s Executive Vice President (the “Tseng Employment Agreement”), dated April 22, 2009 and effective January 1, 2009. Prior to such time, Mr. Tseng was not contractually entitled to any post-termination benefits from the Company. The Tseng Employment Agreement governs the employment of Mr. Tseng in the capacity of Executive Vice President of the Company through December 31, 2011, and provides for a base salary of $140,000 per year, and provides that, in the event the Company terminates Mr. Tseng’s employment without Cause, the Company must pay to Mr. Tseng a lump sum amount equal to 50% of Mr. Tseng’s then-current annual base salary.

Under the terms of the Tseng Employment Agreement, “Cause” means (i) Mr. Tseng’s gross and willful misappropriation or theft of the Company’s or any of its subsidiary’s or affiliate’s funds or property, (ii) Mr. Tseng’s commission of any fraud, misappropriation, embezzlement or similar act, whether or not a punishable criminal offense, or Mr. Tseng’s conviction of or entering of a plea of nolo contendere to a charge of any felony or crime involving dishonesty or moral turpitude, (iii) Mr. Tseng’s engagement in any willful conduct that is injurious to the Company or any of  its subsidiaries or affiliates, (iv) Mr. Tseng’s material breach of the Agreement or failure to perform any of his material duties owed to the Company or any of its subsidiaries or affiliates, or (v) Mr. Tseng’s commission of any act involving willful malfeasance or gross negligence or Mr. Tseng’s failure to act involving material nonfeasance.

If the Tseng Employment Agreement had been effective at the time and was terminated without “Cause” on December 31, 2008, termination amounts payable would have been $70,000 to Mr. Tseng.

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 Other Personal Benefits

In 2007, the Company adopted a defined contribution 401(k) plan for its employees. The plan provides for Company matching of 200% on up to the first 3% of salary contributed by employees. Company contributions are immediately vested to the employee.  The named executive officers participate in this plan on the same basis as other employees.  There is no supplemental nonqualified plan of this type for officers.

Attributed costs of the personal benefits described above for the named executive officers for the fiscal year ended December 31, 2008 are included in the “Summary Compensation Table.”

The Company has also entered into indemnification agreements with its officers and directors, including the named executive officers, which provides for limitation of liability and indemnification of such individuals under certain circumstances as described under the heading “Limitation of Liability and Indemnification Matters” below.

Summary Compensation Table

The following table sets forth the compensation for the Principal Executive Officers (“PEO”), the Principal Financial Officer (“PFO”), the Senior Vice President and Managing Director and the Executive Vice President.  No other executive officer’s total compensation for the fiscal years ended December 31, 2006, 2007 or 2008 exceeded $100,000.

SUMMARY COMPENSATION TABLE

								Stock		Option		All Other
Name and Principal Position	Year	Salary			Bonus			Awards (18)		Awards (19)		Compensation			Total
Frank C. Ingriselli	2006		-0-		$	80,000	(11)		-0-	$	11,815	$	208,125	(20)	$	299,940
President and Chief	2007	$	262,500	(5)	$	140,000	(12)	$	7,479	$	87,471	$	63,450	(21)	$	560,900
Executive Officer  ( PEO) (1)	2008	$	350,000	(6)	$	140,000	(12)	$	193,109	$	172,617	$	21,000	(22)	$	876,726
Stephen F. Groth	2006	$	30,800	(7)	$	10,000	(13)		-0-	$	5,345	$	59,450	(23)	$	105,595
Vice President and	2007	$	135,600	(8)	$	45,000	(14)	$	2,244	$	32,700	$	11,436	(24)	$	226,980
Chief Financial Officer (PFO) (2)	2008	$	165,000	(9)	$	50,000	(15)	$	61,444	$	75,171	$	13,080	(24)	$	364,695
Richard Grigg
Senior Vice President and Managing  Director (3)	2008	$	198,001	(10)	$	96,000	(16)	$	386,241	$	22,014	$	107,355	(25)	$	809,611
Jamie Tseng	2006		-0-			-0-			-0-	$	7,089	$	128,000	(26)	$	135,089
Executive Vice	2007		-0-			-0-			-0-	$	26,316	$	134,673	(26)	$	160,989
President (4)	2008		-0-		$	20,000	(17)	$	2,228	$	33,294	$	142,675	(26)	$	198,197

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1) Mr. Ingriselli was elected President and Chief Executive Officer, and designated a member of the Company’s Board of Directors, on May 7, 2007 upon closing of the mergers of Inner Mongolia Production Company LLC (“IMPCO”) and Advanced Drilling Services, LLC (“ADS”) into the Company (the “Mergers”). Prior to that, he served as Manager, Chief Executive Officer and President of IMPCO.  

2) Mr. Groth was elected Vice President and Chief Financial Officer of the Company on May 7, 2007 upon closing of the Mergers. Prior to that, he served as Manager and Chief Financial Officer of IMPCO.

3) Mr. Grigg was hired as Managing Director of the Company’s International operations on March 1, 2008 and promoted to his present position of Senior Vice President and Managing Director on August 1, 2008. From October 11, 2007 until February 29, 2008, Mr. Grigg provided consulting services to the Company.

4) Mr. Tseng was elected Executive Vice President of the Company on May 7, 2007 upon closing of the Mergers. Prior to that, he served as Manager and Executive Vice President of IMPCO.

5) Represents employee salary as an officer of IMPCO from April 1, 2007 through May 6, 2007 and employee salary as an officer of Pacific Asia Petroleum, Inc. from May 7, 2007 to December 31, 2007.

6) Represents employee salary as an officer of Pacific Asia Petroleum, Inc. for the year 2008.

7) Represents employee salary as an officer of IMPCO.

8) Represents employee salary as an officer of IMPCO through May 6, 2007 and employee salary as an officer of Pacific Asia Petroleum, Inc. from May 7, 2007 to December 31, 2007.

9) Represents employee salary as an officer of Pacific Asia Petroleum, Inc. for the year 2008.

10) Represents Mr. Grigg’s salary as Managing Director of the Company’s international operations from March 1, 2008 until July 31, 2008, and in his current position until December 31, 2008.  On August 1, 2008, Mr. Grigg was promoted to his current position and salary.   Under the terms of Mr. Grigg’s Employment Agreement with the Company, Mr. Grigg may request payment in the currency of his choice. Salary has been computed based on the monthly average exchange rates for the applicable currencies during the year.

11) Represents $80,000 fiscal year 2006 bonus awarded to Mr. Ingriselli by the Board of Directors of the Company and paid to Mr. Ingriselli in 2007.

12) Represents $140,000 fiscal years 2007 and 2008 bonuses awarded to Mr. Ingriselli by the Board of Directors and Compensation Committee of the Company and paid to Mr. Ingriselli in 2007 and 2008, respectively.

13) Represents $10,000 fiscal year 2006 bonus awarded to Mr. Groth by the Board of Directors of the Company and paid to Mr. Groth in 2007.

14) Represents $45,000 fiscal year 2007 bonus awarded to Mr. Groth by the Board of Directors of the Company and paid to Mr. Groth in 2007.

15) Represents $50,000 fiscal year 2008 bonus awarded to Mr. Groth by the Compensation Committee of the Company’s Board of Directors and paid to Mr. Groth in 2008.

16) Represents $96,000 fiscal year 2008 bonus awarded to Mr. Grigg by the Compensation Committee of the Company’s Board of Directors but not yet paid to Mr. Grigg, as of December 31, 2008.

17) Represents $20,000 fiscal year 2008 bonus awarded to Mr. Tseng by the Compensation Committee of the Company’s Board of Directors and paid to Mr. Tseng in 2008.

18) Represents the compensation costs of restricted common stock awards under SFAS No. 123 (R) recorded to expense in the Company’s financial statements in years 2007 and 2008.  The assumptions used are found in the Notes to Consolidated Financial Statements, Note 13 (“Stock-Based Compensation”) in the Company’s Form 10-K for the year ended December 31, 2008.

19) Represents the compensation costs of stock options under SFAS No. 123 (R) recorded to expense in the Company’s financial statements for the respective years. The assumptions used are found in the Notes to Consolidated Financial Statements, Note 13 (“Stock-Based Compensation”) in the Company’s Form 10-K for the year ended December 31, 2008.

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20) Represents fees paid to Mr. Ingriselli for his provision of consulting services to IMPCO, including business development activities, negotiations and contract work, legal services, financial advisory services, and coordination activities pursuant to a consulting agreement entered into with IMPCO for the term of December 15, 2005 through December 31, 2006, and prior to his employment with the Company.

21) Represents fees for consulting services to IMPCO of $49,950 through March 31, 2007 prior to Mr. Ingriselli’s change in status from consultant to employee, and $13,500 in Company 401(k) plan contributions in 2007 during his service period as an employee, provided on the same basis as for all employees.

22) Represents Company 401(k) plan contributions during 2008 provided on the same basis as for all employees and $7,200 in rent reimbursement.

23) Represents fees paid to Mr. Groth for his provision of consulting services to IMPCO, including assistance with financial analysis and financial controls, accounting and other fiscal activities, pursuant to a consulting agreement entered into with IMPCO for the term of December 15, 2005 through August 31, 2006, and prior to his employment with the Company.

24) Represents Company 401(k) plan contributions in 2007 and 2008, provided on the same basis as for all employees.

25) Includes $42,000 in consulting fees for the period January 1, 2008 through February 29, 2008 pursuant to terms of Mr. Grigg’s Consulting Agreement with the Company.  Also includes $36,528 in housing allowance, medical and life insurance benefits, $13,200 in 401(k)-like benefits and $12,957 in travel allowance paid to or reimbursed to Mr. Grigg by the Company as required pursuant to Mr. Grigg’s Employment Agreement with the Company, which became effective March 1, 2008 and was amended August 1, 2008.

26) Represents fees paid to Mr. Tseng for his provision of consulting services to IMPCO and Pacific Asia Petroleum, Inc., including assistance with Beijing representative office activities, business development activities, negotiations, government relations activities and coordination activities, pursuant to consulting agreements. Also includes $2,671 in medical and life insurance benefits in 2008 and $3,000 in 2006 and $8,000 in 2007 for rent paid by IMPCO to Mr. Tseng for office space provided by Mr. Tseng in Beijing.

Tax and Accounting Considerations

Section 162(m) of the Internal Revenue Code, as amended, generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to any executive officer unless such compensation is paid pursuant to a qualified performance-based compensation plan.  All compensation awarded to our executive officers in 2008 is expected to be tax deductible.  The Board considers such deductibility and the potential cost to the Company when granting awards and considering salary changes.

The Company accounts for equity awards under the provisions of Statement of Financial Accounting Standard No. 123 (revised 2004) Share-Based Payment (FAS No. 123(R)).  The Company charges the estimated fair value of option and restricted stock awards to income over the time of service provided by the employee to earn the award, typically the vesting period.  The fair value of options is measured using the Black-Scholes option pricing model.  The fair value of non-vested stock awards issued under the Company’s 2007 Stock Plan is measured by the fair market value of Common Stock of the Company determined in accordance with the 2007 Stock Plan as the mean between the representative bid and asked prices on the close of business the day immediately prior to the grant date as reported by Pink Sheets LLC, with no discount for vesting period or other restrictions.  The compensation expense to the Company under FAS No. 123(R) is one of the factors the Board considers in determining equity awards to be granted, and also may influence the vesting period chosen.

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Limitation of Liability and Indemnification Matters

Under Section 145 of the Delaware General Corporation Law (the “DGCL”), the Company has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). The Company’s Bylaws provide that, to the fullest extent permitted by law, the Company shall indemnify and hold harmless any person who was or is made or is threatened to be made a party or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person, or the person for whom he is the legally representative, is or was a director or officer of the Company, against all liabilities, losses, expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding.

The Company’s Restated Certificate of Incorporation provides for the indemnification of, and advancement of expenses to, such agents of the Company (and any other persons to which Delaware law permits the Company to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted under Section 145 of the DGCL, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the Company, its stockholders and others. The provision does not affect directors’ responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Company has entered into indemnification agreements with certain of its current executive officers and directors, and intends to enter into agreements with its future directors and executive officers, that require the Company to indemnify such persons to the fullest extent permitted by law, against expenses, judgments, fines, settlements and other amounts incurred (including attorneys’ fees), and advance expenses if requested by such person, in connection with investigating, defending, being a witness in, participating, or preparing for any threatened, pending, or completed action, suit, or proceeding or any alternative dispute resolution mechanism, or any inquiry, hearing, or investigation (collectively, a “Proceeding”), relating to any event or occurrence that takes place either prior to or after the execution of the indemnification agreement, related to the fact that such person is or was a director or officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or not done by such person in any such capacity, whether or not the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent of the Company. Indemnification is prohibited on account of any Proceeding in which judgment is rendered against such persons for an accounting of profits made from the purchase or sale by such persons of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any federal, state, or local laws. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.  The Company has been informed that in the opinion of the Securities and Exchange Commission, indemnification provisions, such as those contained in the Company’s Restated Certificate of Incorporation, are unenforceable with respect to claims arising under federal securities laws and, therefore, do not eliminate monetary liability of directors.

Insurance. The Company currently maintains an Executive and Organization Liability Insurance Policy issued by Illinois National Insurance Company, a member company of American International Group, Inc. (“AIG”).  This policy provides insurance coverage on behalf of any person who is or was a director, officer or employee of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against liability under the provisions of this section.

Settlement by the Company. The right of any person to be indemnified is subject always to the right of the Company by its Board of Directors, in lieu of such indemnity, to settle any such claim, action, suit or proceeding at the expense of the Company by the payment of the amount of such settlement and the costs and expenses incurred in connection therewith.

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Grants of Plan-Based Awards in the Last Fiscal Year

The following table sets forth information with respect to incentive stock options and restricted stock granted to the executive officers named in the Summary Compensation Table during the year ended December 31, 2008 under the Company’s 2007 Stock Plan.

	Grant	Stock Awards:  Number of Shares of		Option Awards:  Number of Securities Underlying		Exercise or Base Price of stock and Option Awards	Closing Stock Price on Date of Awards	Grant Date Fair Value of Stock and Option
Name	Date	Stock		Options		($/Sh) (1)	($/Sh)(2)	Awards
Frank C. Ingriselli (PEO)	12/9/2008	20,000	(4)	350,000	(3)	$0.64	$0.75	$149,300
	12/18/2008	130,000	(4)			$0.68	$0.65	$87,750
Stephen F. Groth (PFO)	12/9/2008	165,000	(4)	165,000	(3)	$0.64	$0.75	$169,950
Richard Grigg	12/9/2008	150,000	(4)	240,000	(3)	$0.64	$0.75	$189,600
	12/18//2008	90,000	(4)			$0.68	$0.65	$60,750
Jamie Tseng	12/9/2008	85,000	(4)	85,000	(3)	$0.64	$0.75	$87,550

1) The exercise price of option awards issued under the Company’s 2007 Stock Plan is equal to the fair market value of Common Stock of the Company as determined in accordance with the 2007 Stock Plan as the mean between the representative bid and asked prices on the close of business the day immediately prior to the applicable Grant Date as reported by Pink Sheets LLC.

2) The closing stock price on the date the option awards were granted (December 9, 2008 and December 18, 2008, as applicable) is different from the exercise price of the option awards because, in accordance with the Company’s 2007 Stock Plan under which these option awards were granted, the exercise price for such option awards is equal to the fair market value of Common Stock of the Company calculated as the mean between the representative bid and asked prices on the close of business the day immediately prior to the date these option awards were granted (December 9, 2008 and December 18, 2008, as applicable) as reported by Pink Sheets LLC.

3) The Options will vest and become exercisable as follows: at the rate of  (i) 50% of the shares on the twelve month anniversary of the Grant Date (ii) 20% of the shares on the two year anniversary of the Grant Date (iii) 20% of the shares on the three year anniversary of the Grant Date, and (iv) 10% of the shares on the four year anniversary of the Grant Date, in each case for so long as the recipient of the Option remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and the Optionee.

4) Grant of restricted stock subject to forfeiture.  40% of the shares will become vested and nonforfeitable on the twelve month anniversary of the Grant Date, 30% of the shares will become vested and nonforfeitable on the two year anniversary of the Grant Date, and the balance 30% of the shares will become vested and nonforfeitable on the three year anniversary of the Grant Date, in each case for so long as the recipient of the stock remains an employee of or consultant to the Company and subject to the terms and conditions of the restricted stock purchase agreement entered into by and between the Company and the grantee.

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Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

Employment Agreements with Named Executive Officers

Employment Agreement with Frank C. Ingriselli.  The Company and Mr. Ingriselli are parties to the Ingriselli Agreement. This employment agreement contains, among other things, severance payment provisions that require the Company to continue Mr. Ingriselli’s salary and benefits for 36 months if employment is terminated without “cause,” as such is term defined in the Ingriselli Agreement, and to make a lump sum payment equal to 48 months salary and continue benefits for 48 months if terminated within 12 months of a “change in control,” also as such term is defined in the Ingriselli Agreement. This agreement does not contain a definitive termination date, but Mr. Ingriselli does have the right to terminate his employment at any time without penalty. The Ingriselli Agreement also prohibits Mr. Ingriselli from engaging in competitive activities during and for a period of 24 months following termination of his employment that would result in disclosure of the Company’s confidential information, but does not contain a general restriction on engaging in competitive activities.  Pursuant to the Ingriselli Agreement, Mr. Ingriselli’s annual base salary is $350,000, and he is entitled to an annual bonus of between 20% and 40% of his base salary, as determined by the Company’s Board of Directors based on his performance, the Company’s achievement of financial performance and other objectives established by the Board of Directors each year, provided, however, that his annual bonus may be less as approved by the Board of Directors based on his

performance and the performance of the Company.  Under the agreement, Mr. Ingriselli is also eligible for long-term incentive compensation, such as additional options to purchase shares of the Company’s capital stock, on such terms as established by the Board of Directors. To date, the Board of Directors has not established any terms, performance metrics or eligibility criteria for determining when, and to what extent, Mr. Ingriselli may be eligible for such long-term incentive compensation, or what such long-term incentive compensation may include.

Employment Agreement with Stephen F. Groth.The Company and Mr. Groth are parties to the Groth Agreement.  This employment agreement contains, among other things, severance payment provisions that require the Company to continue Mr. Groth’s salary and benefits for 36 months if employment is terminated without “cause,” as such term is defined in the Groth Agreement, and to make a lump sum payment equal to 48 months salary and continue benefits for 48 months if terminated within 12 months of a “change in control,” as such term is defined in the Groth Agreement. This agreement does not contain a definitive termination date, but Mr. Groth does have the right to terminate his employment at any time without penalty. The Groth Agreement also prohibits Mr. Groth from engaging in competitive activities during and for a period of 24 months following termination of his employment that would result in disclosure of the Company’s confidential information, but does not contain a general restriction on engaging in competitive activities.  Pursuant to the Groth Agreement, Mr. Groth’s annual base salary is $150,000 (changed to $165,000 effective January 1, 2008), and he is entitled to an annual bonus of between 20% and 30% of his base salary, as determined by the Company’s Board of Directors based on his performance, the Company’s achievement of financial performance and other objectives established by the Board of Directors each year, provided, however, that annual bonus may be less as approved by the Board of Directors based on his performance and the performance of the Company.   Under the agreement, Mr. Groth is eligible for long-term incentive compensation, such as additional options to purchase shares of the Company’s capital stock, on such terms as established by the Board of Directors. To date, the Board of Directors has not established any terms, performance metrics or eligibility criteria for determining when, and to what extent, Mr. Groth may be eligible for such long-term incentive compensation, or what such long-term incentive compensation may include.

Compensatory Agreements with Richard Grigg.The Company is a party to two agreements pursuant to which Richard Grigg, the Company’s Senior Vice President and Managing Director, performs services to the Company:   (i) an Amended and Restated Employment Agreement, dated January 27, 2009 (the “Amended Employment Agreement”), entered into directly with Richard Grigg that governs the employment of Mr. Grigg in the capacity of Managing Director of the Company and covers services provided by Mr. Grigg to the Company within the PRC; and (ii) a Contract of Engagement, dated January 27, 2009 (“Contract of Engagement”), entered into with KKSH Holdings Ltd. (“KKSH”), a company registered in the British Virgin Islands in which Mr. Grigg holds a minority interest and on whose board of directors Mr. Grigg sits, which agreement governs the provision of services related to the development and management of business opportunities for the Company outside of the PRC by Mr. Grigg through KKSH.  The Amended Employment Agreement has a term of three years, and provides for a base salary of 990,000 RMB (approximately $145,000) per year and the reimbursement of certain accommodation expenses in Beijing, China, and certain other transportation and expenses of Mr. Grigg.  In addition, in the event the Company terminates Mr. Grigg’s employment without Cause (as defined in the Amended Employment Agreement), the Company must pay to Mr. Grigg a lump sum amount equal to 50%

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of Mr. Grigg’s then-current annual base salary.  The Contract of Engagement also has a term of three years, and provides for a basic fee for the services of 919,000 RMB (approximately $135,000)  per year, to be prorated and paid monthly and subject to annual review and increase upon mutual agreement by the Company and KKSH.  Pursuant to the Contract of Engagement, the Company shall also provide Mr. Grigg with medical benefits and life insurance coverage, and pay KKSH an annual performance-based bonus award targeted at between 54% and 72% of the basic fee, awardable in the discretion of the Company’s Board of Directors.  In addition, in the event the Company terminates the Contract of Engagement without Cause (as defined in the Contract of Engagement), the Company must pay to KKSH a lump sum amount equal to 215% of the then-current annual basic fee.

Employment Agreement with Jamie Tseng.The Company is a party to an Employment Agreement with Jamie Tseng, the Company’s Executive Vice President (the “Tseng Employment Agreement”), dated April 22, 2009 and effective January 1, 2009. The Tseng Employment Agreement governs the employment of Mr. Tseng in the capacity of Executive Vice President of the Company through December 31, 2011, and provides for a base salary of $140,000 per year, and provides that, in the event the Company terminates Mr. Tseng’s employment without Cause (as defined in the Tseng Employment Agreement), the Company must pay to Mr. Tseng a lump sum amount equal to 50% of Mr. Tseng’s then-current annual base salary.

2007 Stock Plan

The Company’s Board of Directors and stockholders approved and adopted the 2007 Stock Plan on May 7, 2007 (the “2007 Plan”).  The 2007 Plan provides for the grant of restricted stock, incentive and/or non-qualified options,and stock appreciation rights (“SARs”) to employees, directors and consultants of the Company to purchase up to an aggregate of 4,000,000 shares of Common Stock. The purpose of the 2007 Plan is to provide participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company, and to attract new employees, directors and consultants with outstanding qualifications. The 2007 Plan is administered by the Compensation Committee on behalf of the Board of Directors which has discretion to select optionees and to establish the terms and conditions of each option, subject to the provisions of the 2007 Plan.

Pursuant to the 2007 Plan, the Company may from time to time grant its employees, directors and consultants restricted stock and options to purchase shares of, and SARs with respect to, the Company’s Common Stock at exercise prices determined by the Board of Directors. The exercise price of incentive stock options may not be less than 110% of the fair market value of Common Stock as of the date of grant. The Internal Revenue Code currently limits to $100,000 the aggregate value of Common Stock that may be acquired in any one year pursuant to incentive stock options under the 2007 Plan or any other option plan adopted by the Company. Nonqualified options may be granted under the 2007 Plan at an exercise price of not less than 85% of the fair market value of the Common Stock on the date of grant. Nonqualified options may be granted without regard to any restriction on the amount of Common Stock that may be acquired pursuant to such options in any one year. Options may not be exercised more than ten years after the date of grant. All stock options are non-transferrable by the grantee (other than upon the grantee’s death) and may be exercised only by the optionee during his service to the Company as an employee, director or consultant or for a specified period of time following termination of such service. The aggregate number of shares of Common Stock issuable under the 2007 Plan, the number of shares of stock, options and SARs outstanding, and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations, stock splits or stock dividends.

Pursuant to the 2007 Plan, in the event of a pending or threatened takeover bid, tender offer or exchange offer for twenty percent (20%) or more of the outstanding Common Stock or any other class of stock or securities of the Company (other than a tender offer or exchange offer made by the Company or any of its subsidiaries), whether or not deemed a tender offer under applicable federal or state law, or in the event that any person makes any filing under Section 13(d) or 14(d) of the Exchange Act with respect to the Company, other than a filing on Form 13G or Form 13D, the Board of Directors may in its sole discretion, without obtaining stockholder approval, take one or more of the following actions to the extent not inconsistent with other provisions of the 2007 Plan: (a) accelerate the exercise dates of any outstanding option or SAR, or make the option or SAR fully vested and exercisable; (b) pay cash to any or all holders of options or SARs in exchange for the cancellation of their outstanding options or SARs; or (c) make any other adjustments or amendments to the 2007 Plan and outstanding options or SARs and substitute new options or SARs for outstanding options or SARs.

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In general, upon the termination of service to the Company as an employee, director or consultant of an optionee or restricted stock or SAR recipient, all options, shares of restricted stock and SARs granted to such person that have not yet vested will immediately terminate, and those options and SARs that have vested as of the date of termination will be exercisable for 90 days after such termination date (12 months in the case of termination by reason of death or disability).

As of December 31, 2008, options to purchase an aggregate of 1,372,000 shares of Common Stock and restricted stock grants of an aggregate of 900,000 shares of Common Stock had been issued under the 2007 Plan. The 2007 Plan terminates on May 7, 2017.

Outstanding Equity Awards at Fiscal Year End

The following table shows information concerning unexercised stock options as of December 31, 2008 for the executive officers named in the Summary Compensation Table.

Outstanding Equity Awards at December 31, 2008 (Option Awards)

					Number of Securities
			Option		Underlying Unexercised				Option			Option
			Grant		Options				Exercise			Expiration
Name			Date		Exercisable		Unexercisable		Price ($)(12)			Date
	Frank C. Ingriselli (PEO)	9/29/2006		204,000		136,000		(1)		$ 0.56	9/29/2016
		12/17/2007		30,002		49,998		(2)		6.00	12/17/2017
		12/9/2008		0		350,000		(3)		0.64	12/9/2018
	Stephen F. Groth (PFO)	12/29/2006		93,840		62,560		(4)		$ 0.56	9/29/2016
		12/17/2007		20,000		20,000		(5)		6.00	12/17/2017
		12/9/2008		0		165,000		(6)		0.64	12/9/2018
	Richard Grigg	12/17/2007		5,000		5,000		(7)		6.00	12/17/2017
		12/9/2008		0		240,000		(8)		0.64	12/9/2018
	Jamie Tseng	9/29/2006		122,400		81,600		(9)		$ 0.56	9/29/2016
		12/17/2007		7,500		7,500		(10)		6.00	12/17/2017
		12/9/2008		0		85,000		(11)		0.64	12/9/2018

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1) The Options will vest and become exercisable as follows:  (i) 68,000 of the shares on September 29, 2009; and (ii) 68,000 of the shares on September 29, 2010. Vesting shall terminate upon the date of any termination of employment for cause or with good reason, and all vesting shall be accelerated upon any termination of employment without cause, without good reason, or upon death or disability (as defined).

2) The Options will vest and become exercisable as follows:  (i) 16,666 of the shares on December 17, 2009; (ii) 16,666 of the shares on December 17, 2010; and (iii) 16,666 of the shares on December 17, 2011, for so long as Mr. Ingriselli remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Ingriselli.

3) The Options will vest and become exercisable as follows: (i)175,000 of the shares on December 9, 2009; (ii) 70,000 of the shares on December 9, 2010;  (iii) 70,000 of the shares on December 9, 2011; and (iv) 35,000 of the shares on December 9, 2012, for so long as Mr. Ingriselli remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Ingriselli.

4) The Options will vest and become exercisable as follows:  (i) 31,280 of the shares on September 29, 2009; and (ii) 31,280 of the shares on September 29, 2010. Vesting shall terminate upon the date of any termination of employment for cause or with good reason, and all vesting shall be accelerated upon any termination of employment without cause, without good reason, or upon death or disability (as defined).

5) The Options will vest and become exercisable as follows:  (i) 8,000 of the shares on December 17, 2009; (ii) 8,000 of the shares on December 17, 2010; and (iii) 4,000 of the shares vest on December 17, 2011, for so long as Mr. Groth remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Groth.

6) The Options will vest and become exercisable as follows: (i) 82,500 of the shares on December 9, 2009; (ii) 33,000 of the shares on December 9, 2010; (iii) 33,000 of the shares on December 2011; and (iv) 16,500 of the shares on December 9, 2012, for so long as Mr. Groth remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Groth.

7) The Options will vest and become exercisable as follows:  (i) 2,000 of the shares on December 17, 2009; (ii) 2,000 of the shares on December 17, 2010; and (iii) 1,000 of the shares on December 17, 2011, for so long as Mr. Grigg remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Grigg.

8) The Options will vest and become exercisable as follows: (i) 120,000 of the shares on December 9, 2009; (ii) 48,000 of the shares on December 9, 2010; (iii) 48,000 of the shares on December 9, 2011; and (iv) 24,000 of the shares on December 9, 2012, for so long as Mr. Grigg remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Grigg.

9) The Options will vest and become exercisable as follows: (i) 40,800 of the shares on September 29, 2009; and (ii) 40,800 of the shares on September 29, 2010, for so long as Mr. Tseng remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Tseng.

10) The Options will vest and become exercisable as follows: (i) 3,000 of the shares on December 17, 2009; (ii) 3,000 of the shares on December 17, 2010; and (iii) 1,500 of the shares on December 17, 2011, for so long as Mr. Tseng remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Tseng.

11) The Options will vest and become exercisable as follows: (i) 42,500 of the shares on December 9, 2009; (ii) 17,000 of the shares on December 9, 2010; (iii) 17,000 of the shares on December 9, 2011; and (iv) 8,500 of the shares on December 9, 2012, for so long as Mr. Tseng remains an employee of or a consultant to the Company, and subject to the terms and conditions of a stock option agreement entered into by and between the Company and Mr. Tseng.

12) The fair market value of Common Stock of the Company determined in accordance with the 2007 Stock Plan as the mean between the representative bid and asked prices on the close of business the day immediately prior to the date of grant as reported by Pink Sheets LLC.

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The following table shows information concerning unvested restricted shares as of December 31, 2008 for the executive officers named in the Summary Compensation Table and for the directors named in the Director Compensation Table.

Outstanding Equity Awards at December 31, 2008 (Stock Awards)

Name	Grant Date	Number of Shares That Have Not Vested			Closing Price of Stock on 12/31/2008		Market Value of Shares That Have Not Vested ($) (6)
Officers
Frank C. Ingriselli (PEO)	12/17/2007		30,000	(1)	$	0.65		19,500
	12/9/2008		20,000	(2)	$	0.65		13,000
	12/18/2008		130,000	(2)	$	0.65		84,500
Stephen F. Groth (PFO)	12/17/2007		9,000	(1)	$	0.65		5,850
	12/9/2008		165,000	(2)	$	0.65		107,250
Richard Grigg	12/17/2007		60,000	(1)	$	0.65		39,000
	12/9/2008		150,000	(2)	$	0.65		97,500
	12/18/2008		90,000	(2)	$	0.65		58,500
Jamie Tseng	12/9/2008		85,000	(2)	$	0.65		55,250
Directors
Laird Q. Cagan (3)
James F. Link, Jr.	7/22/2008		30,000	(4)	$	0.65		19,500
Elizabeth P. Smith	7/22/2008		10,000	(5)	$	0.65		6,500
Robert C. Stempel	7/22/2008		10,000	(5)	$	0.65		6,500

1) Of the remaining unvested shares, 50% will vest and become non-forfeitable on December 17, 2009 and 50% will vest and become non-forfeitable on December 17, 2010, for so long as the recipient of the stock remains an employee of or consultant to the Company and subject to the terms and conditions of the restricted stock purchase agreement entered into by and between the Company and the grantee.

2) Grant of restricted stock subject to forfeiture as follows: (i) 40% of the shares will become vested and non-forfeitable on twelve month anniversary of the Grant Date; (ii) 30% of the shares will become vested and non-forfeitable on the two year anniversary of the Grant Date; and (iii) the balance of 30% of the shares will become vested and non-forfeitable on the three year anniversary of the Grant Date, for so long as the recipient of the stock remains an employee of or consultant to the Company and subject to the terms and conditions of the restricted stock purchase agreement entered into by and between the Company and the grantee.

3) Mr. Cagan was not granted any stock awards in 2008.

4) The unvested shares will vest and become non-forfeitable as follows: (i) 5,000 shares on the six month anniversary of the Grant Date; (ii) 15,000 shares on the twelve month anniversary of the Grant Date; and (iii) 10,000 shares will vest and become non-forfeitable on the two year anniversary of the Gant Date.

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5) The unvested shares will vest and become non-forfeitable as follows: (i) 5,000 shares on the twelve month anniversary of the Grant Date; and (ii) 5,000 shares will vest and become non-forfeitable on the two year anniversary of the Gant Date.

6) Based on $0.65per share, the closing price of the Common Stock as reported by Pink Sheets LLC on December 31, 2008.

Potential Payments Upon Termination or Change in Control

For a description of the potential payments to our Named Executive Officers upon termination or a change in control, see "Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table – Employment Agreements with Executive Officers" above. For further discussion of the determination of termination benefits, see "Compensation Discussion and Analysis – Total Compensation and Description and Allocation of Its Components – Post-Termination Compensation."

Quantification of termination benefits. The following table quantifies the termination benefits due to our Named Executive Officers, in the event of their termination for various reasons, including any termination occurring within 12 months following a change of control. The amounts were computed as if each executive officer's employment terminated on December 31, 2008.

2008 Potential Termination Benefits for Named Executive Officers
			Termination for other than Cause, Death, or Disability
Executive Officer / Element of Compensation	Termination due to Death or Disability		or by Executive for Good Reason		within 12 Months following a Change of Control
Frank C. Ingriselli
Salary and Bonus (1)	$	350,000	$	1,050,000	$	1,400,000
Equity Awards(2)		132,900		132,900		132,900
Benefits(3)		-		44,100		58,800
Total Frank C. Ingriselli	$	482,900	$	1,227,000	$	1,591,700
Richard Grigg
Salary and Bonus (4)	$	131,940	$	131,940	$	131,940
Equity Awards		-		-		-
Benefits		-		-		-
Total Richard Grigg	$	131,940	$	131,940	$	131,940
Stephen F. Groth
Salary and Bonus (1)	$	165,000	$	495,000	$	660,000
Equity Awards(2)		120,454		120,454		120,454
Benefits(3)		-		29,700		39,600
Total Stephen F. Groth	$	285,454	$	645,154	$	820,054

(1) Year 2008 bonuses were awarded and paid by December 31, 2008. Amounts shown represent 12 months salary in the case of death or disability, 36 months salary in the case of   termination for “Good Reason” and 48 months salary in the event of termination due to a “Change in Control.”

(2) Equity awards are quantified at the intrinsic value on December 31, 2008 of all options and restricted stock that was not fully vested and exercisable, but would become exercisable, under the terms of the Named Executive Officer's employment agreement, due to the form of termination specified in the column heading. The intrinsic value of options is determined by calculating the difference between the closing market price of our common stock on December 31, 2008, which was $0.65 per share, and the exercise price of the option, and multiplying that difference by the number of options exercisable at that given exercise price. The intrinsic values of all the options are then totaled. The intrinsic value of restricted stock is equal to the number of shares times the closing price of our common stock on December 31, 2008.

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(3) Terminated employees are entitled to 36 or 48 months of continued participation in the Company’s 401(k) plan, depending on the circumstances. For purposes of this disclosure, we have assumed that terminated employees will continue contributing to the 401(k) plan after their termination, up to Section 415 limits of the Internal Revenue Code.

(4) Represents $35,940 in salary and $96,000 in cash bonus not paid in 2008.

Option Exercises and Stock Vested in Last Fiscal Year

No options were exercised by any of the Company’s executive officers who are named in the Summary Compensation Table during the year ended December 31, 2008.  During the fiscal year ended December 31, 2008, the following number of restricted shares vested for executive officers named in the Summary Compensation Table:  Frank C. Ingriselli (20,000 shares); Richard Grigg (40,000 shares ); and Stephen F. Groth (6,000 shares).  In each case, the vested shares represented 40 percent of the restricted stock awarded on December 17, 2007.

Compensation of Directors

There are no standard arrangements by which directors of the Company are compensated for their services as directors, and none of the directors received any cash compensation for their services as such during the most recently completed fiscal year.  The Company issued 10,000 shares of restricted Common Stock under its 2007 Stock Plan to Robert C. Stempel on February 11, 2008 upon his agreement to join the Company’s Board of Directors, and the Company issued 10,000 shares of restricted Common Stock to James F. Link, Jr. on July 22, 2008 upon his agreement to join the Company’s Board of Directors.

Effective December 31, 2008, the Company rescinded the grants of an aggregate of 20,000 shares of the Company's restricted Common Stock previously issued under the Company's 2007 Stock Plan to members of the Board of Directors as follows:  (i) 10,000 shares issued to Elizabeth P. Smith on December 17, 2007; and (ii) 10,000 shares issued on February 11, 2008 to Robert C. Stempel.  These rescissions were each consummated pursuant to a rescission agreement entered into by and between the Company and each individual.

At its meeting on July 22, 2008, the Company’s Board of Directors formed three committees of the Board – the Audit Committee, the Compensation Committee, and the Nominating Committee -- and appointed Mr.  Link and Mr. Stempel to serve as Chairmen of the Audit and Nominating Committees, respectively. The Board also appointed Ms. Elizabeth P. Smith to serve as Chairperson of the Compensation Committee. At the same time, the Company’s Board decided to establish the “Committee Chairpersons Equity Incentive Policy.” The purpose of the policy is to incentivize members of the Board to serve as Chairpersons of its Committees and to adequately and competitively compensate those members who choose to do so for their time and commitment to serving in such roles.

Under its newly adopted “Committee Chairpersons Equity Incentive Policy,” the Company’s Board of Directors issued 10,000 shares of restricted Common Stock under its 2007 Stock Plan on July 22, 2008 to each of Mr. Stempel and Ms. Elizabeth P. Smith, for accepting Committee Chairpersonships of the Nominating and Compensation Committees, respectively. Also on July 22, 2008, the Company’s Board of Directors issued 20,000 shares of restricted Common Stock under its 2007 Stock Plan to newly appointed Board member James F. Link, Jr. for agreeing to serve as Chairman of the Board’s newly formed Audit Committee. In each instance, restricted shares issued under the “Committee Chairpersons Equity Incentive Policy” vest 50% on the twelve month anniversary of the Grant date and 50% on the two year anniversary of the Grant date, for so long as each of the named Chairpersons remain in those positions.

Additionally, in December 2008, the Company issued to current director, Chief Executive Officer and President, Frank C. Ingriselli, long-term equity compensation as described under “Long-Term Equity Compensation” above in connection with his services as the President and Chief Executive Officer of the Company.  The Board determined not to award Mr. Laird Cagan any additional long-term equity compensation in connection with his role as a member of the Board.

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Directors are also reimbursed for travel and other reasonable expenses relating to meetings of the Board.

The following table sets forth for each director who is not also a named executive in the Summary Compensation Table, compensation for the year ended December 31, 2008:

Director Compensation for the Year 2008

Name	Cash Fees Earned ($)		Stock Awards ($) (1) (2)		All Other Compensation ($)				Total
Laird Q. Cagan	$	0	$	0	$	114,000	(3	)	$	114,000
James F. Link, Jr.	$	0	$	48,525	$	0			$	48,525
Elizabeth P. Smith	$	0	$	72,792	$	0			$	72,792
Robert C. Stempel	$	0	$	140,975	$	0			$	140,975

1) The Stock Award value is equal to the amount of compensation expense recognized during 2008 in accordance with the requirements of FAS 123(R).

2) The Grant Date fair value of restricted shares awarded during 2008 were as follows: Mr. Link - $255,000; Ms. Smith - $85,000; and Mr. Stempel - $210,000. The Stock Award value is calculated by multiplying the number of shares of Common Stock awarded by the fair market value of Common Stock of the Company determined in accordance with the 2007 Stock Plan as the mean between the representative bid and asked prices on the close of business the day immediately prior to the Grant Date as reported by Pink Sheets LLC. At December 31, 2008, Board members held 50,000 shares of unvested stock awards as follows:  Ms. Smith and Mr. Stempel each held 10,000 shares, and Mr. Link held 30,000 shares.

3) Represents indirect cash payments to Mr. Cagan in fees earned by Cagan McAfee Capital Partners, LLC (“CMCP”) for services per an Advisory Agreement between the Company and CMCP dated December 1, 2006. (Mr. Cagan is the Managing Director and 50% owner of CMCP).

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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED   STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the beneficial ownership of Common Stock as of April 24, 2009, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding Common Stock; (ii) each of the Company’s directors; (iii) each executive officer identified in the Summary Compensation Table; and (iv) all executive officers and directors of the Company as a group:

		Amount and Nature
Title of Class	Name and Address of Beneficial Owner	of Beneficial ownership (1)				Percent of Class
Common Stock	Laird Q. Cagan		3,913,594	(2	)		9.01	%
	10600 N. De Anza Blvd.
	Suite 250
	Cupertino, CA 95014
Common Stock	Frank C. Ingriselli		3,762,581	(3	)		8.75	%
	250 East Hartsdale Ave.
	Hartsdale, NY 10530
Common Stock	Linden Growth		3,393,406	(4	)		7.94	%
	Partners Master Fund, LP
	718 South State Street
	Suite 101
	Clarks Summit, PA18411
Common Stock	John Liviakis		2,483,200	(5	)		5.81	%
	655 Redwood Road
	Suite 395
	Mill Valley, CA94941
Common Stock	Richard Grigg		1,275,000	(6	)		2.98	%
	250 East Hartsdale Ave.
	Hartsdale, NY 10530
Common Stock	Eric A. McAfee		1,121,251	(7	)		2.62	%
	10600 N. De Anza Blvd.
	Suite 250
	Cupertino, CA 95014
Common Stock	Jamie Tseng		1,014,795	(8	)		2.37	%
	250 East Hartsdale Ave.
	Hartsdale, NY 10530
Common Stock	Stephen F. Groth		966,840	(9	)		2.26	%
	250 East Hartsdale Ave.
	Hartsdale, NY 10530
Common Stock	Elizabeth P. Smith		188,947				0.44	%
	250 East Hartsdale Ave.
	Hartsdale, NY 10530
Common Stock	James F. Link, Jr.		30,000				0.07	%
	250 East Hartsdale Ave.
	Hartsdale, NY 10530
Common Stock	Robert C. Stempel		10,000				0.02	%
	250 East Hartsdale Ave.
	Hartsdale, NY 10530
Common Stock	All Directors and		11,161,757	(10	)		25.41	%
	Executive Officers as a Group (8 persons)

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1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options, warrants or convertible securities that are currently exercisable, or exercisable within 60 days of April 29, 2009, are deemed outstanding for computing the percentage of the person holding such options, warrants or convertible securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

2) Includes (i) 3,017,500 shares of the Company’s Common Stock owned by Cagan Capital, LLC, a fund owned by Mr. Laird Cagan; (ii) 100,000 shares of the Company’s Common Stock owned by KRC Trust and 100,000 shares of the Company’s Common Stock owned by KQC Trust, trusts for Mr. Cagan’s daughters for which Mr. Cagan is trustee; and (iii) 696,094 shares of the Company’s Common Stock issuable upon exercise of immediately exercisable warrants issued to Mr. Cagan.

3) Includes (i) 3,503,579 shares of the Company’s Common Stock held directly by Mr. Ingriselli, (ii) options exercisable on September 29, 2008 for 204,000 shares of the Company’s Common Stock pursuant to an option grant exercisable for an aggregate of 340,000 shares of Common Stock of the Company that vests with respect to 136,000 shares on September 29, 2007, and 68,000 shares on September 29 of each year thereafter, (iii) options exercisable on December 17, 2008 for an aggregate of 30,002 shares of Common Stock pursuant to an option grant exercisable for an aggregate of 80,000 shares of Common Stock of the Company that vests with respect to 13,336 shares on December 17, 2007, and 16,666 shares on December 17 of each year thereafter, and (iv) 25,000 shares of the Company’s Common Stock owned by Mr. Ingriselli’s son.

4) Linden Growth Partners Master Fund, LP, is a Cayman Islands exempted limited partnership whose general partner is Linden Capital Management IV, LLC, a Delaware limited liability company whose President and controlling member is Paul J. Coviello.

5) Includes shares of Common Stock held by Liviakis Financial Communications, Inc. and Mr. Liviakis individually.  Liviakis Financial Communications, Inc. is the Company’s public relations firm, and John Liviakis is its sole shareholder, President and Chief Executive Officer.

6) Includes (i) 1,270,000 shares of the Company’s Common Stock held directly by Mr. Grigg, and (ii) options exercisable on December 17, 2008 for an aggregate of 5,000 shares of Common Stock pursuant to an option grant exercisable for an aggregate of 10,000 shares of Common Stock of the Company that vests with respect to 5,000 shares on December 17, 2008, 2,000 shares on December 17, 2009 and 2010, and 1,000 shares on December 17, 2011.

7) Includes (i) 721,251 shares of the Company’s Common Stock owned by McAfee Capital, LLC, a fund owned by Mr. Eric McAfee and his wife; and (ii) 400,000 shares of the Company’s Common Stock owned by P2 Capital, LLC, a fund owned by Mr. McAfee’s wife and children.

8) Includes (i) 85,000 shares of the Company' s Common Stock held directly by Mr. Tseng, (ii) 799,895 shares of the Company’s Common Stock held by Golden Ring International Consultants, a British Virgin Islands company wholly-owned by Mr. Tseng, (iii) options exercisable on September 29, 2008 for 122,400 shares of the Company’s Common Stock pursuant to an option grant exercisable for an aggregate of 204,000 shares of Common Stock of the Company that vests with respect to 81,600 shares on September 29, 2007, and 40,800 shares on September 29 of each year thereafter, and (iv) options exercisable on December 17, 2008 for 7,500 shares of the Company’s Common Stock pursuant to an option grant exercisable for an aggregate of 15,000 shares of Common Stock of the Company that vests with respect to 7,500 shares on December 17, 2008, 3,000 shares on December 17, 2009, 3,000 shares on December 17, 2010, and 1,500 shares on December 17, 2011.

9) Includes (i) 440,000 shares of the Company’s Common Stock held directly by Mr. Groth, (ii) options exercisable on September 29, 2008 for 93,840 shares of the Company’s Common Stock pursuant to an option grant exercisable for an aggregate of 156,400 shares of Common Stock of the Company that vests with respect to 62,500 shares on September 29, 2007, and 31,280 shares on September 29 of each year thereafter, (iii) options exercisable on December 17, 2008 for an aggregate of 20,000 shares of Common Stock pursuant to an option grant exercisable for an aggregate of 40,000 shares of Common Stock of the Company that vests with respect to 3,334 shares on December 17, 2007, 16,666 shares on December 17, 2008, 8,000 shares on December 17, 2009, 8,000 shares on December 17, 2010, and 4,000 shares on December 17, 2011, and (iv) 413,000 shares of the Company’s Common Stock owned by Mr. Groth’s spouse.

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10) Includes all shares of the Company’s Common Stock, immediately exercisable warrants to purchase Company Common Stock, and options to purchase Company Common Stock exercisable within sixty (60) days of April 24, 2008, beneficially owned or held by (i) Messrs. Ingriselli who served as Chief Executive Officer of the Company during the last completed fiscal year, (ii) Messrs. Cagan and Stempel, Link and Ms. Smith, who currently serve as directors of the Company, (iii) Mr. Grigg who is presently serves as Senior Vice President and Managing Director of the Company and did so at the end of the Company’s last completed fiscal year  and (iv) Messrs. Groth and Tseng, who currently serve as executive officers of the Company and did so at the end of the Company’s last completed fiscal year.

Equity Compensation Plan Information

The following table sets forth all compensation plans previously approved by the Company’s security holders and all compensation plans not previously approved by the Company’s security holders as of December 31, 2008, which non-approved compensation plans were assumed by the Company in connection with the mergers of ADS and IMPCO into the Company in May 2007:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)				(c)
Equity compensation plans approved by		3,968,147	$	1.31	(4	)		1,728,000
security holders (1)(3)			$	1.27	(5	)
Equity compensation plans not approved by security holders (2)		775,200	$	0.56	(6	)		-
Total		4,743,347

_____________________________________________________________________________________________

1) On May 7, 2007, the Company and its stockholders approved the Company’s 2007 Stock Plan (see summary description of 2007 Stock Plan under “2007 Stock Plan” above). During 2007 and 2008, the Board of Directors and the Compensation Committee of the Company granted options to purchase an aggregate of 1,372,000 shares of Common Stock and grants of 920,400 shares of restricted Common Stock under the 2007 Stock Plan to certain employees, consultants, officers and directors of the Company (of which 20,400 shares of restricted Common Stock were rescinded in December 2008 and returned for issuance under the 2007 Stock Plan).  As of December 31, 2008, 1,728,000 shares of Company Common Stock remain available for future issuances under the 2007 Stock Plan.

2) Includes individual compensation arrangements entered into by and between the Company and the following employees and consultants of the Company in September 2006: (i) an option to purchase an aggregate of 340,000 shares of Common Stock of the Company at $0.56 per share issued to Frank C. Ingriselli; (ii) an option to purchase an aggregate of 204,000 shares of Common Stock of the Company at $0.56 per share issued to Jamie Tseng; (iii) an option to purchase an aggregate of 156,400 shares of Common Stock of the Company at $0.56 per share issued to Stephen F. Groth; (iv) an option to purchase an aggregate of 102,000 shares of Common Stock of the Company at $0.56 per share issued to Sean Hung; and (v) an option to purchase an aggregate of 34,000 shares of Common Stock of the Company at $0.56 per share issued to Douglas E. Hoffmann. All of these options were issued prior to adoption of the Company’s 2007 Stock Plan. Forty percent of the options vested on September 29, 2007; 20% vested on September 29, 2008 and 20% will vest on September 29 of each year thereafter to 2010 subject to the holder’s continued employment with the Company, and are subject to 100% acceleration upon termination of the holder without cause, termination by the holder for good reason, or upon the holder’s death or disability. Also includes individual compensation arrangements entered into by and between the Company and the following employees and consultants of the Company in February 2007 outside of the Company’s 2007 Stock Plan:  (i) 500,004 shares of fully-vested restricted Common Stock of the Company to JCS Consulting, LLC; (ii) 25,007 shares of fully-vested shares of restricted Common Stock of the Company to Dr. Y.M. Shum; (iii) 15,011 shares of fully-vested restricted Common Stock of the Company to Christopher B. Sherwood; (iv) 14,994 shares of fully-vested restricted Common Stock of the Company to Gregory Rozenfeld; (v) 14,994 shares of fully-vested restricted Common Stock of the Company to Zhang Suian; (vi) 5,015 shares of fully-vested restricted Common Stock of the Company to Edward Li; and (vii) 25,007 shares of fully-vested restricted Common Stock of the Company to Sean Huang.

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3) Includes warrants exercisable for an aggregate of 1,772,147 shares of Company Common Stock at a weighted-average exercise price of $1.27 per share, which warrants were originally issued on May 7, 2007 to placement agents representing the Company, the original issuance of which was approved by the stockholders of the Company.

4) The price reflects the weighted-average exercise price of stock options.

5) The price reflects the weighted-average exercise price of stock warrants.

6) The price reflects the weighted-average exercise price of the stock options.  The shares of fully-vested restricted Common Stock of the Company were issued at a fair market value of $0.56 per share.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

Financial Advisory Agreement

The Company is a party to an Advisory Agreement, effective December 1, 2006 (“Advisory Agreement”), with Cagan McAfee Capital Partners, LLC (“CMCP”), pursuant to which CMCP agreed to provide certain financial advisory and management consulting services to the Company. Pursuant to the Advisory Agreement, CMCP is entitled to receive a monthly advisory fee of $9,500 for management work commencing on December 11, 2006 and continuing until December 11, 2009.  In addition, the Advisory Agreement obligates the Company to indemnify CMCP against certain liabilities in connection with the engagement of CMCP under the Advisory Agreement.  Laird Q. Cagan, the Managing Director and 50% owner of CMCP, currently serves as a member of the Company’s Board of Directors.

Public Relations Agreement

In March 2005, the Company engaged Liviakis Financial Communications, Inc. as its public relations firm pursuant to a Consulting Agreement, as amended on April 22, 2009, that expires on May 7, 2011 (“Consulting Agreement”), and John Liviakis, a holder of more than 5 percent of the beneficial ownership of the Company, is the sole shareholder, President and Chief Executive Officer of Liviakis Financial Communications, Inc.  Pursuant to the Consulting Agreement, as amended, and as sole compensation thereunder, Liviakis Financial Communications, Inc. and an employee thereof were issued an aggregate of 2,119,000 shares of the Company’s Common Stock.

SG&E Share Exchange

On March 2, 2009, the Company entered into a Subscription Agreement for Shares (“Subscription Agreement”) with Richard Grigg, the Company’s Senior Vice President and Managing Director, pursuant to which Mr. Grigg purchased 970,000 shares of the Company’s Common Stock (the “Company Shares”) in exchange for 3,825,000 shares of Ordinary Fully Paid Shares (the “SG&E Shares”) of Sino Gas & Energy Holdings Limited, a privately-held company incorporated in Western Australia (“SG&E”) engaged in the exploration and development of coal bed methane and unconventional gas projects in China.  The SG&E Shares represent approximately a 3.5% ownership interest in SG&E, and represented full consideration for the issuance of the Company Share to Mr. Grigg as determined by the Board of Directors as being a fair and equivalent exchange of economic interests and payment of fair market value for the Company Shares based on a number of factors.  Mr. Grigg was formerly an employee and founding member of SG&E before joining the Company in October 2007.  Given that the Company is considering a number of possible transactions that may involve SG&E as a partner or party, which transactions Mr. Grigg may be instrumental in negotiating and overseeing, the Company believed that it was in the best interests of the Company and its stockholders to exchange Mr. Grigg’s SG&E Shares for the Company Shares in order to eliminate potential conflicts of interest on the part of Mr. Grigg and to further align Mr. Grigg’s interests with those of the Company.

Consulting Agreement with KKSH

On January 27, 2009, the Company revised the terms of its employment relationship with Richard Grigg, the Company’s Senior Vice President and Managing Director, by entering into two separate agreements pursuant to which Richard Grigg currently performs services to the Company:   (i) an Amended and Restated Employment Agreement, dated January 27, 2009 (the “Amended Employment Agreement”), entered into directly with Richard Grigg that governs the employment of Mr. Grigg in the capacity of Managing Director of the Company and covers services provided by Mr. Grigg to the Company within the PRC; and (ii) a Contract of Engagement, dated January 27, 2009 (“Contract of Engagement”), entered into with KKSH Holdings Ltd. (“KKSH”), a company registered in the British Virgin Islands in which Mr. Grigg holds a minority interest and on whose board of directors Mr. Grigg sits, which agreement governs the provision of services related to the development and management of business opportunities for the Company outside of the PRC by Mr. Grigg through KKSH.  The basic fee for the services provided under the Contract of Engagement is 919,000 RMB (approximately $135,000)  per year, to be prorated and paid monthly and subject to annual review and increase upon mutual agreement by the Company and KKSH.  Pursuant to the Contract of Engagement, the Company shall also provide Mr. Grigg with medical benefits and life insurance coverage, and pay KKSH an annual performance-based bonus award targeted at between 54% and 72% of the basic fee, awardable in the discretion of the Company’s Board of Directors.  In addition, in the event the Company terminates the Contract of Engagement without Cause (as defined in the Contract of Engagement), the Company must pay to KKSH a lump sum amount equal to 215% of the then-current annual basic fee.

Consulting Agreement with Jamie Tseng

The Company was a party to a consulting agreement, dated November 8, 2005, with Jamie Tseng, the Company’s Executive Vice President (“Tseng Consulting Agreement”), which was assigned on September 1, 2006 by Mr. Tseng to Golden Ring International Consultants Limited, a British Virgin Islands registered company wholly-owned and controlled by Mr. Tseng, and which was later superseded in its entirety effective January 1, 2009 by that certain Employment Agreement, dated April 22, 2009 and effective January 1, 2009, entered into by and between the Company and Mr. Tseng.  Pursuant to the Tseng Consulting Agreement, Mr. Tseng served in the role of Executive Vice President to the Company from November 2005 to December 31, 2008, for a monthly fee of $11,667, plus reasonable expenses incurred in carrying out the services required thereunder.

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Indemnification Agreements

The Company has entered into a stockholder-approved Indemnification Agreement with all of its current officers and directors.

Review, Approval or Ratification of Transactions with Related Persons

On August 15, 2007, the Company adopted a Code of Ethics and Business Conduct (the “Code”) applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other employees, the text of which has been posted on the Company’s website (www.papetroleum.com).  Among other provisions, the Code provides that all officers, directors and employees shall avoid all conflicts of interest or improper or unlawful conduct and even the appearance thereof, and, further, that only the Board of Directors of the Company may waive a conflict of interest or any other non-compliance with the Code.  Although the Company has not adopted a formal policy that covers the review and approval of related party transactions by the Board, in accordance with the Code and Section 144 of the Delaware General Corporation Law, it is the practice of the Board of Directors to review each contract or transaction between the Company and its directors, officers or employees, including the material facts as to the relationship or interest and as to the contract or transaction, determine in good faith whether such contract or transaction is fair as to the Company, and to approve or ratify such contract or transaction if the Board of Directors determines the contract or transaction to be fair as to the Company and in good faith authorizes the contract or transaction by affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum.

Other than the SG&E Agreement, the Contract of Engagement, the amendment to the Consulting Agreement entered into with Liviakis Financial Communications, Inc., and the Company’s form of Indemnification Agreement, which were each approved by the Company’s Board of Directors, none of the Advisory Agreement entered into with CMCP, the original Consulting Agreement entered into with Liviakis Financial Communications, Inc., the Chadbourn Agreement, or the Golden Ring Agreement have been directly approved by the Company’s Board of Directors, although the Company’s Board of Directors did approve the mergers of ADS and IMPCO into the Company in May 2007 pursuant to which these agreements were assumed by the Company from ADS and IMPCO.Additionally, the Board of Managers of ADS approved each of the Advisory Agreement entered into with CMCP, the original Consulting Agreement entered into with Liviakis Financial Communications, Inc., and the Chadbourn Agreement prior to the consummation of the merger of ADS into the Company in May 2007, and the Managers of IMPCO approved the Golden Ring Agreement prior to the consummation of the merger of IMPCO into the Company in May 2007.

Director Independence

The Board of Directors has determined that of its five members, James F. Link, Jr., Elizabeth P. Smith and Robert C. Stempel are “independent” within the meaning of Rule 4200(a) (15) of the Marketplace Rules of the NASDAQ Stock Market.

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ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

RBSM LLP (“RBSM”) examined, as independent auditors, the financial statements of the Company for the years ended December 31, 2007 and 2008.  The following table shows the fees billed to us by RBSM for the audit and other services rendered by RBSM during fiscal 2007 and 2008.  The Board of Directors, serving as the Company’s Audit Committee, has determined that the non-audit services rendered by RBSM were compatible with maintaining RBSM’s independence.

	2007		2008
Audit Fees (1)	$	106,052	$	139,062
Audit-Related Fees (2)		800		4,100
Tax Fees (3)		600		9,843
All Other Fees (4)		0		400
Total	$	107,452	$	153,405

1) Audit fees represent fees for professional services provided in connection with the audit of our financial statements and review of our quarterly financial statements and audit services provided in connection with other statutory or regulatory filings.

2) Audit-related fees consisted primarily of accounting consultations, and services rendered in connection with a proposed acquisition and implementation of Sarbanes-Oxley Act internal control requirements.

3) Tax fees principally represent RBSM charges related to preparing the 2007 Federal Tax return and reviewing Navitas’ tax returns in connection with the Navitas merger.

4) All other fees represent reimbursement of courier, printing and out of pocket expenses

All audit-related and other services rendered by RBSM were pre-approved by the Board of Directors, serving as the Company’s Audit Committee or with respect to services rendered after its formation in July, 2008, by the Audit Committee, before RBSM was engaged to render such services.  It is the Audit Committee’s standard practice to require pre-approval by the Committee of all audit, audit-related, tax and other services rendered by RBSM.  The Audit Committee is solely responsible for selecting, hiring and replacing external auditors. The Committee also pre-approves fees for both audit and non audit services. In reaching decisions on these matters, the Committee confirms the independence of the external auditors and whether the services to be provided are permissible under applicable rules and regulations. The Committee evaluates the competency of the external audit firm and assesses its fee schedule for reasonableness.

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PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)         Documents Filed as Part of this Report:

(1,2)           Financial Statements and Schedules.

The following financial documents of Pacific Asia Petroleum, Inc. are filed as part of this report under Item 8:

Consolidated Balance Sheets – December 31, 2007 and 2008

Consolidated Statement of Operations – For the years ended December 31, 2008, 2007 and 2006, and for the period from inception (August 25, 2005) through December 31, 2008

Consolidated Statement of Stockholders’ Equity (Deficiency) – For the period from inception (August 25, 2005) through December 31, 2008

Consolidated Statement of Cash Flows – For the years ended December 31, 2008, 2007 and 2006, and the period from inception (August 25, 2005) through December 31, 2008

Notes to Consolidated Financial Statements

  (3)                   EXHIBITS:

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
3.2	Bylaws of the Company (incorporated by reference to Exhibit 3.2 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
4.2	Form of Common Stock Warrant (incorporated by reference to Exhibit 4.2 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.1	Company 2007 Stock Plan (incorporated by reference to Exhibit 10.1 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). *
10.2	Company 2007 Stock Plan form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). *
10.3	Company 2007 Stock Plan form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). *
10.4	Company Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.5	ADS Registration Rights Agreement, dated May 7, 2007 (incorporated by reference to Exhibit 10.5 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).

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10.6 10.7	IMPCO Registration Rights Agreement, dated May 7, 2007 (incorporated by reference to Exhibit 10.6 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). Registration Rights Agreement, dated July 2, 2008 (incorporated by reference to Exhibit 10.2 our Current Report on Form 8-K (No. 000-52770) filed on July 8, 2008).
10.8	Engagement Letter, dated October 31, 2007, by and between Chadbourn Securities, Inc. and the Company (incorporated by reference to Exhibit 10.1 of our Annual Report on Form 10-K/A (No. 000-52770) filed on April 29, 2008).
10.9	Engagement Letter, dated February 26, 2007, by and between Sierra Equity Group, Inc. and ADS (incorporated by reference to Exhibit 10.8 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.10	Consulting Agreement, dated February 28, 2007, by and between Christopher B. Sherwood and IMPCO (incorporated by reference to Exhibit 10.9 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.11	Consulting Agreement, dated February 28, 2007, by and between Dr. Y.M. Shum and IMPCO (incorporated by reference to Exhibit 10.10 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.12	Executive Employment Agreement, dated September 29, 2006, by and between Frank C. Ingriselli and the Company (incorporated by reference to Exhibit 10.11 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). *
10.13 10.14 10.15	Executive Employment Agreement, dated September 29, 2006, by and between Stephen F. Groth and the Company (incorporated by reference to Exhibit 10.12 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). * Amended and Restated Employment Agreement, dated January 27, 2009, entered into by and between the Company and Richard Grigg (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52270) filed on February 2, 2009). * Contract of Engagement, dated January 27, 2009, entered into by and between the Company and KKSH Holdings Ltd. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K (No. 000-52270) filed on February 2, 2009). *
10.16	Lease, dated December 1, 2006, by and between Station Plaza Associates, and IMPCO (incorporated by reference to Exhibit 10.13 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.17 10.18	First Amendment to Lease, effective September 10, 2008, entered into by and between the Company and Station Plaza Associates (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed on September 18, 2008). Tenancy Agreement, dated June 29, 2007, by and between Jing Hui Tong Real Estate Management Company and Inner Mongolia Sunrise Petroleum Limited (incorporated by reference to Exhibit 10.14 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). **
10.19	Amended and Restated Agreement and Plan of Merger and Reorganization, dated February 12, 2007, as amended on April 20, 2007, by and among the Company, ADS and ADS Merger Sub (incorporated by reference to Exhibit 10.15 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.20 10.21	Amended and Restated Agreement and Plan of Merger and Reorganization, dated February 12, 2007, as amended on April 20, 2007, by and among the Company, IMPCO and IMPCO Merger Sub (incorporated by reference to Exhibit 10.16 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). Agreement and Plan of Merger, dated July 1, 2008, by and among Pacific Asia Petroleum, Inc., Navitas Corporation and Navitas LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed on July 8, 2008).

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10.22	Contract for Cooperation and Joint Development, dated August 23, 2006, by and between Chifeng Zhongtong Oil and Natural Gas Co., Ltd. and Inner Mongolia Production Company (HK) Ltd. (incorporated by reference to Exhibit 10.18 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). ***
10.23	Agreement for Joint Cooperation, dated November 30, 2006, by and between China United Coalbed Methane Co., Ltd. and the Company (incorporated by reference to Exhibit 10.19 of our Form 10-SB (No. 000-52770) filed on August 15, 2007).
10.24	Agreement on Joint Cooperation, dated May 31, 2007, by and between Sino Geophysical Co., Ltd. and the Company (incorporated by reference to Exhibit 10.20 of our Form 10-SB (No. 000-52770) filed on August 15, 2007). ***
10.25 10.26	Production Sharing Contract for Exploitation of Coalbed Methane Resources in Zijinshan Area, Shanxi Province, The People’s Republic of China, dated October 26, 2007, by and between Pacific Asia Petroleum, Ltd. and China United Coalbed Methane Corp. Ltd. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed on October 31, 2007). *** The Articles of Association of the Chinese-foreign Equity Joint Venture Inner Mongolia Sunrise Petroleum CO.LTD. (incorporated by reference to Exhibit 10.21 of our Form 10-SB/A (No. 000-52770) filed on October 12, 2007). **
10.27	The Contract of the Chinese-foreign Equity Joint Venture Inner Mongolia Sunrise Petroleum CO.LTD. (incorporated by reference to Exhibit 10.22 of our Form 10-SB/A (No. 000-52770) filed on October 12, 2007). **
10.28	Asset Transfer Agreement — Baode Area, dated September 7, 2007, by and among ChevronTexaco China Energy Company, Pacific Asia Petroleum, Ltd., and Pacific Asia Petroleum, Inc. (incorporated by reference to Exhibit 10.23 of our Form 10-SB/A (No. 000-52770) filed on October 12, 2007).
10.28	Amendment Agreement to Asset Transfer Agreement – Baode Area Between ChevronTexaco China Energy Company, Pacific Asia Petroleum, Ltd. and Pacific Asia Petroleum, Inc. dated September 7, 2007, Regarding the Sale of Participating Interest in the Production Sharing Contract in Respect of the Resources in the Baode Area, dated April 24, 2008 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed on April 25, 2008).
10.29	Asset Transfer Agreement — Baode Area, dated March 29, 2008, by and among BHP Billiton World Exploration Inc., Pacific Asia Petroleum (HK), Ltd., and Pacific Asia Petroleum, Inc. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed on April 3, 2008).
10.30	Agreement on Cooperation, dated September 27, 2008, entered into by and between the Company and Well Lead Group Limited (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed on September 30, 2008).
21.1	Subsidiaries of the Company
23.1	Consent of RBSM LLP , Independent Registered Certified Public Accounting Firm, filed herewith
31.1	Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

____________

*           Indicates a management contract or compensatory plan or arrangement.

** English translation of executed Chinese original document included.  Document provides that in the event of any inconsistencies between the Chinese and English versions of these documents, the Chinese versions shall govern.

*** Document provides that inconsistencies between the Chinese and English versions to be resolved in accordance with Chinese law.

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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 report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: January 6, 2010

Pacific Asia Petroleum, Inc.
By:	/s/ FRANK C. INGRISELLI
	Frank C. Ingriselli
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ FRANK C. INGRISELLI	Director, President and Chief Executive Officer	January 6, 2010
Frank C. Ingriselli
/s/ STEPHEN F. GROTH	Vice President and Chief Financial Officer	January 6, 2010
Stephen F. Groth	(Principal Accounting and Financial Officer)
/s/  JAMES F. LINK	Director	January 6, 2010
James F. Link
/s/  ELIZABETH P. SMITH	Director	January 6, 2010
Elizabeth P. Smith
/s/  WILLIAM E. DOZIER	Director	January 6, 2010
William E. Dozier
/s/  ROBERT C. STEMPEL	Director	January 6, 2010
Robert C. Stempel

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