Pacific Asia Petroleum Inc (Form: 10-K, Received: 03/02/2010 13:30:15)

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 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.

Coalbed Methane

In October 2007 Pacific Asia Petroleum, Limited (“PAPL”), a wholly-owned subsidiary of the Company, entered into a production sharing contract (“PSC”) 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. 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. In 2009 the Company completed seismic data acquisition, performed seismic shooting, and drilled its first well in the Zijinshan Block. Core samples have undergone laboratory testing, including tests for gas content, gas saturation and coal characteristics. Based on the results of these tests, at the latest Zijinshan PSC Joint Management Committee (JMC) meeting, the Company agreed to a 2010 work program which includes undertaking further technical studies related to the CUCBM Contract Area and drilling at least two additional wells there.

Chifeng Joint Development Contract

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 was 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 and/or possible negotiations toward acquiring the existing production from the 22 sq. km. Kerqing Oilfield and extending its production license to the Chifeng area. As of year-end 2009, new activity toward accomplishing this result had not commenced. 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 has been recognized to date due to uncertainty of realization of the revenue until a permanent production license is obtained. See Note 7. - Property, Plant and Equipment regarding the impairment adjustment recorded on Chifeng capitalized costs in 2009.

Natural Gas Distribution

In July 2009 the Company entered into a revised Letter of Intent to possibly acquire a 49% ownership interest in the Handan Chang Yuan Natural Gas Co., Ltd. (“HGC”) from the Handan Yua Ying Company Limited (“Handan”). HGC owns and operates gas distribution assets in and around Handan City, China. HGC 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. HGC 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. HGC also owns an 80,000 sq. ft. field distribution facility. Gas is being supplied by Sinopec and PetroChina from two separate sources. The Company will continue its final legal and financial due diligence with an objective of entering into a mutually agreed final sale and purchase agreement in 2010.

Enhanced Oil Recovery and Production (“EORP”)

In May and June 2009, Pacific Asia Petroleum Energy Limited (“PAPE”), a subsidiary of the Company, entered into a Letter of Understanding and associated agreements with two persons pursuant to which a China joint venture company, Beijing Dong Fang Ya Zhou Petroleum Technology Service Company Limited (“Dong Fang”), was formed in September 2009 to engage in EORP operations using the patent rights contributed by a noncontrolling owner of Dong Fang. Dong Fang is owned 75.5% by PAPE and 24.5% by a joint venture partner, LXD. In conjunction with these agreements, a 30% ownership interest in PAPE was issued to one of the joint venture partners, BSG. Operations have commenced in various oil fields in the Liaoning, Shandong, and Xinjiang Provinces in China. Initial revenues were recorded in 2009. The Company intends to negotiate additional agreements for EORP operations in 2010.

Oyo Field Production Sharing Contract Interest

In November 2009, the Company entered into a Purchase and Sale Agreement with CAMAC Energy Holdings Limited and certain of its affiliates (“CAMAC”) involving the acquisition of a 60% interest in production sharing contract rights in the Oyo Field in Nigeria in return for $38.84 million in cash (subject to possible reduction in cash payment by a portion of CAMAC’s net cash flows from the Oyo Field through the closing date) and a 62.74% ownership in the Company’s Common Stock after giving effect to this transaction and related financing transaction (the “Transaction”). If the Transaction is completed, CAMAC will own a majority interest in the Company and designate four of the seven members of the Company’s Board of Directors, and therefore a change of control of the Company will occur. The Transaction is expected to close during the first quarter of 2010.

NOTE 2. --- 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 Pacific East Advisors, Inc. (PEA) and Advanced Drilling Services, LLC (ADS) prior to May 7, 2007, the date of the Mergers.

The Company’s financial statements are prepared under U.S. Generally Accepted Accounting Principles as a development stage company. Refer to Note 5 regarding adoption in 2009 of revised presentation of noncontrolling interests in the balance sheet and income statement which have been applied retrospectively to prior years as required under ASC 810-10. Certain reclassifications have been made to the prior year financial statements to conform to current year presentation.

NOTE 3. --- 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 generated minimal revenue from operations. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise. The Company will require significant financing in excess of its December 31, 2009 available cash, cash equivalents, and short-term and long-term cash investments in order to achieve its business plan. It is not certain that this amount of financing will be successfully obtained.

Refer to Note 20. – Subsequent Event regarding the registered direct offering of Common Stock sold in February 2010.

NOTE 4. --- SIGNIFICANT ACCOUNTING POLICIES

In July 2009, The Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (the “Codification”)(“ASC”) which became the source of authoritative accounting principles effective with financial statements of interim and annual periods ending after September 15, 2009. Sources of accounting principles referred to in this report refer to Topics, Subtopics and Sections of the Codification.

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 of Accounting Standards Codification (ASC) Topic 320 (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.

Inventories – The Company’s inventories of chemicals are carried at lower of cost or market, with cost determined using average cost. The Company had no other inventories as of the balance sheet dates.

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 - 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 ASC Topic 320 (Investments in Debt and Equity Securities), when impairment is deemed to be other than temporary.

Impairment of Long-Lived Assets – The Company reviews its long-lived assets in property, plant and equipment for impairment in accordance with ASC Topic 360 (Property, Plant and Equipment). 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.

Asset Retirement Obligations – The Company accounts for asset retirement obligations in accordance with ASC Topic 410 (Asset Retirement and Environmental Obligations). The Company at December 31, 2009 and 2008 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 – Revenues are recognized only when the earnings process is complete and an exchange transaction has taken place. An exchange transaction may be a physical sale, the providing of services, or an exchange of rights and privileges. The recognition criteria are satisfied when there exists a signed contract with defined pricing, delivery and acceptance (as defined in the contract) of the product or service have occurred, there is no significant uncertainty of collectibility, and the amount is not subject to refund

Income Taxes – Commencing May 7, 2007, the Company became subject to taxation as a corporation but at December 31, 2009 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 ASC Topic 740 (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 U.S. parent company is the U.S. dollar. The functional currency of China subsidiaries is the local currency (RMB). For Hong Kong subsidiaries, the functional currency is the U.S. dollar or RMB, depending on the primary activity of the subsidiary. Balance sheet translation effects from translating functional currency into U.S. dollars (the reporting currency) are recorded directly to other comprehensive income in accordance with ASC Topic 200 (Comprehensive Income).

Stock Based Compensation – The Company accounts for stock based compensation in accordance with ASC Topics 718 (Compensation) and 505 (Equity) which specify 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 ASC provisions 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.

Net Income (Loss) Per Common Share –The Company computes earnings per share under ASC Topic 260 (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 other than possibly those below.

Accounting Standards Update (ASU) No. 2009-17 – Consolidations (Topic 810) – “Improvements to Financial Reporting by Enterprises with Variable Interest Entities.” This standard amends Topic 810 by requiring consolidation of certain special purpose entities that were previously exempted from consolidation. The revised criteria will define a controlling financial interest for requiring consolidation as: the power to direct the activities that most significantly affect the entity’s performance, and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This standard is effective for fiscal years beginning after November 15, 2009.

NOTE 5. ADOPTION OF UPDATES TO THE FASB ACCOUNTING STANDARDS CODIFICATION

ASC 820-10

Effective January 1, 2009 the Company adopted the portion of ASC Topic 820 (Fair Value Measurements and Disclosures) that relates to assets measured at fair value on a nonrecurring basis. The Company had previously adopted the remainder of ASC Topic 820 effective January 1, 2008. Neither adoption had a material effect on the Company’s measurement practices for determining fair value.

ASC 825-10

Commencing with the interim period ending June 30, 2009, the Company adopted new requirements for quarterly disclosures related to fair values of financial instruments whether or not currently reflected on the balance sheet at fair value. Previously, qualitative and quantitative information about fair value estimates for financial instruments not measured on the balance sheet at fair value were disclosed only annually. Quarterly disclosures were required under an update to ASC Topic 825 (Financial Instruments) effective for interim periods ending after June 15, 2009. The adoption of this update did not have a material impact on the Company’s results of operations or financial condition.

ASC 810-10

Effective January 1, 2009 the Company adopted an update to ASC Topic 810 (Consolidation) that changes the accounting and reporting for noncontrolling interests (formerly known as minority interests) in subsidiaries and for the deconsolidation of a subsidiary. The presentation of noncontrolling interests in the balance sheet and income statement has been revised to report noncontrolling interests as a separate component of total consolidated equity and total consolidated net income, rather than as reduction adjustments. In addition, if a subsidiary is deconsolidated, the parent company will now recognize a gain or loss to net income based upon the fair value of the noncontrolling equity at that date.

The update is applied prospectively except for the provisions involving financial statements line detail presentation. All of the Company’s financial statements contain changes as a result of the update. Under the update, the amount formerly titled “Net Loss” in the income statement is now referred to as “Net Loss - Pacific Asia Petroleum, Inc. and Subsidiaries,” to designate the portion of total net loss attributable to the controlling shareholder interest of the parent company. Financial statements for years prior to 2009 have been revised retrospectively in this report to reflect the revised presentation basis.

ASC 855-10

Effective with the six months ended June 30, 2009, the Company adopted an update to ASC Topic 855 (Subsequent Events). Subsequent events are events or transactions about which information becomes available after the balance sheet date but before the financial statements are issued or are available to be issued. In the case of the Company as a public entity, the applicable cutoff date is the date the financial statements are issued, whereas previously the cutoff date could be the date the financial statements were available for issuance.

The update requires that certain subsequent events (“recognized subsequent events”) be recorded in the financial statements of the latest preceding period currently being issued. These items provide evidence about conditions that existed at the date of that balance sheet, including estimates inherent in preparing the financial statements for that period. Other subsequent events (“nonrecognized subsequent events”) are not recorded in balance sheet for the latest preceding period currently being issued. Those items relate to conditions that arose only after the balance sheet date. Disclosure is required for nonrecognized subsequent events if necessary to prevent those financial statements from being misleading.

NOTE 6. --- FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments for cash equivalents, short-term and long-term cash investments, accounts receivable, deposits, advances, accounts payable, accrued expenses, and notes payable, approximate fair value at December 31, 2009, and 2008. The carrying amount for the investment in nonsubsidiary is fair value from a market price. The recorded amounts for fair values of securities were as follows at December 31, 2009 and 2008:

	2009		2008
Available for sale:
Short-term investments	$	1,735,397	$	1,260,000
Investment in nonsubsidiary		478,255		-

Held to maturity:
Long-term certificate of deposit	$	25,141	$	-
Long-term advances		33,015		386,415

Long-Term Advances

At December 31, 2008, and December 31, 2007, 100% of the Company’s long-term advances ($33,015 in 2009, $386,415 in 2008) 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 had 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 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. On December 31, 2009 the total recorded capital of IMPCO Sunrise was reduced by agreement among IMPCO Sunrise and its owners, and the reduction (including the BJHTC share) was reclassified to an intercompany loan from IMPCO HK to IMPCO Sunrise. The recorded amount for the outside note receivable of IMPCO HK from BJHTC was reduced to $33,015 as a result.

Under the provisions of ASC Topic 320 (Investments - 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. ASC Topic 320 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 ASC Topic 820 (Fair Value Measurements and Disclosures). 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 had 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 was 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 ASC Topic 820, 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 cash distributions to the noncontrolling 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. After reduction in the note balance at December 31, 2009 as previously described above, it was concluded that no additional impairment adjustment was required for 2009.

Concentration of Credit Risk

The Company is exposed to concentration of credit risk with respect to cash, cash equivalents, short-term investments, long-term investments, and long-term advances. At December 31, 2009, 65% ($1,291,455) of the Company’s total cash was on deposit at HSBC in China and Hong Kong. Also at that date, 64% ($1,028,762) of the Company’s total cash equivalents was invested in a single money market fund in the U.S. 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.

NOTE 7. --- PROPERTY, PLANT AND EQUIPMENT

	Gross		Accumulated Depreciation		Net
December 31, 2009
Oil and gas leases	$	150,000	$	-	$	150,000
Office and computer equipment		358,320		161,078		197,242
Enhanced oil recovery equipment		34,202		2,028		32,174
Leasehold improvements		89,946		18,659		71,287
Total	$	632,468	$	181,765	$	450,703
December 31, 2008
Oil and gas wells	$	221,805	$	-	$	221,805
Oil and gas leases		150,000		-		150,000
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

Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $132,052, $66,769, and $18,850, respectively.

No interest expense has been capitalized through December 31, 2009.

Impairment of Chifeng Oil Well Costs

In 2009, the Company conducted an impairment review of its Chifeng contract capitalized oil well cost for recoverability as an asset to be held and used. This review was prompted based on the continuing lack of production license that would enable recovery of these costs through production revenues and that three years have passed with no progress in this regard. Without a production license, the opportunities to drill additional production wells under the contract and future production from this initial well are significantly at risk. The Company has alternate strategies it intends to pursue toward possibly obtaining a production license through modification of the existing agreement and/or inclusion of this area in a production license for a neighboring area should the Company be able to obtain a production license for that other area. However, as of December 31, 2009, activity toward accomplishing this result by specific negotiations and agreements had not commenced, and the likelihood of possible success and when it might occur could not be reasonably estimated. Therefore, the Company concluded that an estimate of future cash flows from this asset no longer could be made. Absent the likely ability to obtain a production license, the fair value of the asset is zero under Level 3 unobservable inputs for estimation of fair value under ASC Topic 820. Those conditions required the recording of an impairment charge to expense and retirement of capitalized costs of $219,388. The impairment is included in “all other” within costs and operating expenses in the income statement.

NOTE 8. – FAIR VALUE MEASUREMENTS

The Company calculates fair values for assets and liabilities utilizing a three level hierarchy as follows:

Level 1:	Quoted market prices in active markets for identical items.

Level 2:	Observable inputs not included in Level 1, such as quoted prices for similar assets or liabilities, broker quotations, or other observable inputs for a similar contract term.

Level 3:	Unobservable inputs where Level 1 or Level 2 inputs are not available. Level 3 inputs may involve internal models of risk-adjusted expected cash flows using present value techniques.

The tables below exclude current assets and current liabilities other than assets for short-term investments, as fair value and cost are deemed to be identical for the excluded items.

Assets Measured at Fair Value on a Recurring Basis – as of December 31

	2009		Level 1 Measurements		2008		Level 1 Measurements

Short-term investments	$	1,735,397	$	1,735,397	$	1,260,000	$	1,260,000
Investment in nonsubsidiary		478,255		478,255		-		-
Total	$	2,313,652	$	2,313,652	$	1,260,000	$	1,260,000

Assets Measured at Fair Value on a Nonrecurring Basis – as of December 31

	2009		Level 3 Measurements		Loss Recorded for Year
Property, plant and equipment to be held and used	$	450,703	$	450,703	$	(219,388	)
Long-term advances		33,015		33,015		-

Refer to Note 7. – Property, Plant and Equipment regarding determination of the impairment loss recorded to net loss in 2009.

NOTE 9. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Following is a detail of activity by category for accumulated other comprehensive income (loss).

	Currency translation adjustment			Gain (loss) on investments in securities			Total
Balance – December 31, 2006	$	19,228		$	-		$	19,228
Change during 2007		108,833			-			108,833
Balance – December 31, 2007		128,061			-			128,061
Change during 2008		101,799			-			101,799
Balance – December 31, 2008		229,860			-			229,860
Change during 2009		( 63,643	)		( 74,645	)		(138,288	)
Balance – December 31, 2009	$	166,217		$	( 74,645	)	$	91,572

NOTE 10. --- INCOME TAXES

Income tax expense was as follows for the respective periods:

	2009		2008			2007
Current:
U.S. Federal	$	-	$	(19,044	)	$	19,085
State and other		39,575		32,126			19,741
Total income tax expense	$	39,575	$	13,082		$	38,826

The Company’s subsidiaries outside the United States did not have any undistributed net earnings at December 31, 2009, due to accumulated net losses.

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

	2009			2008			2007
Net (loss) before income tax expense	$	(11,449,802	)	$	(5,433,567	)	$	(2,344,858	)
Expected income tax provision at statutory rate of 35%, assuming U.S. Federal filing as a corporation	$	(4,007,431	)	$	(1,901,748	)	$	(820,700	)
Increase (decrease) due to:
Foreign-incorporated subsidiaries		1,585,060			433,577			40,011
U.S. Federal filing as a partnership during LLC periods		-			-			315,254
State and other income tax		39,575			32,126			19,741
Net losses not realizable currently for U.S. tax purposes		2,422,371			1,468,171			465,435
Penalties and miscellaneous		-			(19,044	)		19,085
Total income tax expense	$	39,575		$	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 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:

	2009			2008			2007
Tax basis operating loss carryovers	$	5,171,772		$	1,746,203		$	444,756
Stock compensation		386,465			402,323			24,156
Depreciation		-			3,712			-
		5,558,237			2,152,238			468,912
Valuation allowance		(5,558,237	)		(2,152,238	)		(468,912	)
Net deferred income tax assets	$	-		$	-		$	-

The Company’s total tax basis loss carryovers at December 31, 2009 were $15,594,950. Of this amount, $448,457 has no expiration date. The remainder expires from 2011 to 2029.

NOTE 11. --- 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 an 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 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.

The Company was a party to a consulting agreement, dated November 8, 2005, with Jamie Tseng, the Company’s former 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. Mr. Tseng served in the role of Executive Vice President to the Company from November 2005 to January 15, 2010, on which date Mr. Tseng retired as an executive officer and employee of the Company.

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 was 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 received services from CMCP under this agreement since the Mergers. Laird Q. Cagan, the Managing Director and 50% owner of CMCP, served as a member of the Company’s Board of Directors until his resignation in May 2009. During 2008, the Company paid $123,500 in fees under this contract, including an amount due for 2007. During 2009, the Company paid $85,500 in fees under this contract, including amounts paid for early termination of this contract in June 2009.

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 (at that time a director and significant shareholder of the Company) served 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.

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 served 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 former member of the Company’s Board of Directors and the then-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, 2009, 1,460,888 warrants remained unexercised, at a weighted average exercise price of $1.30 per share of Common Stock, and expire May 7, 2012.

Acquisition of SGE Common Stock

In March, 2009, the Company issued 970,000 shares of Company Common Stock, to Mr. Richard Grigg, the Company’s Senior Vice President and Managing Director, in exchange for 3,825,000 Ordinary Fully Paid Shares of Sino Gas & Energy Holdings Limited (SG&E) owned by Mr. Grigg. This represented approximately 3.26% of the outstanding shares of SG&E as of March 9, 2009. The acquired shares were originally accounted for by the Company as a non-current investment carried at cost. Commencing with the interim period ending September 30, 2009, the carrying amount is recorded at fair value. Mr. Grigg is a former executive of SG&E who joined the Company in October 2007. The SG&E shares were acquired in order to eliminate possible conflicts of interest involving Mr. Grigg regarding possible future transactions that may occur between the Company and SG&E, as both companies’ business plans involve developing operations in China.

Chemical Sales Agent Arrangement

During the third quarter of 2009, the Company conducted its initial business involving EORP chemicals through an arrangement with Tongsheng, a subsidiary of the family-owned business of Mr. Li Xiangdong (LXD). A new China Joint Venture Company (CJVC) was established for this purpose in September 2009, known as Beijing Dong Fang Ya Zhou Petroleum Technology Services Company Ltd. (Dong Fang). LXD is a 24.5% owner of Dong Fang as a result of contributing patent rights and related technology for specialty chemicals and processes to Dong Fang. Prior to formation of Dong Fang, the Company was not licensed in China to purchase or blend chemicals for resale or to sell chemicals. Under the arrangement with Tongsheng, Tongsheng manufactured specialty blends of chemicals using technology developed by LXD and sold finished product to customers of the Company. Tongsheng collects the revenues from customers in advance on these sales, bills the Company for the cost of sales, and is obligated to remit the revenues to the Company.

NOTE 12. --- OTHER COMMITMENTS

Lease Commitments

At December 31, 2009, the Company had non-cancelable lease commitments for two operating leases on office facilities. Future minimum lease rentals by year are as follows:

2010 - $ 210,748

2011 - $ 86,358

Rental expense for the years ended December 31, 2009, 2008 and 2007 was $233,042, $110,013, and $78,183, respectively.

NOTE 13. --- CAPITALIZATION

Capital Stock Authorized and Issued

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, 2009 was 43,037,596 shares of Common Stock issued and outstanding, and 23,708,952 shares of Series A Convertible Preferred Stock issued but none outstanding. 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 .

Common Stock Issued as Compensation for Consultant Services

In 2009, the Company issued 1,029,000 shares of Common Stock for consultant compensation valued at $1,053,100, as follows: 879,000 shares at $.85 per share ($747,150); 90,000 shares at $1.92 per share ($172,800); 10,000 shares at $.65 per share ($6,500); 15,000 shares at $1.90 per share ($28,500); 15,000 shares at $2.09 per share ($31,350); and 20,000 shares at $3.34 per share ($66,800).

In 2008, the Company issued 15,000 shares of Common Stock for consultant compensation valued at $138,000, as follows: 5,000 shares at $22.90 per share ($114,500); and 10,000 shares at $2.35 per share ($23,500).

Other Equity-Based Compensation

Refer to Note 15. – Stock-Based Compensation Plans regarding activity for stock options and stock compensation not immediately vested at award date.

NOTE 14. --- 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. At the time of the merger, Eric McAfee was a 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. At the time of the merger, Mr. Cagan was 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 15. --- STOCK-BASED COMPENSATION PLANS

Stock Options

Under the Company’s 2009 Equity Incentive Plan, the Company may issue stock, options or units to result in issuance of a maximum aggregate of 6,000,000 shares of Common Stock. Options awarded expire 10 years from date of grant or shorter term as fixed by the Board of Directors. In 2009, the Company issued a total of 460,070 stock options with vesting periods from 6 months to 25 months. The approximate percentages of the 2009 awards vesting by year is as follows: 2010 - 53%; 2011 – 23%; 2012 – 24%.

The following is a table of options activity:

	Number of Shares Underlying Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term(Years)
Outstanding at December 31, 2008		2,137,200		$	1.04		9.07
Granted in 2009		460,070		$	3.96		5.25
Exercised in 2009		(30,000	)	$	.59
Forfeited in 2009		(25,000	)	$	.64
Outstanding at December 31, 2009		2,542,270		$	1.57		8.16
Expected to vest		2,474,610		$	1.56		8.17
Exercisable at December 31, 2009		1,291,488		$	1.06		8.85

The total intrinsic values of options at December 31, 2009 were $7,090,724 for options outstanding and expected to vest and $4,811,400 for options that were exercisable at that date. The total intrinsic values realized by recipients on options exercised were $117,824 in 2009 and none in 2008 and 2007.

The Company recorded compensation expense relative to stock options in 2009, 2008 and 2007 of $583,547, $378,025, and $167,325 respectively.

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.

	2009			2008			2007
Expected price volatility (basket of comparable public companies)		77.54	%		65.60	%		55.80	%
Risk-free interest rate (U.S. Treasury bonds)		1.42	%		2.04	%		4.09	%
Expected annual dividend rate		0.00	%		0.00	%		0.00	%
Expected option term – weighted average	3.17 yrs.			5.95 yrs.			5.98yrs.
Grant date fair value per common share-weighted average	$	2.05		$	.39			3.38

Restricted Stock	Number Of Grants			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2008		834,000		$	1.78
Granted in 2009		924,055		$	2.42
Vested in 2009		(738,000	)	$	1.87
Outstanding at December 31, 2009		1,020,055		$	2.29

The Company recorded compensation expense relative to restricted stock in years 2009, 2008 and 2007 of $1,848,459, $977,565 and $28,117 respectively.

Unamortized Compensation

At December 31, 2009, the remaining future compensation expense to be recorded on unvested stock options and restricted stock was $2,530,180, to be recognized over a weighted average period of 1.66 years, assuming that no forfeitures occur.

Fair Value Data

The total grant date fair value of shares vested during 2009, 2008, and 2007 were $1,383,370, $763,510, and $173,441 respectively.

The total grant date fair values of stock options and restricted shares issued during the years 2009, 2008, and 2007 were $3,185,240, $1,478,080, and $1,660,800 respectively.

NOTE 16. --- 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 17. --- 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 2009, the Company contributions were $75,322 under this plan including third party administration fees.

NOTE 18. --- PATENT APPLICATION RIGHTS

On November 27, 2009, the State Intellectual Property Office of the PRC in China recognized Dong Fang as the official owner of the six LXD Patent Application Rights (the “Rights”), covering enhanced oil recovery technologies developed by LXD (the “EORP Technologies”). LXD contributed the Rights in satisfaction of his 24.5% share of Dong Fang’s registered capital of RMB 30,000,000. The fair value of the Rights was verified by a certified Chinese valuation firm.

Thus far, Dong Fang has used the Rights to utilize the EORP Technologies in both service and sale scenarios. Dong Fang intends to pursue various short- and long-term strategies to expand its EORP operations in order to add value to the Company.

Under interpretation SAB No. 48 issued by the Staff of the U.S. Securities and Exchange Commission, the Company in this case is not permitted to record a capitalized asset value on the Rights for U.S. reporting. This ruling in no way lessens the fair value of the Rights to the Company.

NOTE 19. --- LITIGATION AND CONTINGENCIES

The Company at December 31, 2009 had no litigation, actual or potential, of which it was aware and which could have a material effect on its financial position.

NOTE 20. --- SUBSEQUENT EVENT

On February 16, 2010, the Company consummated the offer and sale of 5,000,000 shares (the "Shares") of its common stock, par value $0.001 per share ("Common Stock"), for an aggregate purchase price of $20 million, or $4.00 per share (the "Purchase Price"), pursuant to a Securities Purchase Agreement, dated February 10, 2010, among the Company and certain purchasers signatory thereto (the “Purchasers”). In addition, the Company issued to the Purchasers (1) warrants to purchase up to an additional 2,000,000 shares of Common Stock of the Company, in the aggregate, at an exercise price of $4.50 (subject to customary adjustments), exercisable commencing six months following the closing for a period of 36 months after such commencement date (the “Series A Warrants”); and (2) warrants to purchase up to an additional 2,000,000 shares of Common Stock of the Company, in the aggregate, at an exercise price $4.00 per share (subject to customary adjustments), exercisable immediately at the closing until November 1, 2010 (the “Series B Warrants” and together with the Series A Warrants, the “Warrants”). If all the Warrants are exercised, the Company would receive additional gross proceeds of $17 million. The Shares and the Warrant Shares are to be sold pursuant to a shelf registration statement on Form S-3 declared effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by the prospectus supplement filed with the SEC on February 12, 2010 and delivered to the Purchasers.

Rodman & Renshaw, LLC (“Rodman”) served as the Company’s exclusive placement agent in connection with the offering. As consideration for its services as placement agent, Rodman received a cash fee equal to 6.0% of the gross proceeds of the offering ($1,200,000), as well as a 5-year warrant to purchase shares of Common Stock of the Company equal to 3.0% of the aggregate number of shares sold in the offering (150,000 shares of Common Stock), plus any shares underlying the Warrants. Rodman’s warrant has the same terms as the Warrants issued to the Purchasers in the offering except that the warrant is not exercisable until the 6-month anniversary of the closing and the exercise price is 125% of the per share purchase price of the shares issued in the offering ($5.00 per share). In addition, subject to compliance with Financial Industry Regulatory Authority ("FINRA") Rule 5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable expenses actually incurred in the amount of $25,000.

Net proceeds from the offering are planned to be used by the Company for working capital purposes, and also may be used by the Company to fund the Company’s acquisition from CAMAC of the Contract Rights with respect to the Oyo Field, which began production in December 2009.

Quarterly Information (unaudited)

The table below presents unaudited quarterly data for the years ended December 31, 2009 and December 31, 2008:

	1 st Quarter			2 nd Quarter			3 rd Quarter			4 th Quarter
2009
Revenues – sales and services	$	-		$	-		$	55,409		$	11,393
Operating Loss	$	(2,939,025	)	$	(2,149,474	)	$	(2,696,731	)	$	(3,803,749	)
Net Loss	$	(2,922,351	)	$	(2,158,650	)	$	(2,644,162	)	$	(3,764,215	)
Basic and diluted net loss per common share	$	(.07	)	$	(.05	)	$	(.06	)	$	(.09	)

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	)

Fourth quarter 2009 versus fourth quarter 2008

The 2009 fourth quarter operating loss exceeded the 2008 fourth quarter operating loss by $1,622,329. The increase was principally due to increased consulting expense of $905,905 of which $630,519 was for amounts paid as equity and $275,386 was for amounts paid as cash. The increased consulting expense was largely due to milestone payments under agreements related to start-up of EORP operations. In addition, stock compensation expense for restricted stock and stock options increased $358,528 due to greater value of awards subject to amortization. Legal fees expense decreased $82,309 principally due to lower expense related to China. All other expenses reflected a net increase, including 2009 write-offs of deferred charges of $85,000 on asset acquisition and financing transactions under negotiation that were terminated.

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, 2009 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, 2009.

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, 2009 which is given below.

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, 2009, 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, 2009, 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 balance sheets of Pacific Asia Petroleum, Inc. and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009 and for the period August 25, 2005 (date of inception) through December 31, 2009, and our report dated March 2, 2010 expressed an unqualified opinion.

	/s/ RBSM LLP

New York, New York March 2, 2010

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, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

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.

Other information called for by Item 10 of Form 10-K is set forth in the Company’s Proxy Statement for its annual meeting of shareholders to be held on June 9, 20 10 (the “Proxy Statement”), which is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information called for by Item 11 of Form 10-K is set forth in the Proxy Statement, which is incorporated herein by reference.

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

Information called for by Item 12 of Form 10-K is set forth in the Proxy Statement, which is incorporated herein by reference.

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

Information called for by Item 13 of Form 10-K is set forth in the Proxy Statement, which is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information called for by Item 14 of Form 10-K is set forth in the Proxy Statement, which is incorporated herein by reference.

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, 2009 and 2008

Consolidated Statements of Operations – For the years ended December 31, 2009, 2008 and 2007, and

for the period from inception (August 25, 2005) through December 31, 2009

Consolidated Statements of Comprehensive Income – For the years ended December 31, 2009, 2008 and 2007,

and for the period from inception (August 25, 2005) through December 31, 2009

Consolidated Statement of Stockholders’ Equity (Deficiency) – For the period from inception

(August 25, 2005) through December 31, 2009

Consolidated Statements of Cash Flows – For the years ended December 31, 2009, 2008 and 2007,

and for the period from inception (August 25, 2005) through December 31, 2009

Notes to Consolidated Financial Statements

(3) EXHIBITS:

Exhibit Number		Description

2.1		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 16, 2007).

2.2		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).

2.3		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 16, 2007).

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 16, 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 16, 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 16, 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 16, 2007).

4.3		Company 2007 Stock Plan (incorporated by reference to Exhibit 10.1 of our Form 10-SB (No. 000-52770) filed on August 16, 2007). *

4.4		Company 2009 Equity Incentive Plan. (incorporated by reference to Registration Statement on Form S-8 (No. 333-160737) filed on July 22, 2009). *

4.5		Form of Series A Warrant (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on February 10, 2010).

4.6		Form of Series B Warrant (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed on February 10, 2010).

10.1		Form of Securities Purchase Agreement, dated February 10, 2010 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 12, 2010).

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 16, 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 16, 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 16, 2007).

10.5		Company 2009 Equity Incentive Plan form of Stock Option Agreement. *

10.6		Company 2009 Equity Incentive Plan form of Restricted Shares Grant Agreement. *

10.7		Subscription Agreement, dated March 2, 2009, by and between the Company and Richard Grigg (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed March 4, 2009).

10.8		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 16, 2007).

10.9		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 16, 2007).

10.10		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 16, 2007). *

10.11		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 16, 2007). *

10.12		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 3, 2009). *

10.13		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 3, 2009). *

10.14		Employment Agreement, dated April 22, 2009, entered into by and between the Company and Jamie Tseng (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 000-52770) filed on April 28, 2009). *

10.15		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 16, 2007).

10.16		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).

10.17		Tenancy Agreement, dated June 12, 2009, by and between Bluewater Property Management Co., Ltd. and the Company (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q (No. 000-52770) filed on August 6, 2009).**

10.18		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 16, 2007). ***

10.19		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 16, 2007). ***

10.20		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). ***

10.21		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). **

10.22		The Contract of the Chinese-Foreign Equity Joint Venture Inner Mongolia Sunrise Petroleum Co. Ltd., by and between Beijing Jin Run Hang Da Technology Company Ltd. and Inner Mongolia Production Company (HK) Ltd., dated October 25, 2006 (incorporated by reference to Exhibit 10.22 of our Form 10-SB/A (No. 000-52770) filed on October 12, 2007). **

10.23		Amendment to the Contract of the Chinese-Foreign Equity Joint Venture Inner Mongolia Sunrise Petroleum Co. Ltd., Promissory Note, by and between Beijing Jin Run Hang Da Technology Company Ltd. and Inner Mongolia Production Company (HK) Ltd., dated December 31, 2009 and Promissory Note, by and between Inner Mongolia Sunrise Petroleum Co. Ltd. and Inner Mongolia Production Company (HK) Ltd., dated December 31, 2009.

10.24		Purchase and Sale Agreement, dated November 18, 2009, by and among the Company, CAMAC Energy Holdings Limited, CAMAC International (Nigeria) Limited, and Allied Energy Plc. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (No. 001-34525) filed on November 23, 2009).

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.

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: March 2, 2010

	Pacific Asia Petroleum, Inc.


	By:	/s/ F rank C. I ngriselli
		Frank C. Ingriselli
		President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ S tephen F. G roth
		Stephen F. Groth
		Chief Financial Officer (Principal Financial and Accounting 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/ F rank C. I ngriselli	Director, President and Chief Executive Officer	March 2, 2010
Frank C. Ingriselli	(Principal Executive Officer)

/s/ S tephen F. G roth	Vice President and Chief Financial Officer	March 2, 2010
Stephen F. Groth	(Principal Accounting and Financial Officer)

/s/ J ames F. L ink , Jr .	Director	March 2, 2010
James F. Link, Jr.

/s/ E lizabeth P. S mith	Director	March 2, 2010
Elizabeth P. Smith

/s/ William E. Dozier	Director	March 2, 2010
William E. Dozier

/s/ R obert C. S tempel	Director	March 2, 2010
Robert C. Stempel

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

·	OML 125 (“Abo Oilfield”) and OPL 211 operated by Eni S.p.A.;
·	OML 118 (“Bonga Oilfield”) operated by Shell; and
·	OML 133 (“Erha Oilfield”) operated by Exxon.

·	The Minister for Petroleum Resources, who is supported by 3 junior ministers overseeing different aspects of the energy sector.

·	The National Assembly as the legislative arm of government is empowered to pass legislation regarding petroleum matters, which are on the Exclusive Legislative List.

·	The Federal Ministry of Petroleum is responsible for formulating and implementing Government policy.

·	The Department of Petroleum Resources is the regulatory arm of the oil and gas industry.

·	The Ministry of Environment/The Federal Environmental Protection Agency was established in 1988 (Decree No. 50) to protect, restore and preserve the ecosystem of the Nigerian environment.

·	The Federation Inland Revenue Service is responsible for collection of royalties and PPT on behalf of the Nigerian Government.

	Employees		Part-Time Contractors/ Employees
Administration		26		7
Research and Development/Technical Support		8		6

·	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.

·	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.

·	mechanical failure;

·	damages requiring dry-dock repairs;

·	human error;

·	labor strikes;

·	adverse weather conditions;

·	vessel off hire periods

·	regulatory delays; and

·	political action, civil conflicts, terrorism and piracy in countries where vessel operations are conducted, vessels are registered or from which spare parts and provisions are sourced and purchased.

Fiscal year ended December 31, 2010:	High			Low
First quarter (through March 1, 2010)		$5.15			$3.50

Fiscal year ended December 31, 2009:	High			Low
First quarter		$	1.15		$	0.35
Second quarter			2.41			0.75
Third quarter			3.70			1.50
Fourth quarter			5.75			3.15

Fiscal year ended December 31, 2008:	High		Low
First quarter	$	17.00	$	7.50
Second quarter		22.00		14.50
Third quarter		17.05		1.82
Fourth quarter		1.93		0.45

P Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders (1)(3)		4,268,013	$	2.00	(4)		5,013,375
			$	1.30	(5)
Equity compensation plans not approved by security holders (2)		755,200	$	.56			-
Total		5,023,213					5,013,375

Financial Summary Data	For the year ended December 31, 2009			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, 2009

Net Loss – Pacific Asia Petroleum, Inc. and subsidiaries	$	(11,489,378	)	$	(5,446,649	)	$	(2,383,684	)	$	(1,086,387	)	$	(51,344	)	$	(20,457,442	)


Net Loss per share of common stock-basic and diluted	$	(.28	)	$	(.14	)	$	(.08	)	$	(.10	)	$	(.03	)

Cash Used in Operating Activities	$	7,111,002		$	3,208,017		$	2,060,887		$	814,024		$	10,071		$	13,204,001

Capital Expenditures	$	232,535		$	329,782		$	80,689		$	207,833		$	-		$	850,839

	As of December 31,
	2009		2008		2007		2006		2005
Selected Balance Sheet Data

Working Capital	$	3,909,991	$	11,223,902	$	13,316,694	$	3,110,818	$	(39,344	)

Property, Plant and Equipment-Net	$	450,703	$	569,303	$	285,027	$	208,511	$	-

Total Assets	$	7,435,693	$	14,119,089	$	17,456,927	$	3,929,321	$	101,929

	Years ended December 31,
	2009		2008		2007

Salaries and cash bonus	$	2,140,166	$	1,672,694	$	898,875
Consulting and PSC management fees		2,606,728		669,441		803,485
Stock-based compensation		2,432,006		1,355,590		195,442
Exploratory		1,705,217		249,440		-
Legal fees		321,851		361,096		300,228
Travel, meals and entertainment		314,130		332,565		194,071
Payroll taxes		239,947		74,029		38,010
Rent		233,042		110,013		78,183
Auditing		182,668		169,368		135,305
Impairment of assets		219,388		273,618		-
All other		1,260,638		515,966		338,648
Total Costs and Operating Expenses	$	11,655,781	$	5,783,820	$	2,982,247

Cash Flows	Years Ended December 31,
	2009			2008
Net Cash Used in Operating Activities	$	(7,111,002	)	$	(3,208,017	)
Net Cash Provided by Investing Activities		191,553			11,511,505
Net Cash Provided by (Used in) Financing Activities		13,944			(2,513	)
Effect of Exchange Rate Changes on Cash		(8,041	)		5,713
Net (decrease) increase in Cash and Cash Equivalents		(6,913,546	)		8,306,688
Cash and Cash Equivalents – Beginning of Period		10,515,657			2,208,969
Cash and Cash Equivalents – End of Period		3,602,111			10,515,657

	Payments Due By Period
Contractual Obligations	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Operating Lease Obligations	$297,106	$210,748	$86,358	$-	$-

	Page
Report of Independent Registered Public Accounting Firm	61

Financial Statements:

Consolidated Balance Sheets December 31, 2009 and 2008	62

Consolidated Statements of Operations For the years ended December 31, 2009, 2008 and 2007, and for the period from inception (August 25, 2005) through December 31, 2009	63

Consolidated Statements of Comprehensive Income For the years ended December 31, 2009, 2008 and 2007, and for the period from inception (August 25, 2005) through December 31, 2009	64

Consolidated Statement of Stockholders’ Equity (Deficiency) For the period from inception (August 25, 2005) through December 31, 2009	65

Consolidated Statements of Cash Flows For the years ended December 31, 2009, 2008 and 2007, and for the period from inception (August 25, 2005) through December 31, 2009	66

Notes to Consolidated Financial Statements	67-81

AUDITED FINANCIAL STATEMENTS	Pacific Asia Petroleum, Inc. and Subsidiaries
	(A Development Stage Company)
Consolidated Balance Sheets

As of December 31,	2009			2008

Assets
Current assets
Cash and cash equivalents	$	3,602,110		$	10,515,657
Short-term investments		1,735,397			1,260,000
Accounts receivable (2009 - related parties: $55,441)		68,771			-
Income tax refunds receivable		-			8,500
Prepaid expenses		427,101			90,657
Inventories (2009 - unfinished: $51,097; finished: $22,297)		73,394			-
Deposits		35,262			37,556
Advances		5,121			383
Total current assets		5,947,156			11,912,753

Non-current assets
Property, plant and equipment - at cost (net of accumulated depreciation and amortization:
$ 2009 - 181,765; 2008 - $88,577)		450,703			569,303
Intangible assets		384			384
Investment in long-term certificate of deposit		25,141			-
Long-term advances		33,015			386,415
Investment in nonsubsidiary - at fair value		478,255			-
Deposits on prospective property acquisitions		-			1,150,000
Deferred charges		501,039			100,234

Total Assets	$	7,435,693		$	14,119,089

Liabilities and Equity
Current liabilities
Accounts payable (2009 - related parties: $75,748)	$	172,140		$	25,446
Income taxes payable		12,801			5,148
Accrued contracting and development fees (2009 - related parties: $662,000)		920,486			294,020
Accrued bonuses and vacations		367,957			158,473
Accrued and other liabilities		563,781			205,764
Total current liabilities		2,037,165			688,851

Equity
Stockholders' equity - Pacific Asia Petroleum, Inc. and Subsidiaries:
Common stock
Authorized - 300,000,000 shares at $.001 par value; Issued and outstanding -
43,037,596 as of December 31, 2009; 40,061,785 as of December 31, 2008		43,038			40,062
Preferred stock
Authorized - 50,000,000 shares at $.001 par value;
Issued - 23,708,952 as of December 31, 2009 and December 31, 2008
Outstanding - none as of December 31, 2009 and December 31, 2008		-			-
Paid-in capital		26,034,871			21,741,965
Deficit accumulated during the development stage		(20,457,442	)		(8,968,064	)
Other comprehensive income		91,572			229,860
Total stockholders' equity - Pacific Asia Petroleum, Inc. and Subsidiaries		5,712,039			13,043,823
Noncontrolling interests (deficit) equity		(313,511	)		386,415
Total equity		5,398,528			13,430,238

Total Liabilities and Equity	$	7,435,693		$	14,119,089

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

										For the period
										from inception
										(August 25, 2005)
										through
	2009			2008			2007			December 31, 2009
Revenues
Sales and services	$	66,802		$	-		$	-		$	66,802

Costs and Operating Expenses
Depreciation		132,052			66,769			18,850			219,411
All other		11,523,729			5,717,051			2,963,397			21,440,794
Total costs and operating expenses		11,655,781			5,783,820			2,982,247			21,660,205

Operating Loss		(11,588,979	)		(5,783,820	)		(2,982,247	)		(21,593,403	)

Other Income (Expense)
Interest Income		37,885			323,762			618,089			1,079,142
Interest Expense		(939	)		-			-			(939	)
Other Income		217			14,695			12,937			27,849
Other Expense		(11	)		(172	)		(714	)		(897	)
Total Other Income		37,152			338,285			630,312			1,105,155

Net loss before income taxes and
noncontrolling interests		(11,551,827	)		(5,445,535	)		(2,351,935	)		(20,488,248	)
Income tax expense		(39,575	)		(13,082	)		(38,826	)		(91,483	)

Net loss		(11,591,402	)		(5,458,617	)		(2,390,761	)		(20,579,731	)
Less: Net loss - noncontrolling interests		102,024			11,968			7,077			122,289

Net Loss - Pacific Asia Petroleum, Inc. and Subsidiaries	$	(11,489,378	)	$	(5,446,649	)	$	(2,383,684	)	$	(20,457,442	)


Net loss per common share - Pacific Asia
Petroleum Inc. common shareholders -
basic and diluted	$	(0.28	)	$	(0.14	)	$	(0.08	)

Weighted average number of common
shares outstanding, basic and diluted		41,647,002			39,992,512			31,564,121

	Pacific Asia Petroleum, Inc. Stockholders
	No. of Common Shares $.001 par value			Common Stock			Subscriptions Receivable			No. of Preferred Shares $.001 par value			Preferred Stock			Paid-in Capital			Deficit Accumulated During the Development Stage			Other Comprehensive Income (Loss)			Noncontrolling Interests			Total Equity (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
Subsidiary paid-in capital additions		-			-			-			-			-			-			-			-			359,410			359,410
Amortization of options fair value		-			-			-			-			-			29,065			-			-			-			29,065
Currency translation		-			-			-			-			-			-			-			19,228			-			19,228
Net loss		-			-			-			-			-			-			(1,086,387	)		-			(1,220	)		(1,087,607	)
Balance - December 31, 2006		5,304,000			5,304			-			9,991,223			9,991			4,474,799			(1,137,731	)		19,228			358,190			3,729,781
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
Subsidiary paid-in capital additions		-			-			-			-			-			-			-			-			40,020			40,020
Currency translation		-			-			-			-			-			-			-			108,833			3,961			112,794
Net loss		-			-			-			-			-			-			(2,383,684	)		-			(7,077	)		(2,390,761	)
Balance - December 31, 2007		39,931,109			39,931			-			-			-			20,251,022			(3,521,415	)		128,061			395,094			17,292,693
Issued on exercise of warrants		79,671			80			-			-			-			(83	)		-			-			-			(3	)
Vesting of restricted stock		76,400			76			-			-			-			(76	)		-			-			-			-
Cancellation of 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			3,289			105,088
Net loss		-			-			-			-			-			-			(5,446,649	)		-			(11,968	)		(5,458,617	)
Balance - December 31, 2008		40,061,785			40,062			-			-			-			21,741,965			(8,968,064	)		229,860			386,415			13,430,238
Issued on exercise of warrants and options		238,811			239			-			-			-			13,705			-			-			-			13,944
Exchanged for stock of Sino Gas & Energy Holdings Limited		970,000			970			-			-			-			551,930			-			-			-			552,900
Vesting of restricted stock		738,000			738			-			-			-			(738	)		-			-			-			-
Compensation cost of stock options and restricted stock		-			-			-			-			-			2,432,006			-			-			-			2,432,006
Issued for services		1,029,000			1,029			-			-			-			1,052,071			-			-			-			1,053,100
Adjustments to noncontrolling interests in subsidiary equity		-			-			-			-			-			243,932			-			(21	)		(597,751	)		(353,840	)
Currency translation		-			-			-			-			-			-			-			(63,622	)		(151	)		(63,773	)
Unrealized gain (loss) on investments in securities		-			-			-			-			-			-			-			(74,645	)		-			(74,645	)
Net loss		-			-			-			-			-			-			(11,489,378	)		-			(102,024	)		(11,591,402	)
Balance - December 31, 2009		43,037,596		$	43,038		$	-			-		$	-		$	26,034,871		$	(20,457,442	)	$	91,572		$	(313,511	)	$	5,398,528

OPTIONEE				PACIFIC ASIA PETROLEUM, INC.


Signature				By:

Print Name:				Print Name:

Address:				Address:

				Date Received:

Submitted by:				Accepted by:
OPTIONEE				PACIFIC ASIA PETROLEUM, INC.

Signature				By:

Print Name:				Print Name:

Address:				Address:

				Date Received:

	TAXPAYER:	SPOUSE:
NAME:
ADDRESS:
IDENTIFICATION NO.:
TAXABLE YEAR:

Party	Sunrise Paid-In Capital Pre-Adjustment (RMB)		Paid-In Capital Adjustment Amount (RMB)			Sunrise Paid-In Capital Post-Adjustment (RMB)		Sunrise Equity Ownership Interest Post-Adjustment
IMPCO HK		11,816,858.00		(176,858.00	)		11,640,000.00		97	%
BJHTC		3,143,308.44		(2,783,308.44	)		360,000.00		3	%
TOTAL:		14,960,166.44		(2,960,166.44	)		12,000,000.00		100	%

1.	I have reviewed this annual report on Form 10-K of Pacific Asia Petroleum, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements and other financial information included in this report, fairly present, in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2010	By:	/s/ Frank C. Ingriselli
		Frank C. Ingriselli
		President and Chief Executive Officer (Principal Executive Officer)

Date: March 2, 2010	By:	/s/ Stephen F. Groth
		Stephen F. Groth
		Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ F rank C. Ingriselli
Frank C. Ingriselli
President and Chief Executive Officer (Principal Executive Officer)