- Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
New Oriental Energy & Chemical Corp. (MM)	NASDAQ:NOEC	NASDAQ	Common Stock

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission file number: 001-33470

NEW ORIENTAL ENERGY & CHEMICAL CORP.

(Exact name of registrant as specified in its charter)

Delaware		20-1917956
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Xicheng Industrial Zone of

Luoshan, Xinyang

Henan Province, The People’s

Republic of China

(Address of principal executive

offices)

464200

(Zip Code)

(86) 27 853 75701

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

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

Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer ¨	(Do not check if a smaller reporting company)	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at August 23, 2010
Common Stock, $.001 par value per share		14,100,000 shares

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

New Oriental Energy & Chemical Corp. And Subsidiaries

Condensed Consolidated Financial Statements

For the Three Months Ended June 30, 2010 And 2009

		Page

Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and March 31, 2010		F-2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended June 30, 2010 and 2009 (Unaudited)		F-3

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Three Months Ended June 30, 2010 (Unaudited)		F-4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2010 and 2009 (Unaudited)		F-5

Notes to Condensed Consolidated Financial Statements for the Three Months Ended June 30, 2010 and 2009 (Unaudited)		F-6-21

F-1

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2010			March 31, 2010
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,117,917		$	319,816
Restricted cash		23,192,802			3,662,306
Notes receivable, net of reserve of $736,279 and $732,461 at June 30, 2010
and March 31, 2010, respectively		-			42,483
Inventories, net		2,765,992			7,607,683
Prepayments for goods		323,773			275,735
Due from employees		-			225,519
Other assets		224,266			35,762
Due from a related party		233,080			231,872
Deferred taxes		492,396			622,452
Total current assets		28,350,226			13,023,628

Plant and equipment, net		15,700,625			16,246,562
Land use rights, net		1,602,991			1,603,674
Construction in progress		30,077,799			29,540,856
Deposits		1,214,907			1,208,607
Deferred taxes		761,785			551,037
Other long-term assets		9,766			8,282
Total long-term assets		49,367,873			49,159,018

TOTAL ASSETS	$	77,718,099		$	62,182,646

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$	8,749,292		$	8,672,865
Other payables and accrued liabilities		1,431,060			1,169,859
Short-term debt		41,249,319			18,900,429
Customer deposits		4,341,424			10,814,494
Due to employees		88,159			16,810
Payable to contractors		1,174,841			1,175,726
Due to related parties		15,240,212			14,871,559
Deferred taxes		459,427			450,853
Taxes payable		573,587			570,768
Derivative liabilities		479,645			-
Current portion of long-term notes payable		534,539			531,767
Total current liabilities		74,321,505			57,175,130

LONG-TERM LIABILITIES
Long-term bank loan		2,945,118			2,929,845
Deferred taxes		794,754			722,636
Due to employees		127,506			129,555
Total long-term liabilities		3,867,378			3,782,036

TOTAL LIABILITIES	$	78,188,883		$	60,957,166

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, par value $0.001 per share; 30,000,000 shares authorized, 14,100,000 and
12,640,000 shares issued and outstanding at June 30, 2010 and March 31, 2010, respectively		14,100			12,640
Additional paid-in capital		5,466,977			4,573,205
Retained deficit (restricted portion was $0 and $950,327 at June 30, 2010 and
March 31, 2010, respectively)		(8,500,966	)		(5,903,362	)
Accumulated other comprehensive income		2,549,105			2,542,997
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)		(470,784	)		1,225,480

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)	$	77,718,099		$	62,182,646

See accompanying notes to the condensed consolidated financial statements.

F-2

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended June 30,
	2010			2009

REVENUES	$	13,730,314		$	8,384,866

COST OF GOODS SOLD		(14,667,701	)		(9,973,189	)

GROSS LOSS		(937,387	)		(1,588,323	)

General and administrative		767,811			727,934

Selling and distribution		241,029			287,540

Research and development		18,251			27,626

LOSS FROM OPERATIONS		(1,964,478	)		(2,631,423	)

OTHER INCOME (EXPENSES)

Interest expense, net		(875,441	)		(461,917	)

Other income (expenses), net		9,384			(3,507	)

Change in fair value of derivatives liabilities		232,931			-

LOSS BEFORE INCOME TAXES		(2,597,604	)		(3,096,847	)

INCOME TAX EXPENSE		-			(55,008	)

NET LOSS		(2,597,604	)		(3,151,855	)

OTHER COMPREHENSIVE INCOME (LOSS)

Foreign currency translation gain (loss)		6,108			(9,672	)

OTHER COMPREHENSIVE INCOME (LOSS)		6,108			(9,672	)

COMPREHENSIVE LOSS	$	(2,591,496	)	$	(3,161,527	)

WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED		13,538,000			12,640,000

NET LOSS PER SHARE, BASIC AND DILUTED	$	(0.19	)	$	(0.25	)

See accompanying notes to the condensed consolidated financial statements.

F-3

NEW ORIENTAL ENERGY & CHEMICAL CORP.AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

	Common stock				Additional Paid-in		Retained			Accumulated Other Comprehensive
	Shares		Par value		Capital		Deficit			Income		Total

BALANCE AT MARCH 31, 2010		12,640,000	$	12,640	$	4,573,205	$	(5,903,362	)	$	2,542,997	$	1,225,480

Sale of 1,460,000 shares of common stock for cash, net of expenses and derivative liabilities		1,460,000		1,460		893,772		-			-		895,232

Foreign currency translation gain		-		-		-		-			6,108		6,108

Net loss		-		-		-		(2,597,604	)		-		(2,597,604	)

BALANCE AT JUNE 30, 2010		14,100,000	$	14,100	$	5,466,977	$	(8,500,966	)	$	2,549,105	$	(470,784	)

See accompanying notes to the condensed consolidated financial statements.

F-4

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,597,604	)	$	(3,151,855	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		649,999			652,255
Gain on disposal of plant and equipment		(8,629	)		-
Deferred taxes		-			54,530
Write-down of inventories to net realizable value		271,991			807,448
Change in fair value of derivatives		(232,931	)		-

Changes in operating assets and liabilities:

(Increase) Decrease In:
Inventories		4,569,700			(2,632,107	)
Prepayments for goods		(48,038	)		54,804
Other assets		(188,504	)		1,621
Due from a related party		-			30,211

Increase (Decrease) In:
Accounts payable		76,427			(744,169	)
Other payables and accrued liabilities		261,201			62,745
Customer deposits		(6,473,070	)		625,794
Due to employees		71,349			-
Due to a related party		39,444			27,437
Net cash used in operating activities		(3,608,665	)		(4,211,286	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment		(11,294	)		(1,623	)
Purchases of construction in progress		(131,033	)		(599,727	)
Deposits		-			(68,680	)
Purchases of other long-term assets		(2,136	)		-
Proceeds from disposal of plant and equipment		8,629
Due from employees		225,519			(2,311	)
Notes receivable		42,593			(84,968	)
Net cash provided by (used in) investing activities		132,278			(757,309	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt, net of restricted cash		13,148,763			12,697,960
Repayments of short-term debt		(10,486,738	)		(7,887,151	)
Proceeds from issuance of common stock, net		1,607,808			-
Net cash provided by financing activities		4,269,833			4,810,809

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		793,446			(157,786	)

Effect of exchange rate changes on cash		4,655			(19,027	)
Cash and cash equivalents at beginning of period		319,816			410,870

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,117,917		$	234,057

SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid	$	350,476		$	324,001

See accompanying notes to the condensed consolidated financial statements.

F-5

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES

New Oriental Energy & Chemical Corp. was incorporated under the laws of the State of Delaware on November 15, 2004. The principal activities of New Oriental Energy & Chemical Corp. and subsidiaries (“NOEC” or the “Company”) are the manufacture and distribution of fertilizer and chemical products. The products are distributed to markets in the People’s Republic of China (the “PRC”).

2.	BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed consolidated balance sheet information as of March 31, 2010 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that report.

3.	GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company had a net loss of $ 2,597,604 and has negative cash flow from operations of $3,608,665 for the three months ended June 30, 2010, and has a working capital deficit of $ 45,971,279 and a shareholders’ deficit of $470,784 at June 30, 2010.

The Company will need to obtain additional financing to continue operations beyond 2011. Its primary source of capital is cash generated from operations as well as through loans. If the Company is unable to obtain additional financing, it will not be able to sustain its operations and would likely be required to cease its operations.

The major shareholder has committed to provide financial assistance of RMB 50 to 80 million (approximately $7.3 to $11.7 million) over the next few years, if necessary.

A former shareholder of the Company forgave $1,344,328 of debt after June 30, 2010. See Note 19.

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)	Principles of Consolidation

The consolidated financial statements include the accounts of New Oriental Energy & Chemical Corp. and the following subsidiaries:

(i)

Kinfair Holding Limited. (“KHL”) (An inactive holding company, 100% subsidiary of NOEC).

(ii)

Henan Jinding Chemicals Co., Ltd. (“Henan Jinding”) (100% subsidiary of KHL)

(iii)

Luoshan Jinding Chemicals Co., Ltd. (“Luoshan Jinding”) (100% subsidiary of Henan Jinding)

Inter-company accounts and transactions have been eliminated in consolidation.

(b)	Concentrations

The Company has major customers who accounted for the following percentage of total sales and total customer deposits:

F-6

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Customer	Sales						Customer Deposits
	Three Months Ended June 30,						As of June 30,			As of March 31,
	2010			2009			2010			2010
Company A		37.56	%		7.53	%		89.45	%		83.32	%
Company B		12.69	%		16.13	%		2.52	%		5.16	%
Company C		5.45	%		-			0.07	%		0.52	%
Company D		5.22	%		-			-			0.47	%

The Company has major suppliers who accounted for the following percentage of total purchases and total accounts payable/deposits:

Supplier	Purchases						Accounts Payable /Deposits
	Three Months Ended June 30,						As of June 30, 2010			As of March 31, 2010
	2010			2009			As of June 30, 2010			As of March 31, 2010
Company E		45.69	%		15.48	%		25.03	%		0.24	%
Company F		20.82	%		13.35	%		13.75	%		12.51	%
Company G		9.15	%		23.58	%		5.47	%		6.38	%
Company H		7.94	%		19.05	%		7.92	%		8.94	%

The sole market of the Company is the PRC for the three months ended June 30, 2010 and 2009.

(c)	Economic and Political Risks

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

(d)	Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ materially from those estimates.

(e)	Fair Value of Financial Instruments

ASC 820-10 (formerly SFAS No. 157, Fair Value Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

F-7

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

These tiers include:

•Level 1—defined as observable inputs such as quoted prices in active markets;

•Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

•Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The assets and liabilities measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 as of June 30, 2010 are as follows:

	Fair Value Measurements at Reporting Date Using
	Carrying value as of June 30, 2010		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Fair value of warrants	$	479,645	$	-	$	-	$	479,645

Cash and cash equivalents consist primarily of high rated money market funds at a variety of well-known institutions with original maturities of three months or less. Restricted cash represent time deposits on account to secure short-term debt. The original cost of these assets approximates fair value due to their short term maturity. See Note 10.

The carrying amounts of other financial assets and liabilities, such as notes receivable, due from employees, due from a related party, accounts payable, other payables and accrued liabilities, short-term debt, customer deposits, due to employees, payable to contractors, due to related parties, taxes payable and long-term bank loan, approximate their fair values because of the short-term maturity of these instruments.

(f)	Derivative Financial Instruments

The Company evaluates all of its financial instruments to determine if such instruments are derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option pricing models to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Notes 15 and 16.

(g)	Inventories

Inventories are stated at the lower of cost or net realizable value (market). The cost of raw materials is determined on a weighted average basis. Finished goods costs are determined on a weighted average basis and comprise direct materials, direct labor and an appropriate proportion of overhead.

Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.

F-8

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(h)	Capitalized Interest

The interest cost associated with debt relating to construction projects is capitalized and included in the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using weighted-average cost of the Company’s outstanding borrowings. Capitalization of interest ceases when the project is substantially complete or development activity is suspended for more than a brief period. Capitalized interest for the three months ended June 30, 2010 and 2009 was $258,590 and $99,153, respectively.

(i)	Revenue Recognition

Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:

-Persuasive evidence of an arrangement exists,

-Delivery has occurred or services have been rendered,

-The seller’s price to the buyer is fixed or determinable, and

-Collectability is reasonably assured.

(j)	Foreign Currency Translation

The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

	June 30, 2010		March 31, 2010		June 30, 2009
Period end RMB: $ exchange rate		6.7909		6.8263		-
Average period RMB: $ exchange rate		6.8086		-		6.8339

(k)	Loss Per Share

Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding during the period. The diluted loss per share calculation gives effect to all potentially dilutive common shares outstanding during the period using the treasury stock method. Common equivalent shares consist of shares issuable upon the exercise of stock warrants. As of June 30, 2010, common stock equivalents were composed of warrants convertible into 876,000 shares of the Company's common stock. For three months ended June 30, 2010, common equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive.

(l)

Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.

The Company has determined that there are two reportable segments:

The fertilizer segment is made up of four business units, which involve the manufacture and sale of Urea, Carbonate Hydrogen Ammonia, Liquefied Ammonia and Ammonia Water.

F-9

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l)	Segments (Continued)

The fuel segment involves the manufacture and sale of Methanol, Dimethyl Ether. The Company believes it is not feasible to separately identify the assets and operating expenses of each segment because of the similarities shared by each in the manufacturing process. Both segments share the same coal-to-gas primary system, and also share the same manufacturing sub-systems and cycles. Therefore, the following represents the revenue, cost of goods sold and gross profit by each product within each segment:

Fuel Segment :

For The Three Months Ended June 30, 2010
	DME		Methanol			Segment Total
Revenues		-	$	2,051,729		$	2,051,729
COGS		-		2,510,587			2,510,587
Gross loss		-	$	(458,858	)	$	(458,858	)

For The Three Months Ended June 30, 2009
	DME		Methanol			Segment Total
Revenues		-	$	1,665,163		$	1,665,163
COGS		-		2,735,103			2,735,103
Gross loss		-	$	(1,069,940	)	$	(1,069,940	)

Fertilizer Segment:

For The Three Months Ended June 30, 2010
	Urea			Ammonium Bicarbonate			Liquefied Ammonia			Ammonia Water		Segment Total
Revenues	$	10,719,109		$	756,170		$	100,340		$	102,966	$	11,678,585
COGS		11,133,333			806,459			115,598			101,724		12,157,114
Gross (loss) profit	$	(414,224	)	$	(50,289	)	$	(15,258	)	$	1,242	$	(478,529	)

For The Three Months Ended June 30, 2009
	Urea			Ammonium Bicarbonate			Liquefied Ammonia			Ammonia Water			Segment Total
Revenues	$	5,724,165		$	671,142		$	218,243		$	106,153		$	6,719,703
COGS		6,135,880			707,467			279,688			115,051			7,238,086
Gross loss	$	(411,715	)	$	(36,325	)	$	(61,445	)	$	(8,898	)	$	(518,383	)

(m)	New Accounting Pronouncements

Effective January 1, 2009, the Company adopted ASC 815-10 (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities), which amends SFAS No. 133 and expands disclosures to include information about the fair value of derivatives, related credit risks and a company's strategies and objectives for using derivatives. The adoption of ASC 815-10 did not have a material effect on the Company’s condensed consolidated financial statements as of June 30, 2010.

F-10

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Effective January 1, 2009, the Company adopted ASC 815-40 (formerly Emerging Issues Task Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). ASC 815-40 addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which is the first part of the scope exception in paragraph 11(a) of FASB SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument under paragraphs 6-9 of SFAS 133 is indexed to an entity's own stock, it is still necessary to evaluate whether it is classified in stockholders' equity (or would be classified in stockholders' equity if it were a freestanding instrument). Other applicable authoritative accounting literature, including Issues EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company Own Stock, and EITF 05-2, The Meaning of “Conventional Debt Instrument” in Issue No. 00-19, provides guidance for determining whether an instrument (or an embedded feature) is classified in stockholders' equity (or would be classified in stockholders' equity if it were a freestanding instrument). ASC 815-40 does not address that second part of the scope exception in paragraph 11(a) of SFAS 133. The Company adopted ASC 815-40 and determined that the outstanding warrants were derivative liabilities rather than equity. Nee Notes 14, 15 and 16.

On April 9, 2009, the FASB also approved ASC 825-10 (formerly FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments) to require disclosures about fair value of financial instruments in interim period financial statements of publicly traded companies and in summarized financial information required by APB Opinion No. 28, Interim Financial Reporting . We are required to adopt ASC 825-10 for our interim and annual reporting periods ending after June 15, 2009. ASC 825-10 does not require disclosures for periods presented for comparative purposes at initial adoption. ASC 825-10 requires comparative disclosures only for periods ending after initial adoption. The adoption of ASC 825-10 did not have a material effect on the Company’s condensed consolidated financial statements as of June 30, 2010.

In April 2009, the FASB updated guidance related to fair-value measurements to clarify the guidance related to measuring fair-value in inactive markets, to modify the recognition and measurement of other-than-temporary impairments of debt securities, and to require public companies to disclose the fair values of financial instruments in interim periods. This updated guidance became effective for the Company beginning June 1, 2009. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements as of June 30, 2010.

In June 2009, the FASB issued ASC 810-10 (formerly SFAS No. 167) Amendments to FASB Interpretation No. 46(R), which require an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity and amends certain guidance for determining whether an entity is a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement in a variable interest entity. ASC 810-10 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 and for all interim reporting periods after that. The adoption of ASC 810-10 did not have a material effect on the Company’s condensed consolidated financial statements as of June 30, 2010.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. This guidance is effective for the Company beginning March 1, 2010. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements as of June 30, 2010.

F-11

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

5.	INVENTORIES

Inventories consist of the following:

	June 30, 2010		March 31, 2010
	(Unaudited)
Finished goods	$	1,708,984	$	6,108,597
Raw materials		558,520		989,483
Packing materials		498,488		509,603
Total inventories, net	$	2,765,992	$	7,607,683

The net book value of $1,472,559 and $3,868,274 of finished goods inventory is pledged as collateral for short-term debt at June 30, 2010 and March 31, 2010, respectively. See Note 10.

As of June 30, 2010 and 2009, the Company recorded a write-down of inventories to net realizable value of $271,991 and $807,448, respectively.

6.	RELATED PARTY TRANSACTIONS

(I)	Due from a Related Party

	June 30, 2010		March 31, 2010
	(Unaudited)
Current:
Huaiyang Desheng Chemical Co., Ltd	$	233,080	$	231,872

Huaiyang Desheng Chemical Co., Ltd (“Huaiyang Desheng”) is a company controlled by a director of the Company. The remaining balance represents an advance for the purchase of raw materials from Huaiyang Desheng. The amount is unsecured, interest free, and has no fixed repayment terms.

(II)	Due to Related Parties

		June 30, 2010		March 31, 2010
		(Unaudited)
Principal:
Xinyang Hong Chang Pipeline Gas Co., Ltd.	(a)	$	10,896,935	$	10,840,426
Long Triumph Investments Limited	(b)		1,344,328		1,344,328
Chen Siqiang	(c)		1,030,791		1,025,446
Wang Guiquan	(d)		132,530		131,843
Zhou Dianchang	(e)		73,628		73,246
Mai Xiaofu	(f)		147,256		146,492
Yu Zhiyang	(g)		44,177		43,948
Yang Hongtao	(h)		44,177		43,948
Subtotal		$	13,713,822	$	13,649,677

Interest:
Xinyang Hong Chang Pipeline Gas Co., Ltd.	(a)		1,201,893		934,227
Chen Siqiang	(c)		230,073		204,269
Wang Guiquan	(d)		28,026		24,716
Zhou Dianchang	(e)		15,570		13,731
Mai Xiaofu	(f)		31,768		28,087
Yu Zhiyang	(g)		9,530		8,426
Yang Hongtao	(h)		9,530		8,426
Subtotal		$	1,526,390	$	1,221,882
Total		$	15,240,212	$	14,871,559

F-12

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

6.	RELATED PARTY TRANSACTIONS (CONTINUED)

(II)	Due to Related Parties (continued)

(a)	Xinyang Hong Chang Pipeline Gas Co., Ltd. is a company controlled by the Chairman of the board and chief executive officer of the Company. The amount represents advances from Xinyang Hong Chang Pipeline Gas Co., Ltd, and the amount consists of the following at June 30, 2010:

Due December 30, 2010, interest rate at 8.748% per annum, unsecured	$	2,945,117
Due January 13, 2011, interest rate at 10.62% per annum, unsecured		441,768
Due January 20, 2011, interest rate at 10.62% per annum, unsecured		1,030,791
Due September 1, 2010, interest rate at 10.62% per annum, unsecured		736,279
Due September 25, 2010, interest rate at 15% per annum, unsecured		736,279
Due October 9, 2010, interest rate at 10.62% per annum, unsecured		589,024
Due October 14, 2010, interest rate at 10.62% per annum, unsecured		883,535
Due December 10, 2010, interest rate at 10.62% per annum, unsecured		736,279
Due December 28, 2010, interest rate at 10.62% per annum, unsecured		441,768
Due December 31, 2010, interest rate at 10.62% per annum, unsecured		294,512
Due January 25, 2011, interest rate at 10.62% per annum, unsecured		294,512
Due February 9, 2011, interest rate at 10.62% per annum, unsecured		441,768
No fixed repayment term, interest free, unsecured		1,325,303
Total	$	10,896,935

Interest expense for the three months ended June 30, 2010 and 2009 is $296,869 and $91,765, respectively. Of the $296,869 of interest expense, $223,249 was capitalized interest in construction in progress, since the amount was used for construction. Also see Note 9.

(b)	Long Triumph Investments Limited is a former shareholder of the Company. The amount represents advances from Long Triumph Investments Limited. The amount is unsecured, interest free, and has no fixed repayment terms.

(c)

Chen Siqiang is the chairman of the board and chief executive officer of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on September 3, 2010. The interest expense for the three months ended June 30, 2010 and 2009 of $24,739 and $24,591 was capitalized in construction in progress, since the amount was used for construction. Also see Note 9.

(d)

Wang Guiquan is the president and director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on January 18, 2011. The interest expense for the three months ended June 30, 2010 and 2009 of $3,181 and $3,162 was capitalized interest in construction in progress, since the amount was used for construction. Also see Note 9.

(e)

Zhou Dianchang is a director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due January 18, 2011. The interest expense for the three months ended June 30, 2010 and 2009 of $1,767 and $1,756 was capitalized in construction in progress, since the amount was used for construction. Also see Note 9.

(f)

Mai Xiaofu is a director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on January 2, 2011. The interest expense for the three months ended June 30, 2010 and 2009 of $3,534 and $3,513 was capitalized in construction in progress, since the amount was used for construction. Also see Note 9.

(g)

Yu Zhiyang is a significant shareholder of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on January 2, 2011. The interest expense for the three months ended June 30, 2010 and 2009 of $1,060 and $1,054 was capitalized in construction in progress, since the amount was used for construction. Also see Note 9.

F-13

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

6.	RELATED PARTY TRANSACTIONS (CONTINUED)

(II)	Due to Related Parties (continued)

(h)

Yang Hongtao is a significant shareholder of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on January 2, 2011. The interest expense for the three months ended June 30, 2010 and 2009 of $1,060 and $1,054 was capitalized in construction in progress, since the amount was used for construction. Also see Note 9.

(III)

Due from employees

	June 30, 2010		March 31, 2010
	(Unaudited)
Current	$	-	$	225,519
Total amount due from employees	$	-	$	225,519

Amounts due from employees was interest-free, unsecured and had no fixed repayment terms. The amounts primarily represented payments made by the Company on behalf of employees for their purchase of apartments.

7.	PLANT AND EQUIPMENT

Plant and equipment consist of the following:

	June 30, 2010		March 31, 2010
	(Unaudited)
At cost:
Buildings	$	2,460,035	$	2,447,278
Machinery		25,330,456		25,196,080
Motor vehicles		324,285		344,841
Office equipment		282,552		272,839
		28,397,328		28,261,038
Less: Accumulated depreciation
Buildings		540,886		513,328
Machinery		11,726,924		11,076,634
Motor vehicles		238,506		247,040
Office equipment		190,387		177,474
		12,696,703		12,014,476
Plant and equipment, net	$	15,700,625	$	16,246,562

Depreciation expense for the three months ended June 30, 2010 and 2009 is $640,282 and $642,575, respectively.

The net book value of machinery of $7,370,549 and $7,332,326 is pledged as collateral for a long-term bank loan at June 30, 2010 and March 31, 2010, respectively. See Note 12.

8.	LAND USE RIGHTS

	June 30, 2010		March 31, 2010
	(Unaudited)
Cost	$	1,808,447	$	1,799,069
Less: Accumulated amortization		205,456		195,395
Land use rights, net	$	1,602,991	$	1,603,674

F-14

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

8.	LAND USE RIGHTS (CONTINUED)

Amortization expense for the three months ended June 30, 2010 and 2009 is $9,019 and $8,985, respectively.

The net book value of $1,602,991 and $1,603,674 of land use rights are pledged as collateral for short-term bank loans at June 30, 2010 and March 31, 2010, respectively. See Note 10.

Amortization expense for the next five years and thereafter is as follows:

Nine months ended March 31, 2011	$	27,127
2012		36,169
2013		36,169
2014		36,169
2015		36,169
Thereafter		1,431,188
Total	$	1,602,991

9.	CONSTRUCTION IN PROGRESS

Construction in progress consists of the following:

	June 30, 2010		March 31, 2010
	(Unaudited)
Plant	$	27,758,985	$	27,176,737
Machinery		2,111,450		2,183,122
Other		207,364		180,997
	$	30,077,799	$	29,540,856

Capitalized interest for the three months ended June 30, 2010 and 2009 is $257,918 and $99,153, respectively.

Plant construction in progress of $3,156,135 and $3,139,768 is pledged as collateral for short-term bank loans at June 30, 2010 and March 31, 2010, respectively. See Note 10.

10.	SHORT-TERM DEBT

Short-term debt consists of the following:

	June 30, 2010		March 31, 2010
	(Unaudited)
Bank Loans:
Xinyang Commercial Bank, due April 28, 2010, interest rate at 10.08% per annum, collateralized by finished goods inventory. (Repaid on its due date)	$	-	$	1,464,922

Guangdong Development Bank, due May 12, 2010, interest rate at 5.31% per annum, collateralized by land use rights and guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd. (Repaid on its due date)		-		4,394,767

Rural Credit Cooperatives, due August 16, 2010, interest rate at 9.56% per annum, collateralized by construction in progress. (Repaid on its due date)		559,572		556,671

Xinyang Commercial Bank, due August 4, 2010, interest rate at 10.08% per annum, collateralized by finished goods inventory. (Repaid on its due date)		1,472,559		1,464,922

F-15

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

	June 30, 2010		March 31, 2010
	(Unaudited)
Rural Credit Cooperatives, due October 23, 2010, interest rate at 10.62% per annum, collateralized by construction in progress.		574,298		571,320

Xinyang Commercial Bank, due January 4, 2011, interest rate at 10.08% per annum, guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.		2,356,094		2,343,875

Xinyang Commercial Bank, due November 30, 2010, interest rate at 10.08% per annum, guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.		1,472,559		-

Guangdong Development Bank, due April 15, 2011, interest rate at 5.31% per annum, collateralized by land use rights and guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.		4,417,678		-

Notes Payable to Unrelated Companies :
Due May 2, 2010 (Repaid on its due date)		-		2,197,384
Due May 26, 2010 (Repaid on its due date)		-		2,197,384
Due August 2, 2010 (Repaid on its due date)		1,619,815		1,611,415
Due August 3, 2010 (Repaid on its due date)		736,279		732,461
Due September 16, 2010		589,024		585,969
Due October 6, 2010		2,208,838		-
Due October 8, 2010		4,049,537		-
Due October 12, 2010		3,681,397		-
Due October 14, 2010		4,417,677		-
Due October 29, 2010		2,208,838		-
Due November 5, 2010		2,208,838		-
Due November 10, 2010		5,153,956		-
Due December 1, 2010		2,208,838		-

Notes Payable to Unrelated Individuals :
Due December 3, 2010, interest rate at 15% per annum, unsecured		135,475		339,862
Due October 13, 2010, interest rate at 7.2% per annum, unsecured		441,768		439,477
Due July 15, 2010, interest rate at 6% per annum, unsecured		736,279		-
	$	41,249,319	$	18,900,429

Interest expense for the three months ended June 30, 2010 and 2009 was $852,860 and $430,365, respectively.

Notes payable to unrelated companies are interest-free. All the notes payable are subject to bank charges of 0.05% of the principal as a commission on each loan transaction. Bank charges for notes payable were $13,035 and $4,390 for the three months ended June 30, 2010 and 2009, respectively.

Restricted cash of $23,192,802 and $3,662,306 is collateralized for the notes payable at June 30, 2010 and March 31, 2010, respectively.

Finished goods inventory and construction in progress are pledged as collateral for short-term bank loans at June 30, 2010 and March 31, 2010. See Notes 5 and 9.

F-16

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

11.	CURRENT PORTION OF LONG-TERM NOTES PAYABLE

	June 30, 2010		March 31, 2010
	(Unaudited)
Due December 31, 2010, interest free, unsecured	$	534,539	$	531,767

In September 2003, the Company purchased plant and machinery, a building and a land use right from Luoshan Fertilizer Plant, a bankrupt company, for $4,633,601 through long-term notes payable. The remaining balance at June 30, 2010 is $534,539.

12.	LONG-TERM BANK LOAN

	June 30, 2010		March 31, 2010
	(Unaudited)
Luoshan Rural Credit Cooperatives	$	2,945,118	$	2,929,845

The long-term bank loan is collateralized by the Company’s machinery, has an interest rate of 9.558% per annum and is due March 19, 2012. See Note 7.

13.	INCOME TAXES

Corporation Income Tax (“CIT”)

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the PRC (the “new CIT Law”), which is effective from January 1, 2008. The new CIT rate applicable to the Company starting January 1, 2008 is 25%, replacing the previous tax rate of 33%.

Income tax expense for the three months ended June 30, 2010 and 2009 is summarized as follows:

	Three Months Ended June 30,
	2010		2009
	(Unaudited)		(Unaudited)
Current:
CIT	$	-	$	-
Deferred:
CIT		-		(55,008	)
Income tax expense	$	-	$	(55,008	)

The Company’s income tax expense differs from the “expected” tax expense (computed by applying the CIT rate of 25% percent to income before income taxes) as follows:

	Three Months Ended June 30,
	2010			2009
	(Unaudited)			(Unaudited)
Computed “expected” benefit	$	649,401		$	774,212
Permanent differences		(46,560	)		-
Valuation allowance		(602,841	)		(829,220	)
Income tax expense	$	-		$	(55,008	)

The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of June 30, 2010 and March 31, 2010 are as follows:

F-17

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

13.	INCOME TAXES (CONTINUED)

	June 30, 2010			March 31, 2010
	(Unaudited)
Deferred tax assets:
Current portion:
Cost of sales	$	226,418		$	362,250
Financial expense		12,238			12,175
Welfare		10,354			10,300
Provision for notes receivable		184,070			183,115
Other expense		59,316			54,612
Total current deferred tax assets		492,396			622,452
Non-current portion:
Net operating loss carry forward		5,015,933			4,202,344
Valuation allowance		(4,254,148	)		(3,651,307	)
Total non-current deferred tax assets		761,785			551,037
Total deferred tax assets		1,254,181			1,173,489

Deferred tax liabilities:
Current portion:
Cost of sales		383,123			374,721
Government grant		25,402			30,031
Investment income		17,348			17,258
Other expenses		33,554			28,843
Total current deferred tax liabilities		459,427			450,853
Non-current portion:
Amortization		33,636			32,094
Depreciation		761,118			690,542
Total non-current deferred tax liabilities		794,754			722,636
Total deferred tax liabilities		1,254,181			1,173,489

Net deferred tax assets	$	-		$	-

In June 2006, the FASB issued ASC 740-10 (formerly FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109), which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in an income tax return. ASC 740-10 presents a two-step process for evaluating a tax position. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, based on the technical merits of the position. The second step is to measure the benefit to be recorded from tax positions that meet the more likely than not recognition threshold, by determining the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement, and recognizing that amount in the financial statements. At the date of adoption, and as of June 30, 2010, the Company does not have a liability for unrecognized tax benefits. There was no effect on financial condition or results of operations as a result of implementing ASC 740-10.

The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is subject to U.S. Federal or State income tax examinations by tax authorities for years after 2006. During the periods open to examination, the Company has net operating loss (“NOL”) and tax credit carry forwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs and tax credit carry forwards may be utilized in future periods, they remain subject to examination. The Company also files certain tax returns in the PRC. As of June 30, 2010 the Company was not aware of any pending income tax examinations by tax authorities in the PRC.

F-18

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

13.	INCOME TAXES (CONTINUED)

The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2010, the Company has no accrued interest or penalties related to uncertain tax positions.

14.	SHAREHOLDERS’ EQUITY

In May 2010, the Company sold 1,460,000 shares of common stock and warrants to purchase 730,000 shares of common stock to certain individuals at $1.25 per unit, for net proceeds of $1,607,807. The Company incurred total expenses of $217,177, which were directly related to the sale of the common stock, and the amount was deducted from the total proceeds and recorded to additional paid-in capital for the three months ended June 30, 2010.

The fair value of the warrants acquired by the investors was $552,800, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 1.56% and 1.21%, respectively; an expected life of 3 years; and an estimated volatility of 88.23% and 106.83%, respectively, based on recent history of its stock price.

The fair value of the warrants acquired by Internet Securities Inc., the placement agent in connection with the sale of common stock, was $159,776, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 2.47%; an expected life of 5 years; and an estimated volatility of 88.23% based on recent history of its stock price.

At the grant date, the fair value of warrants in connection with the sale of common stock is $712,576 and was recorded as derivative liabilities. Also see Notes 15 and 16.

15.

WARRANTS

Common Stock Warrants (also see Note 16)

On May 3, 2010 and May 25, 2010, the Company issued two series of warrants to certain investors to purchase 680,000 and 50,000 shares of common stock at $2 per share with a term of three years (730,000 warrants in the aggregate). The fair value of the warrants were recorded as derivative liabilities. The fair value of the warrants was $515,961 and $36,839, respectively, at the grant date, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 1.56% and 1.21%, respectively; an expected life of 3 years; and an estimated volatility of 88.23% and 106.83%, respectively, based on recent history of its stock price.

On May 3, 2010, the Company issued warrants to Internet Securities Inc., the placement agent in connection with the sale of common stock, for the purchase of 146,000 shares of common stock at $1.25 per share with a term of five years. We recorded the fair value of the warrants as derivative liabilities. The fair value of the warrant was $159,776 at the grant date, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 2.47%; an expected life of 5 years; and an estimated volatility of 88.23% based on recent history of its stock price.

At June 30, 2010, warrants outstanding were as follows:

	Numbers of Shares Underlying Warrants		Weighted Average Exercise Price
Warrants outstanding at March 31, 2010		-	$	-
Warrants granted		876,000		1.88
Warrants expired		-		-
Warrants outstanding at June 30, 2010		876,000		1.88

F-19

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

15.	WARRANTS (CONTINUED)

The following table summarizes information about warrants outstanding at June 30, 2010:

Warrants outstanding and exercisable
Numbers of Shares under Warrants	Exercise Price		Expiration Date	Weighted Average Exercise Price
680,000	$	2.00	May 2, 2013	$	2.00
50,000	$	2.00	May 24, 2013	$	2.00
146,000	$	1.25	May 2, 2015	$	1.25
876,000	$	1.25-2.00		$	1.88

The aggregate intrinsic value of the 876,000 warrants outstanding and exercisable as of June 30, 2010 was zero.

16.	DERIVATIVE LIABILITIES

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The strike price of warrants issued by the Company is denominated in US dollars, a currency other than the Company’s functional currency, RMB. As a result, the warrants are not considered indexed to the Company’s own stock. The fair value of certain of the Company’s warrants has been characterized as derivative liabilities. The FASB’s guidance requires the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

At June 30, 2010, the Company had 876,000 warrants outstanding with a strike price denominated in US dollars, a currency other than the Company’s functional currency, RMB.

The derivative liabilities were valued using the Black-Scholes valuation model with the following assumptions:

	June 30, 2010			At the date of issuance
Risk-free interest rate		1.00	%	1.21% to 2.47		%
Expected volatility		104.88	%	88.23% to 106.83		%
Expected life (in years)	2.8 to 4.8 years			3 to 5 years
Expected dividend yield		0.00	%		0.00	%

Fair Value	$	479,645		$	712,576

The risk-free interest rate is based on the yield available on U.S. Treasury securities. The Company estimates volatility based on the historical volatility of its common stock. The expected life of the warrants is based on the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future.

The Company measured the fair value of the warrants as of June 30, 2010 as $479,645. For the three months ended June 30, 2010, the Company recorded a gain on the change in the fair value of derivatives of $232,931.

17.	CONTINGENCIES

On December 29, 2004, the Company entered into an agreement (the “Luoshan Agreement”) to purchase Luoshan Fertilizer Plant, a bankrupt company and to assume $1.3 million in debt owed by Xixian Fertilizer Plant (the principal shareholder of Luoshan Fertilizer Plant). Under the Luoshan Agreement, the Company was to receive reimbursements of RMB 5 million (approximately $650,000) from both the Luoshan county government and the Xi county government, which were to be received before December 29, 2007. Luoshan county government paid its note of RMB 5 million (approximately $650,000) to the Company on its due date.

F-20

NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

17.	CONTINGENCIES (CONTINUED)

In November 2007, the Company initiated a lawsuit in the Intermediate Court of Xinyang City (the “Intermediate Court”) against the Xi county government and Henan Shiji Jinyuan Chemicals Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian Fertilizer Plant) for non-payment of the Xi county government note receivable of RMB 5 million (approximately $650,000) on its due date as set forth under the Luoshan Agreement, and sought the enforcement of the terms of the note receivable and the Luoshan Agreement for payment of the RMB 5 million (approximately $650,000) by both the Xi county government and Shiji Jinyuan. On June 12, 2009, the court entered judgment against Xi county government and Shiji Jinyuan in amount of RMB 5 million (approximately $650,000) to be paid before June 22, 2009. In addition, the judgment ordered the Xi county government and Shiji Jinyuan to pay the Company interest and late fee based on market rates. On December 16, 2009, Xi county government and Shiji Jinyuan appealed to the Higher Court of Henan Province (“Higher Court”). On April 13, 2010, the Higher Court entered final judgment to reject the appeal and sustain the original judgment. On June 17, 2010, the intermediate Court issued an enforcement notice to Xi County Government and Shiji Jinyuan. The Xi County Government and Shiji Jinyuan did not pay the amount to the Company before June 21, 2010. On June 30, 2010, the Company has a reserve against the RMB 5 million ($736,279) note of $736,279 due to the uncertainty of collection.

18.	CAPITAL COMMITMENT

As of June 30, 2010, the Company entered into an agreement and made a down payment of $25.1 million toward the purchase of production equipment to be used in the Methanol project. The Company is required to pay the remainder of the purchase price of approximately $7.82 million prior to delivery of the equipment, which is estimated to occur in 2010. The amount paid is recorded in construction in progress. Through June 30, 2010, the Company used its working capital and borrowed money from its shareholders to fund the project. The Company originally planned on completing the project by December 2009, however, financing needs have delayed the estimated completion date of the project until September 2010.

19.	SUBSEQUENT EVENT

On August 10, 2010, the Company obtained a short-term bank loan for RMB 10 million (approximately $1.47 million) with an interest rate of 10.08% per annum from Xinyang Commercial Bank, which is due on August 10, 2011.

F-21

Item 2.

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the condensed consolidated financial statements and the accompanying notes of New Oriental Energy & Chemical Corp. (the “Company”, “we” or “our”) for the quarter ended June 30, 2010. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States (“GAAP”).

Forward Looking Statements

We are including the following discussion to inform our existing and potential security holders of some of the risks and uncertainties that can affect us and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities laws afford. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our Company. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as future capital expenditures, business strategy, competitive strengths, goals, growth of our business and operations, plans and references to future successes, may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” “forecast,” “may,” “should,” “budget,” “goal,” “expect,” “probably” or similar expressions, we are making forward-looking statements. Many risks and uncertainties may impact the matters addressed in these forward-looking statements. Our forward-looking statements speak only as of the date made and we will not update such forward-looking statements unless the securities laws require us to do so.

Some of the key factors which could cause our future financial results and performance to vary from those expected include:

The loss of primary customers;

Our ability to implement productivity improvements, cost reduction initiatives or facilities expansions;

Market developments affecting, and other changes in, the demand for our products and the introduction of new competing products;

Availability or increases in the price of our primary raw materials or active ingredients;

The timing of planned capital expenditures;

Our ability to identify, develop or acquire, and market additional product lines and businesses necessary to implement our business strategy and our ability to finance such acquisitions and development;

The condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;

The ability to obtain registration and re-registration of our products under applicable law;

The political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and

Other People’s Republic of China (the “PRC”) or foreign regulatory or legislative developments which affect the demand for our products generally or increase the environmental compliance cost for our products or impose liabilities on the manufacturers and distributors of such products.

The information contained in this report identifies additional factors that could cause our results or performance to differ materially from those we express in our forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements which are included in this report and the exhibits and other documents incorporated herein by reference, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved.

Critical Accounting Policies and Estimates

Use of estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts receivable

The Company reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the turnover and adequacy of accounts receivable and adjust its collection strategies.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Company compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower.

Property and equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of: 30 years for building, 10 years for machinery, 5 years for office equipment and 8 years for vehicles.

Revenue recognition

Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations by the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

Income taxes

The Company utilizes ASC 740 (formerly SFAS No. 109, “Accounting for Income Taxes”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Foreign currency transactions and comprehensive income (loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Transactions occur in Chinese Renminbi (“RMB”). The unit of RMB is in Yuan.

Recent Accounting Pronouncements

The following recently issued but not yet enacted accounting standards have not yet been codified by the FASB, as described in Note 2, “Basis of Presentation.”

Effective January 1, 2009, the Company adopted ASC 815-40 (formerly Emerging Issues Task Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). ASC 815-40 addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which is the first part of the scope exception in paragraph 11(a) of FASB SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument under paragraphs 6–9 of SFAS 133 is indexed to an entity's own stock, it is still necessary to evaluate whether it is classified in stockholders' equity (or would be classified in stockholders' equity if it were a freestanding instrument). Other applicable authoritative accounting literature, including Issues EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company Own Stock, and EITF 05-2, The Meaning of “Conventional Debt Instrument” in Issue No. 00-19, provides guidance for determining whether an instrument (or an embedded feature) is classified in stockholders' equity (or would be classified in stockholders' equity if it were a freestanding instrument). ASC 815-40 does not address that second part of the scope exception in paragraph 11(a) of SFAS 133. The Company adopted ASC 815-40 and determined that the outstanding warrants were derivative liabilities rather than equity.

Overview

The Company was incorporated in the State of Delaware on November 15, 2004, and its operating subsidiary, Henan Jinding Chemical Industry Co. Ltd. (“Henan Jinding”), is headquartered in Henan Province, the PRC. The Company is a leading manufacturer and marketer of various products, including Urea, liquefied ammonia, ammonia water, methanol, ammonium bicarbonate and dimethyl ether (“DME”).

On October 11, 2006, a share exchange agreement was entered into by and among the Company, Kinfair Holdings Limited (“KHL”) and KHL’s shareholders, whereby the Company issued 7,500,000 shares, representing 59.34% of total common stock in exchange of 100% of KHL common stock (the “Share Exchange”). Henan Jinding is a wholly owned subsidiary of KHL. Jinding is the principal operating subsidiary of KHL.

After the Share Exchange, KHL and its wholly owned subsidiary, Henan Jinding, became a wholly-owned subsidiary of the Company and Henan Jinding became the principal operating subsidiary of the Company and is deemed to be the accounting acquirer and the exchange transaction has been accounted for as a reverse acquisition in accordance with Statement of Financial Accounting Standards (“SFAS”) No.141, Business Combinations. The Share Exchange has been accounted for as the recapitalization of Henan Jinding.

On November 13, 2007, Luoshan Jinding Chemical Co., Ltd. (“Luoshan Jinding”) was incorporated as a wholly owned subsidiary of Henan Jinding under the laws of the PRC.

We aim to continue to improve our products in order to maintain our market leadership and to support our performance. We are focused on applying innovation and technology to make our processes more productive and profitable and provide improved products to our customers. Our capabilities in alternative fuel and traditional chemical products are generating a rich product pipeline that is expected to drive long-term growth.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2010 as Compared to

Three Months Ended June 30, 2009

	Three Months Ended June 30, 2010						Three Months Ended June 30, 2009						Comparisons
																Increase
				Percentage of						Percentage of			Change in			(Decrease) in
	Amount			Revenues			Amount			Revenues			Amount			Percentage
Item	US $			(%)			US $			(%)			US $			(%)
Revenues		13,730,314			100.00	%		8,384,866			100.00	%		5,345,448			63.75	%
Cost of Goods Sold		(14,667,701	)		(106.83	)%		(9,973,189	)		(118.94	)%		(4,694,512	)		47.07	%
Gross loss		(937,387	)		(6.83	)%		(1,588,323	)		(18.94	)%		650,936			(40.98	)%
General & administrative		767,811			5.59	%		727,934			8.68	%		39,877			5.48	%
Selling and distribution		241,029			1.76	%		287,540			3.43	%		(46,511	)		(16.18	)%
Research and development		18,251			0.13	%		27,626			0.33	%		(9,375	)		(33.94	)%
Loss from operations		(1,964,478	)		(14.31	)%		(2,631,423	)		(31.38	)%		666,945			(25.35	)%
Interest expense, net		(875,441	)		(6.38	)%		(461,917	)		(5.51	)%		(413,524	)		89.52	%
Other income (expenses), net		9,384			0.07	%		(3,507	)		(0.04	)%		12,891			(367.58	)%
Change in fair value of derivatives liabilities		232,931			1.70	%		-			-			232,931			100.00	%
Loss before income taxes		(2,597,604	)		(18.92	)%		(3,096,847	)		(36.93	)%		499,243			(16.12	)%
Income tax expense		-			-			(55,008	)		(0.66	)%		55,008			(100.00	)%
Net loss		(2,597,604	)		(18.92	)%		(3,151,855	)		(37.59	)%		554,251			(17.58	)%
Foreign currency translation gain (loss)		6,108			0.04	%		(9,672	)		(0.12	)%		15,780			(163.15	)%
Weighted average shares outstanding basic and diluted		13,538,000						12,640,000						898,000			7.10	%
Net loss per share, basic and diluted		(0.19	)					(0.25	)					0.06			(24	)%

Revenues, Cost of Goods Sold and Gross Profit (Loss)

Revenues for the three months ended June 30, 2010 were $13,730,314, which represented an increase of 63.75% from the same period in the prior year. The increase was mainly due to the following factors: (i) the increase in sales volume of Urea and Ammonium Bicarbonate as compared to the same period last year and (ii) the increase in the selling price of Methanol as compared to the same period last year.

Cost of Goods Sold (“COGS”) for the three months ended June 30, 2010 was $14,667,701, which was 106.83% of total revenues and represents a 47.07% increase, as compared to $9,973,189, and 118.94% of total revenues for the three months ended June 30, 2009. This was mainly due to the increase in sales volume of products as compared to the same period last year.

COGS as a percentage of revenue may fluctuate in the future. This fluctuation may primarily be due to changes in the price of raw materials, which can have a significant impact on the COGS.

Gross loss is calculated by deducting from revenues the cost of raw materials used to produce the finished products as well as charges for depreciation, employee welfare, repairs to machinery and equipment, all inventory costs and all other costs incident to or necessary for the production of our products. The Company’s COGS line item does not include any inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of our distribution network. The Company’s gross profit may not be comparable to those of other entities, since some entities include all of the costs related to their distribution network in COGS and others exclude a portion of them from gross profit.

Gross loss increased by $650,936, or 40.98%, to $(937,387) for the three months ended June 30, 2010 as compared to $(1,588,323) for the three months ended June 30, 2009. This increase was mainly due to the decrease in the production cost as compared to the same period last year.

		DME		Methanol			Urea			Ammonium Bicarbonate			Liquefied Ammonia			Ammonia Water
2011Q1	Revenues		-	$	2,051,729		$	10,719,109		$	756,170		$	100,340		$	102,966
	COGS		-		2,510,587			11,133,333			806,459			115,598			101,724
	Gross (Loss) Profit		-		(458,858	)		(414,224	)		(50,289	)		(15,258	)		1,242
	Gross Margin		-		(22.36	)%		(3.86	)%		(6.65	)%		(15.21	)%		1.21	%
2010Q1	Revenues		-		1,665,163			5,724,165			671,142			218,243			106,153
	COGS		-		2,735,103			6,135,880			707,467			279,688			115,051
	Gross Profit (Loss)		-		(1,069,940	)		(411,715	)		(36,325	)		(61,445	)		(8,898	)
	Gross Margin		-		(64.25	)%		(7.19	)%		(5.41	)%		(28.15	)%		(8.38	)%
Changes	Revenues		-		386,566			4,994,944			85,028			(117,903	)		(3,187	)
	Percentage		-		23.21	%		87.26	%		12.67	%		(54.02	)%		(3.00	)%

Sales of Urea increased $ 4,994,94 4 , or 87.26% , to $ 10,719,109 for the three months ended June 30, 2010, as compared to $ 5,724,165 for the three months ended June 30, 2009. This increase was mainly due to the increase in sales volume as compared to the same period of last year.

The gross margin of Urea increased to (3.86)% for the three months ended June 30, 2010, as compared to (7.19)% for the three months ended June 30, 2009. This was mainly due to the decrease in the production cost as compared to the same period last year.

Sales of ammonium bicarbonate for the three months ended June 30, 2010 were $ 756,170 , which represented an increase of 12.67% from the same period in the prior year. This was mainly due to the increase in sales volume as compared to the same period of last year.

The gross margin of ammonium bicarbonate decreased to (6.65)% for the three months ended June 30, 2010 as compared to (5.41)% for the same period of the prior year. This was mainly due to the decrease in sales volume.

Sales of methanol for the three months ended June 30, 2010 increased 23.21% to $ 2,051,729 , from $ 1,665,163 for the three months ended June 30, 2009. This increase was mainly due to the increase in sales volume and the selling price of Methanol as compared to the same period of last year. Methanol incurred a negative gross margin of 22.36 % for the three months ended June 30, 2010, which was mainly due to the decrease in the production cost as compared to the same period last year.

Sales of liquefied ammonia decreased $ 117,903 , or 54.02% , to $ 100,340 for the three months ended June 30, 2010, as compared to $ 218,243 for the three months ended June 30, 2009. This was mainly due to the decrease in sales volume as compared to the same period last year.

The gross margin of liquefied ammonia increased to (15.21)% for the three months ended June 30, 2010, as compared to (28.15)% for the three months ended June 30, 2009. This was mainly due to the increase in the selling price and the decrease in the production cost of liquefied ammonia as compared to the same period of last year.

Sales of DME decreased to $0 for the three months ended June 30, 2010. This was due to the decrease in the selling price which would have resulted in a negative gross profit of DME sales. Management ceased the production of DME temporarily. Based on the management's estimation, when the market price of DME increases to over RMB 3,150 per ton in China, the Company's DME will have positive gross profit. The Company plans to resume the production of DME in the near future, and recover to the normal level within one year.

The gross margin of ammonia water increased 9.59 % for the three months ended June 30, 2010 as compared to (8.38)% for the same period prior year. This was mainly due to the fact that the decrease in the production cost of ammonia water as compared to the same period of last year.

	Three Months Ended June 30, 2010					Three Months Ended June 30, 2009					Comparisons
Provinces	Amount US $		Percentage of Revenues (%)			Amount US $		Percentage of Revenues (%)			Change in Amount US $			Increase (Decrease) in Percentage (%)
Henan Province		4,118,627		30.00	%		2,868,226		34.21	%		1,250,401			43.59	%
Guangdong Province		6,415,753		46.73	%		3,125,464		37.26	%		3,290,289			105.27	%
Hubei Province		1,189,708		8.66	%		176,689		2.11	%		1,013,019			573.33	%
Anhui Province		1,986,549		14.47	%		2,113,675		25.21	%		(127,126	)		(6.01	)%
Hunan Province		2,661		0.02	%		63,344		0.76	%		(60,683	)		(95.80	)%
Hebei Province		-		-			6,670		0.08	%		(6,670	)		(100.00	)%
Jiangxi Province		-		-			30,798		0.37	%		(30,798	)		(100.00	)%
Guangxi Province		17,016		0.12	%		-		-			17,016			100.00	%
Total		13,730,314		100.00	%		8,384,866		100.00	%		5,345,448			63.75	%

The sales for the three months ended June 30, 2010 in Henan Province, Guangdong Province and Hubei Province increased by 43.59% , 105.27% and 573.33 % respectively as compared to the same period last year. This increase was mainly attributable to the Company’s reinforcement of its marketing strategy and expansion of the market share.

The sales for the three months ended June 30, 2010 in other provinces decreased as compared to the same period last year. The decrease was mainly attributable to the fact that the Company made adjustments to its product structure, and the sales volume of Methanol decreased in these provinces.

Operating Expenses

The Company incurred general and administrative expenses of $767,811 for the three months ended June 30, 2010, representing an increase of $39,877, or 5.48%, as compared to $727,934 for the three months ended June 30, 2009.

The Company incurred selling and distribution expenses of $241,029 for the three months ended June 30, 2010, a decrease of $46,511, or 16.18%, as compared to $287,540 for the three months ended June 30, 2009.

The Company incurred R&D expenses of $18,251 for the three months ended June 30, 2010, representing a decrease of $9,375, or 33.94%, compared to $27,626 for the three months ended June 30, 2009.

Income Tax Expense

The Company incurred income tax expense of $0 for the three months ended June 30, 2010, a decrease of $55,008, or 100%, as compared to $55,008 for the three months ended June 30, 2009. This decrease is mainly attributable to the decrease in the reserve against the net operating loss carry forward deferred tax asset.

Net Loss

The Company’s net loss of $2,597,604 for the three months ended June 30, 2010 represented a decrease of $554,251, or 17.58%, as compared to a net loss of $3,151,855 for the three months ended June 30, 2009. This decrease was mainly due to the decrease in the production cost as compared to the same period last year offset by the increase in the change in fair value of derivatives liabilities of $232,931 in the reporting period.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

	Three Months Ended June 30,
	2010			2009
Net cash provided by (used in)
Operating activities	$	(3,608,665	)	$	(4,211,286	)
Investing activities		132,278			(757,309	)
Financing activities		4,269,833			4,810,809
Net change in cash and cash equivalents		793,446			(157,786	)

Effect of exchange rate changes on cash and cash equivalents		4,655			(19,027	)

Cash and cash equivalents at beginning of period		319,816			410,870

Cash and cash equivalents at end of period	$	1,117,917		$	234,057

Cash flows used in operating activities during the three months ended June 30, 2010 amounted to $3,608,665, which was mainly due to the Company’s net loss of $2,597,604 in the reporting period and the decrease in customer deposits by $6,473,070.

As of June 30, 2010, the cash provided by investing activities was $132,278, which was mainly due to the decrease in due from employees.

As of June 30, 2010, the cash provided by financing activities was $4,269,833, which represented the net increase short-term debt and the increase in proceeds from issuance of common stock in the reporting period.

Liquidity

The Company has a working capital deficit of $45,971,279 and a shareholders’ deficit of $470,784 as of June 30, 2010, and the Company incurred a net loss of $2,597,604 and negative cash flow from operations of $3,608,665 for the three months ended June 30, 2010. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management recognizes that the Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow the Company to continue the development of its business plans and satisfy its current and long-term obligations on a timely basis. The Company believes that it will be able to complete the necessary steps in order to meet its cash requirements throughout the fiscal year ending March 31, 2011.

The major shareholder has committed to provide financial assistance of RMB 30 to 50 million (approximately $4.4 to $7.3 million) over the next few years, if necessary.

Capital Resources

As of June 30, 2010, our total assets were $77,718,099 and our total liabilities were $78,188,883. Our debt to asset ratio, calculated as total liabilities (including short-term debt and payables) over total assets, was 100.61%.

As of June 30, 2010, our total assets were $77,718,099 and our operating revenue for the three months ended June 30, 2010 was $13,730,314, reflecting a total asset turnover of 0.18.

As of June 30, 2010, we had working capital deficit of $ 45,971,279 . This was mainly due to the increase in the Company’s net loss.

CONTINGENT LIABILITIES

None.

OFF BALANCE SHEET ARRANGEMENTS

None.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. Controls and Procedures.

A. Evaluation of Disclosure Controls and Procedures:

The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company's management, with the participation of its principal executive and financial officers, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company's principal executive and financial officers have concluded, based on such evaluation, that such disclosure controls and procedures were effective for the purpose for which they were designed as of the end of such period.

B. Changes in Internal Control over Financial Reporting:

There was no change in the Company's internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In November 2007, the Company initiated a lawsuit in the Intermediate Court of Xinyang City (the “Intermediate Court”) against the Xi county government and Henan Shiji Jinyuan Chemicals Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian Fertilizer Plant) for non-payment of the Xi county government note receivable of RMB 5 million (approximately $650,000) on its due date as set forth under the Luoshan Agreement, and sought the enforcement of the terms of the note receivable and the Luoshan Agreement for payment of the RMB 5 million (approximately $650,000) by both the Xi county government and Shiji Jinyuan. On June 12, 2009, the court entered judgment against Xi county government and Shiji Jinyuan in amount of RMB 5 million (approximately $650,000) to be paid before June 22, 2009. In addition, the judgment ordered the Xi county government and Shiji Jinyuan to pay the Company interest and late fee based on market rates. On December 16, 2009, Xi county government and Shiji Jinyuan appealed to the Higher Court of Henan Province.(“Higher Court”). On April 13, 2010, the Higher Court entered final judgment to reject the appeal and sustain the original judgment. On June 17, 2010, the intermediate Court issued enforcement notice to Xi county government and Shiji Jinyuan. The Xi County Government and Shiji Jinyuan did not pay the amount to the Company before June 21, 2010. At June 30, 2010, the Company has a reserve against the RMB 5 million ($736,279) note of $736,279 due to the uncertainty of collection.

Item 1A. Risk Factors.

Not required.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

As disclosed in the Company’s Annual Report Form 10-K filed with the SEC on June 29, 2010, during the fiscal quarter covered by this Current Quarterly Report Form 10-Q, the following sale of unregistered securities occurred:

On May 3, 2010, the Company entered into a Securities Purchase and Registration Rights Agreement (the “First Purchase Agreement”) and a Warrant Agreement, with certain accredited investors (collectively, the “First Investors”), pursuant to which the Company issued 1,360,000 units (the “Units”) to the Investors, consisting of (i) one (1) share of our common stock, par value $0.001, and (ii) a Warrant to purchase one half (½) of one (1) share of common stock with an exercise price of Two Dollars ($2.00) per share (the “First Offering”). The purchase price for each Unit is $1.25 and the aggregate purchase price for the Units sold in the Offering was $1,700,000.

On May 25, 2010, the Company entered into a separate Securities Purchase and Registration Rights Agreement (the “Additional Purchase Agreement,” and together with the First Purchase Agreement, the “Purchase Agreements”) and a Warrant Agreement with Joseph Zilfi, an accredited investor (the “Second Investor,” and together with the First Investors, the “Investors”), pursuant to which the Company issued 100,000 Units to the Second Investor, consisting of (i) one (1) share of our common stock, par value $0.001, and (ii) a Warrant to purchase one half (½) of one (1) share of common stock with an exercise price of Two Dollars ($2.00) per share (the “Second Offering,” and together with the First Offering, the “Offerings”). The purchase price for each Unit is $1.25 and the aggregate purchase price for the Units sold in the Second Offering was $125,000.

The Warrants have a 2½ year term and will not be exercisable until 6 months following the issuance of the Warrants.

Pursuant to the terms of the Purchase Agreements, the Company shall, on or prior to sixty (60) calendar days following the closing of each of the Offerings, use all reasonable efforts to prepare and file with the SEC a registration statement covering the shares of the Common Stock and the shares underlying the Warrants issued in connection with the applicable Offering.

The Company engaged Internet Securities, Inc. as placement agent (the “Placement Agent”) in connection with the Offerings. The Company will pay the Placement Agent an amount equal 10% of the aggregate gross proceeds raised in the Offerings in cash and a 5 year warrant to purchase 10% of the Securities sold in the Offerings (the “Placement Agent Warrant”). The Placement Agent Warrant shall have the same terms as the Warrant, except that the exercise price of the Placement Agent Warrant shall be $1.25.

The Company sold the Units in the Offerings in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D as promulgated by the SEC under the Securities Act 1933. When appropriate, we determined that the purchaser of securities described above was a sophisticated investor with the financial ability to assume the risk of its investment in our securities and acquired such securities for its own account and not with a view to any distribution thereof to the public. Where required by applicable law, the certificates evidencing the securities bear legends stating that the securities are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information

(a) There is no information required to be disclosed on Form 8-K during the period covered by this Form 10-Q that was not so reported.

(b) There were no material changes to the procedures by which security holders may recommend nominees to the registrant's board of directors during the quarter ended June 30, 2010.

Item 6. Exhibits.

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

Exhibit Number		Exhibit Description

2.1		Share Exchange Agreement dated as of October 11, 2006, between Sports Source, Kinfair Holdings Limited and Auto Chance International Limited. (2)

2.2		Share Transfer Agreement, dated February 29, 2006, between Kinfair Holdings Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu, Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)

2.3		Stock Purchase Agreement, dated February 19, 2006, by and between Henan Jinding Chemical Industry Co., Ltd. and Kinfair Holdings Limited. (2)

3.1		Certificate of Incorporation of the Company, as amended by the current report on Form 8-K filed with the SEC on February 7, 2007 (1)

3.2		Bylaws of the Company, as amended by the current report on Form 8-K/A filed with the SEC on February 23, 2007 (1)

4.1		Specimen of Common Stock Certificate (3)

10.1		Form of Labor Contract for Henan Jinding Chemical Industry Co., Ltd. (2)

10.2		Land Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by the People’s Government of Luoshan County. (2)

10.3		Securities Purchase and Registration Rights Agreement, dated May 3, 2010, by and between the Company and the Investors listed on the Schedule of Buyers attached thereto. (6)

10.4		Securities Purchase and Registration Rights Agreement, dated May 25, 2010, by and between the Company and the Investors listed on the Schedule of Buyers attached thereto. (4)

10.5		Form of Warrant. (6)

31.1		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (4)

31.2		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (4)

32.1		Certification of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (4)

32.2		Certification of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (4)

99.1		Loan Agreement, dated August 8, 2008, by and between New Oriental Energy & Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd. (5)

(1)	Incorporation by reference to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-125131).

(2)	Incorporated by reference to the Company's Current Report on Form 8-K dated October 13, 2006.

(3)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2008.

(4)	Filed herewith.

(5)	Incorporated by reference to the Company’s Form 10-Q for the period ended June 30, 2008.

(6)	Incorporated by reference to the Company’s Current Report on Form 8-K dated May 4, 2010.

SIGNATURES

Pursuant to the requirements 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.

NEW ORIENTAL ENERGY & CHEMICAL CORP.

By:	/s/ Chen Si Qiang
	Chen Si Qiang
	Chief Executive Officer and Chairman of the Board

By:	/s/ Donglai Li
	Donglai Li
	Chief Financial Officer

DATED: August 23, 2010

INDEX TO EXHIBITS

Exhibit Number		Exhibit Description

2.1		Share Exchange Agreement dated as of October 11, 2006, between Sports Source, Kinfair Holdings Limited and Auto Chance International Limited. (2)

2.2		Share Transfer Agreement, dated February 29, 2006, between Kinfair Holdings Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu, Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)

2.3		Stock Purchase Agreement, dated February 19, 2006, by and between Henan Jinding Chemical Industry Co., Ltd. and Kinfair Holdings Limited. (2)

3.1		Certificate of Incorporation of the Company, as amended by the current report on Form 8-K filed with the SEC on February 7, 2007 (1)

3.2		Bylaws of the Company, as amended by the current report on Form 8-K/A filed with the SEC on February 23, 2007 (1)

4.1		Specimen of Common Stock Certificate (3)

10.1		Form of Labor Contract for Henan Jinding Chemical Industry Co., Ltd. (2)

10.2		Land Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by the People’s Government of Luoshan County. (2)

10.3		Securities Purchase and Registration Rights Agreement, dated May 3, 2010, by and between the Company and the Investors listed on the Schedule of Buyers attached thereto. (6)

10.4		Securities Purchase and Registration Rights Agreement, dated May 25, 2010, by and between the Company and the Investors listed on the Schedule of Buyers attached thereto. (4)

		Form of Warrant. (6)

31.1		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (4)

31.2		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (4)

32.1		Certification of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (4)

32.2		Certification of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (4)

99.1		Loan Agreement, dated August 8, 2008, by and between New Oriental Energy & Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd. (5)

(1)	Incorporated by reference to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-125131).

(2)	Incorporated by reference to the Company's Current Report on Form 8-K dated October 13, 2006.

(3)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2008.

(4)	Filed herewith.

(5)	Incorporated by reference to the Company’s Form 10-Q for the period ended June 30, 2008.

(6)	Incorporated by reference to the Company’s Current Report on Form 8-K dated May 4, 2010.

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NOEC New Oriental Energy & Chemical Corp. (MM)