Throughout this Quarterly Report on Form 10-Q, the terms "we," "us," "our," " Company," and "our Company" refer to Pacific Asia Petroleum, Inc. ("PAP"), a Delaware corporation, and its present and former subsidiaries, including Pacific Asia Petroleum, Ltd. ("PAPL"), Pacific Asia Petroleum Energy Limited ("PAPE"), Inner Mongolia Production Co (HK) Limited, and Inner Mongolia Sunrise Petroleum JV Company (collectively, the "Company"). References to "PAP" refer to Pacific Asia Petroleum, Inc. prior to the mergers of Inner Mongolia Production Company LLC ("IMPCO") and Advanced Drilling Services, LLC ("ADS") into wholly-owned subsidiaries thereof, effective May 7, 2007. Historical financial results presented herein are the results of IMPCO from inception on August 25, 2005 to May 6, 2007 and the consolidated entity Pacific Asia Petroleum, Inc. from May 7, 2007 forward, which is considered to be the continuation of IMPCO as Pacific Asia Petroleum, Inc.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements, which reflect the views of our management with respect to future events and financial performance. These forward-looking statements are subject to a number of uncertainties and other factors that could cause actual results to differ materially from such statements. Forward-looking statements are identified by words such as "anticipates," "believes," "estimates," "expects," "plans," "projects," "targets" and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on the information available to management at this time and which speak only as of this date. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a discussion of some of the factors that may cause actual results to differ materially from those suggested by the forward-looking statements, please read carefully the information under "Risk Factors" included in the Company's Annual Report on Form 10-K for 2008. The identification in this Quarterly Report of factors that may affect future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Our Business

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

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

The Company was originally incorporated in Delaware on December 12, 1979 as Gemini Marketing Associates Inc., subsequently changed its name to Pacific East Advisors, Inc., and on May 7, 2007 consummated a reverse merger involving IMPCO and ADS (the "Mergers"), in connection with which the Company changed its name to Pacific Asia Petroleum, Inc. Under applicable accounting standards, IMPCO was defined as the acquiring company in the Mergers.

Accordingly, the reportable results of operations for the Company through the date of the Mergers of May 7, 2007 are comprised only of the historical results of the former IMPCO. Therefore, for purposes of financial reporting, the inception of the Company is reflected as August 25, 2005, the inception date of IMPCO. The cumulative net losses of the Company from inception through September 30, 2009 attributable to common stockholders are $16,693,227. Our losses have resulted primarily from exploration activities on our Zijinshan Block, as well as general and administrative expenditures associated with developing a new enterprise, and consulting, legal and accounting expenses.

During the three months ending September 30, 2009, the Company generated its initial revenues totaling $55,409 from sales of specialty chemicals to a single customer.

ZIJINSHAN BLOCK CBM OPERATIONS

On April 2, 2008, the Company received written confirmation that the Ministry of Commerce of The People's Republic of China approved the entry by the Company's subsidiary, PAPL, into that certain Production Sharing Contract entered into on October 26, 2007 with China United Coalbed Methane Corp. Ltd. for the exploitation of coalbed methane ("CBM") resources in the Zijinshan block, which is a 175,000 acre area located in the Shanxi Province of China (the "Zijinshan Block").

The Company has completed seismic data acquisition operations on the Zijinshan Block and spent approximately $1.5 million to shoot 162 kilometers of seismic under the work program. This seismic data has since been processed and interpreted. Based on the seismic interpretation, four potential well locations have been identified. A regional environmental impact assessment study ("EIA") has also been completed. Following completion of a site specific EIA study the Company spudded well ZJN 001 on September 30, 2009. This well is targeted at the 4/5 coal seams in the Shanxi formation and 8/9 coal seams in the Taiyuan formation. The well is anticipated to reach total depth in mid- November 2009, with laboratory and test results expected to be available in early 2010.

OTHER CBM ACTIVITIES

On October 5, 2009, Molopo Australia Ltd. ("Molopo") publicly disclosed that it is in an advanced stage of negotiations with the Company in respect of the sale of Molopo's 26.1% gross interest in Fortune Liulin Gas Company Limited (the "FLG Interest"), which entity is a party to a production sharing contract covering the Liulin coalbed methane block (the "Liulin PSC") located in the Shanxi Province of the People's Republic of China. As currently contemplated by the parties, as consideration for the FLG Interest, the Company plans to issue approximately 2.7 million shares of Common Stock of the Company to Molopo and pay to Molopo a 2% royalty on future production revenue received from the FLG Interest by the Company. The sale remains subject to the finalization of negotiations, terms and documentation, and is subject to waiver of pre-emptive rights held by the Fortune Oil Group, Molopo's partner in the PSC. There is no certainty the transaction will proceed and be consummated under the terms currently contemplated, or at all.

HANDAN GAS DISTRIBUTION VENTURE INTEREST

On July 7, 2009 the Company announced that its China affiliate, Inner Mongolia Sunrise Petroleum Co. Ltd., had entered into a Letter of Intent with Handan Hua Ying Company Limited ("Handan"), relating to the acquisition of a 49% ownership interest in the Handan Chang Yuan Natural Gas Company, Ltd. ("HGC") held by Handan. HGC owns and operates gas distribution assets in and around Handan City in the Hebei Province of the People's Republic of China. Pursuant to the Letter of Intent, the Company will continue with its final legal and financial due diligence with a goal of entering into a final sale and purchase agreement before the end of the year, and will also enter into negotiations with HGC with the intent of creating a joint venture to operate and manage the HGC business. The Letter of Intent supplements the Letter of Intent entered into by the Company in November 2008 covering the same gas distribution assets.

ENHANCED OIL RECOVERY AND PRODUCTION (EORP)

On May 13, 2009, PAP and its wholly-owned Hong Kong subsidiary, PAPE, entered into a Letter of Understanding ("LOU"), which was amended and further detailed in an AOC and various other associated agreements that were executed on 7th June 2009, with Mr. Li Xiangdong ("LXD") and Mr. Ho Chi Kong ("HCK"), pursuant to which the parties agreed to form a Chinese joint venture company (the "CJVC"), to be 75.5% owned by PAPE and 24.5% owned by LXD, into which LXD would assigned certain pending patent rights related to chemical enhanced oil recovery (the "LXD Patents"). The CJVC was officially incorporated under Chinese law on 24th September 2009. As required by the LOU, and the certain AOC dated 7th June 2009 and as amended on June 25, 2009, LXD is now required to assign the LXD Patents to the incorporated CJVC. Once the LXD Patents have been assigned to the CJVC and as further required by the LOU, and the certain AOC dated 7th June 2009 and as amended on June 25, 2009, then the CJVC will be required to pay to LXD and HCK US $100,000 each. At the same time, PAPE will be required to issue shares to HCK to provide him with 30% ownership of PAPE, with the Company retaining 70% ownership of PAPE. Upon acknowledgement from the Chinese Government that the CJVC is the registered owner of the LXD patents, the Company shall issue to HCK up to 100,000 shares of Common Stock of the Company and options to purchase up to 400,000 additional shares of Common Stock of the Company at an exercise price coinciding with the Company's share price on the day of the issue of the options. The Company has agreed to issue

300,000 more shares to HCK upon the signing of certain contracts by the CJVC with respect to the Fulaerjiqu oilfield. The options will not vest immediately, and vesting will be contingent upon the achievement of certain milestones related to the entry by the CJVC into certain EORP-related development contracts pertaining to oilfield projects in the Fulaerjiqu Oilfield. These contracts are anticipated to each deliver to the CJVC a significant percentage of the oil produced and/or fixed fees per ton for the incremental production using the technology covered by the LXD Patents. According to the Qiqihar City branch of the Chinese Ministry of Land and Resources, the Fulaerjiqu Oilfield contains 115,000,000 barrels of Original Oil In Place ("OOIP"), of which only 510,000 barrels of cumulative oil have been produced to date.

In addition, LXD has been engaged as a consultant by the CJVC to provide research and development services, training, and assistance in promoting certain other opportunities developed by him that target the application of the technology embodied in the LXD Patents, including assistance with entering into a contract with respect to the Liaohe Oilfield (the "Liaohe Contract"), and helping to develop projects in both the Shandong Province and the Xinjiang autonomous region of the People's Republic of China for the provision and application of technology and chemicals developed by LXD.

The Company has agreed to loan up to $5 million to PAPE, which may then invest up to RMB 30,000,000 (approximately $ 4.4 million) with portion of this being a requirement to invest RMB 22,650,000 as PAPE's share of the registered capital of the CJVC when and to the extent required under applicable law, to be used by the CJCV to carry out work projects, fund operations, and to make aggregate payments of up to $1.5 million in cash to LXD and HCK. The payments of up to $1.5 million to LXD and HCK shall be subject to the achievement of certain milestones, including the formation of the CJVC, the transfer of the LXD Patents to the CJVC, and the signing of the contracts with respect to the Fularjiqu Oilfield and the Liaohe Contract by the CJVC, as well as certain production-based milestones resulting from the implementation of these contracts.
The loan from the Company to PAPE will be repaid from funds distributed to PAPE by way of dividends or other appropriate payments from the CJVC.

In accordance with the terms of the LOU, as amended, on June 7, 2009, PAPE, LXD and the Company's Chinese joint venture company, Inner Mongolia Sunrise Petroleum JV Company ("Sunrise"), entered into an Assignment Agreement of Application Right for Patent, Consulting Engagement Agreement, and an Interest Assignment Agreement.

Pursuant to the Assignment Agreement of Application Right for Patent, LXD will be transferring all rights related to the LXD Patents to the CJVC.

With these EORP-related agreements signed and in place, the Company - initially through Sunrise and then through the CJVC following its incorporation - has commenced operations in various oil fields located in the Liaoning, Shandong, and Xinjiang Provinces in China. In the three months ended September 30, 2009, the Company recorded initial revenues, cost of sales and expenses from the EORP business activities.

OYO FIELD PRODUCTION SHARING CONTRACT INTEREST

On September 1, 2009, the Company entered into a Memorandum of Understanding with CAMAC Energy Holdings Limited ("CAMAC") and certain CAMAC subsidiaries, regarding the Company's intention to acquire CAMAC's entire aggregate 60% participating interest in the Oyo Oilfield, currently held by two of CAMAC's wholly-owned subsidiaries, which is covered by production sharing contract OML120 and located in the Nigerian offshore (the "Oyo Asset"). The parties anticipate that the originally proposed total consideration of $198.84 million would be payable by the Company through a combination of shares of the Company's Common Stock and a smaller portion of cash (the "Proposed Transaction"). The Oyo Oilfield is operated by Eni/Agip, who owns the balance of the participating interest in the Oyo Oilfield. If the Proposed Transaction is consummated, CAMAC would beneficially own approximately 63% of the Company post-closing, resulting in a change of control of the Company.

The Company's entry into the Proposed Transaction is subject to the satisfactory completion of due diligence, entry into a definitive agreement with CAMAC, approval by the Company's Board of Directors and stockholders, and certain other closing conditions. In the interim, CAMAC has agreed to a four-month exclusivity period with respect to the Oyo Asset, and the Company has agreed to a limited stand-still agreement which limits its ability to engage in certain material transactions, both of which will expire on December 31, 2009. There is no certainty the Proposed Transaction will proceed and be consummated under the terms currently contemplated, or at all.

FUNDING

To date, although the Company has generated minimal operating revenue, it has raised approximately $21.6 million in equity financings to fund its ongoing working capital requirements, as well as possible acquisition and development activities. In order to fully implement its business strategy, the Company will need to raise additional capital. In the event the Company is unable to raise such capital on satisfactory terms or in a timely manner, the Company would be required to significantly revise its business plan.

You should read the information in this Item 2 together with our unaudited condensed financial statements and notes thereto that appear elsewhere in this Report.

Plan of Operation

The following describes in general terms the Company's plan of operation and development strategy for the twelve-month period ending September 30, 2010 (the "Next Year"). During the Next Year, the Company plans to focus its efforts by continuing operations in its 100% owned and operated Zijinshan Block. These operations will include the completion of drilling of the current well, the possible drilling of 2 additional wells in 2010 as well as undertaking appropriate laboratory, testing and other activities. The Company also plans to continue putting into commercial use the new EORP technology to produce incremental oil in oilfields located in the Heilongjiang, Liaoning, Shandong, Henan and Xinjiang Provinces in China through the operations of the CJVC entity. The Company will also assess the applicability of the new EORP technology to the Company's August 2006 Contract for Cooperation and Joint Development with Chifeng Zhongtong Oil and Natural Gas Co. ("Chifeng"), pursuant to which drilling operations commenced in October 2006 and were subsequently suspended in 2007 pending receipt of a production license from the Chinese government. The Company's revised strategy with regards to Chifeng is to seek to enhance all the relevant parties' economic positions and use these benefits to acquire the necessary production licenses in order to carry out the plans under that agreement.

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

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

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

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

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

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

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

Product Research and Development

The Company has to date not engaged in any product research or development, however, it does anticipate that the CJVC will engage in research and development related to its new EORP technology during the Next Year.

Liquidity and Capital Resources
The Company has sufficient funds to fund all of its current committed operations for the Next Year. The discussion below considers the Company's ability to fund its operations and overhead expenses.

As of September 30, 2009, the Company had net working capital of $6,935,324 and cash, cash equivalents and short-term investments of $7,498,280. For the nine months ended September 30, 2009, the Company incurred a net loss attributable to common stockholders of $7,725,163. As a result of our operating losses from our inception through September 30, 2009, we generated a cash flow deficit of $11,297,157 from operating activities. Cash flows used in investing activities were $2,663,614 during the period from inception through September 30, 2009. We met our cash requirements during this period through net proceeds of $19,671,092 from the private placement of restricted equity securities.

Net cash used in operating activities for the first nine months of 2009 was $5,204,158 compared to $2,115,217 for the first nine months of 2008. The increase in 2009 versus 2008 was due to increases in expenses, principally for exploratory expenses incurred on the Zijinshan Block and consulting and PSC management fees.

Net cash provided by investing activities was $464,924 for the first nine months of 2009, as compared to $10,077,016 for the first nine months of 2008. The net change was principally due to $468,217 in net purchases of available for sale short-term securities in the first nine months of 2009 versus net sales of $10,900,000 of such securities in the first nine months of 2008. Partly offsetting the decrease in cash flows from activity in short-term securities were combined refunds of $1,150,000 from Chevron and BHP in 2009 for amounts the Company had previously deposited with them in connection with the proposed Baode PSC transaction. There were no net cash effects from financing activities in the first nine months of 2009 and a nominal amount in the first nine months of 2008.

Our available working capital and capital requirements will depend upon numerous factors, including progress of our exploration and development programs, progress of our EORP efforts, market developments and the status of our competitors. Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing and strategic alliances. Such additional funds may not become available on acceptable terms, if at all, and any additional funding obtained may not be sufficient to meet our needs in the long-term. Through September 30, 2009 virtually all of our financing has been raised through private placements of equity instruments. The Company at September 30, 2009 had no credit lines for financing and no short-term or long-term debt.

We intend to continue to fund operations from cash on hand and through the similar sources of capital previously described for the foreseeable future. Any additional capital that we are able to obtain may not be sufficient to meet our needs. We believe that we will continue to incur net losses and negative cash flows from operating activities for the next 1-2 years. Based on the resources available to us on September 30, 2009, we can sustain operations at the present "burn rate" for approximately one year. We will need additional equity or debt financing to expand our operations through 2010 and we may need additional financing thereafter.

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

To the extent the Company acquires additional CBM and other energy related investments and rights, consistent with its business plan, the Company will need to raise additional funds for such projects.

Results of Operations

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

As a result of limited capital resources and minimal revenues from operations from the date of IMPCO's inception on August 25, 2005, the Company has relied on the issuance of equity securities as a means of compensating employees and non-employees for services. The Company enters into equity compensation agreements with

non-employees if it is in the best interest of the Company and in accordance with applicable federal and state securities laws. In order to conserve its limited operating capital resources, the Company anticipates continuing to compensate employees and non-employees partially with equity compensation for services during the Next Year. This policy may have a material effect on the Company's results of operations during the Next Year.

Revenues

We have generated $55,409 in revenues from operations since IMPCO's inception on August 25, 2005. Revenues commenced in the three months ended September 30, 2009. We expect to generate additional revenues from operations in the remainder of 2009 and in 2010, as the Company transitions from a development stage company to an active growth stage company.

Cost of sales associated with these revenues totaled $53,207, resulting in a gross profit of $2,202.

Expenses
                                               Nine months ended                Three months ended
                                                 September 30,                     September 30,
                                             2009          2008             2009           2008
 Description
Salaries                                 $ 1,289,500     $   960,570     $   425,099     $   339,950
Consulting and PSC management fees         1,460,255         428,843         803,108         133,326
Stock-based compensation                   1,681,076         963,187         648,353         362,515
Exploratory expenses                       1,457,255               -          70,970               -
Legal fees                                   288,460         245,396          69,805          58,261
Travel, meals and entertainment              218,720         272,168          96,354         111,645
Auditing                                     135,334         143,633          23,746          27,150
All other operating expenses               1,256,832         588,604         561,498         218,076
     Total Operating Expenses            $ 7,787,432     $ 3,602,401     $ 2,698,933     $ 1,250,923

Nine months ended September 30, 2009 versus nine months ended September 30, 2008

For the nine months ended September 30, 2009, total operating expenses before income taxes were $7,787,432. For the nine months ended September 30, 2008, the comparable amount was $3,602,401. The increase in expenses reflects increased effort in identifying potential oil and gas opportunities, seeking related financing, increased administrative costs, initial EORP operations in 2009, and the continuing of seismic work (Exploratory Expenses) which commenced in December 2008 on the Zijinshan Block. The major components of the expense differences are as follows:

· Salaries: For the nine months ended September 30, 2009, salaries totaled $1,289,500 versus $960,570 for the nine months ended September 30, 2008, an increase of $328,930. The increase is principally due to additional personnel and increased compensation.

· Consulting and PSC management fees: For the nine months ended September 30, 2009, consulting and PSC management fees totaled $1,460,255 versus $428,843 for the nine months ended September 30, 2008, an increase of $1,031,412. Expense for such fees payable in cash totaled $1,065,779 versus $290,843 for the nine month periods ended September 30, 2009 and September 30, 2008 respectively. The increase in cash fees of $774,936 was principally due . . .