**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**




(Mark
      one)


x
              ANNUAL
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934
  For
        the
        fiscal year ended December 31, 2007
  OR
  o
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934




For
      the
      transition period from __________ to __________




Commission
      file number: 333-126900







**CHINA
      CLEAN ENERGY INC.**


(Name
      of
      Small Business Issuer in Its Charter)




**Delaware**
              (State
                or Other Jurisdiction of Incorporation or Organization)
            **87-0700927**
              (I.R.S.
                Employer Identification No.)**17
                Candlewood Drive**
              **West
                Windsor, New Jersey**
              (Address
                of Principal Executive Offices)
            **08550**
              (Zip
                Code)





**(609)
      799-8921**


(Issuers
      Telephone Number, Including Area Code)




Securities
      registered under Section 12(b) of the Exchange Act:


**None**




Securities
      registered under Section 12(g) of the Exchange Act:


**None**




(Title
      of
      Class)




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No
o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x




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




The
      issuer’s revenues for the fiscal year ended December 31, 2007 were
      $21,756,010.




The
      aggregate market value of the voting and non-voting common stock held by
      non-affiliates computed by reference to the average bid and asked price of
      the
      common stock as of March 10, 2008 was approximately $22,008,744.




As
      of
      March 10, 2008, 31,512,269 shares of Issuer’s common stock were
      outstanding.




Transitional
      Small Business Disclosure Format (check one): Yes o No
x








**TABLE
      OF CONTENTS**




PagePART
                  IItem
                  1.
              Description
                  of Business.
              1Item
                  2.
              Description
                  of Property.
              26Item
                  3.
              Legal
                  Proceedings.
              26Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              26PART
                  IIItem
                  5.
              Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity Securities.
              26Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation.
              27Item
                  7.
              Financial
                  Statements.
              33Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.
              33Item
                  8A.
              Controls
                  and Procedures.
              33Item
                  8A(T).
              Management's
                  Annual Report on Internal Control Over Financial
                  Reporting.
              33Item
                  8B.
              Other
                  Information.
              34PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act.
              34Item
                  10.
              Executive
                  Compensation.
              36Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters and Director Independence.
              38Item
                  12.
              Certain
                  Relationships and Related Transactions and Director
                  Independence.
              40Item
                  13.
              Exhibits.
              41Item
                  14.
              Principal
                  Accountant Fees and Services.
              44









**PART
      I**




As
      used
      in this Annual Report, unless otherwise indicated, the terms “we,” “us,” “our”
and “the Company” refer to China Clean Energy Inc.




This
      Annual Report on Form 10-KSB contains “forward-looking statements.” To the
      extent that any statements made in this Annual Report of Form 10-KSB contain
      information that is not historical, these statements are essentially
      forward-looking. Forward-looking statements can be identified by the use of
      words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,”
“should,” “intends,” “estimates” and other words of similar meaning. These
      statements are subject to risks and uncertainties that cannot be predicted
      or
      quantified and, consequently, actual results may differ materially from those
      expressed or implied by these forward-looking statements. Forward-looking
      statements involve risks and uncertainties. These uncertainties include factors
      that affect all businesses as well as matters specific to us. We caution readers
      not to place undue reliance on any forward-looking statement that speaks only
      as
      of the date made and to recognize that forward-looking statements are
      predictions of future results, which may not occur as anticipated. Actual
      results could differ materially from those anticipated in the forward-looking
      statements and from historical results, due to the risks and uncertainties
      described below under the heading “Risk Factors,” as well as others that we may
      consider immaterial or do not anticipate at this time. The risks and
      uncertainties identified in this report are not exclusive and further
      information concerning our business, including factors that potentially could
      materially affect our financial results or condition, may emerge from time
      to
      time. We assume no obligation to update forward-looking statements to reflect
      actual results or changes in factors or assumptions affecting the
      forward-looking statements. We advise you, however, to consult any further
      disclosures we may make on related subjects in our quarterly reports on Form
      10-QSB and current reports on Form 8-K we file with or furnish to the Securities
      and Exchange Commission.




**Item
                1.**
            **Description
                of Business.**




**Company
      Overview**




We,
      through our wholly-owned subsidiary, Fujian Zhongde Technology Co., Ltd., are
      engaged in the development, manufacturing, and distribution of biodiesel and
      specialty chemical products made from renewable resources. Fujian Zhongde
      Technology Co., Ltd. was incorporated in the Fujian Province of the People’s
      Republic of China in 1995 and Fujian Zhongde Energy Co., Ltd. was incorporated
      and officially granted a business license on November 5, 2007. Since inception,
      we have been engaged in the manufacture of high-quality specialty chemical
      products from renewable resources. Through cooperation with outside experts
      at
      various research institutes and our research and development efforts, we
      formulated a proprietary process for refining biodiesel from waste vegetable
      oils and waste grease. Using this proprietary process, we began producing
      biodiesel in 2005 and commenced selling biodiesel commercially in December
      2005.




1




**Products**




*Biodiesel
      Segment*




In
      November 2005 we filed an application with the State Intellectual Property
      Office (SIPO) of the People’s Republic of China for patent protection for our
      method of producing biodiesel from monomer acid. The patent application is
      still
      pending and the patent has not yet been issued. In December 2005, we began
      producing biodiesel and currently sell our biodiesel to regional service
      stations.




The
      term
“biodiesel” generally refers to methyl esters (sometimes called “fatty acid
      methyl esters”) made by transesterification, a chemical process that reacts a
“feedstock” oil or fat with methanol and a potassium hydroxide catalyst. The
“feedstock” can be vegetable oil, such as that derived from oil-seed crops (e.g.
      soy, sunflower, cottonseed, rapeseed, etc.), or used frying oil (e.g. yellow
      grease from restaurants). In addition to biodiesel, our production process
      typically yields co-products that can be turned into an array of valuable
      specialty chemicals. We believe that this specialty chemical co-production
      capability improves the economic viability of producing biodiesel.




According
      to the National Biodiesel Board (in the United States), “biodiesel” is a
      clean-burning alternative fuel produced from domestic, renewable resources
      for
      use in compression ignition (diesel) engines. Biodiesel is comprised of
      mono-alkyl esters of long chain fatty acids derived from vegetable oils or
      animal fats. Biodiesel is produced from feedstock, which comes from animal
      fats
      or vegetable oils.




According
      to the National Biodiesel Board, biodiesel can be used in virtually any diesel
      engine without modification. It can be used in its pure form (called B100)
      or as
      a blend with petroleum diesel at any ratio. It can also be stored in the same
      containers as petroleum diesel, which allows it to use the current fuel supply
      infrastructure that is already in place. Biodiesel has a higher flash point
      (the
      point at which fuel ignites) than petroleum diesel, according to the National
      Biodiesel Board. This characteristic makes biodiesel safer than petroleum diesel
      because it will not combust as easily.




A
      commonly used form of biodiesel is a 20% blend of biodiesel with 80% petroleum
      diesel, known as B20. This has become a common practice of balancing benefits
      with costs and addressing cold weather and solvency considerations associated
      with biodiesel. Biodiesel provides similar horsepower and fuel economy as
      petroleum diesel with superior lubricity to reduce wear and tear on
      engines.




*Chemicals
      Segment*




We
      manufacture and sell a variety of industrial products using
      environmentally-focused chemicals derived from renewable resources, such as
      waste vegetable oils. Our product categories include polyamide hot-melt
      adhesives, printing inks, alcohol and benzene-soluble polyamide resins and
      various fatty acids, such as dimer acid. We believe that our vegetable oil-based
      products will be viewed as an increasingly attractive alternative to products
      made with petroleum-based chemicals as a result of rising oil prices and
      possible shortages, as well as increased awareness and concern for protecting
      the environment.




*Hot-
      Melt Adhesives.* We
      manufacture dimer acid-based polyamide hot-melt adhesives and a wide variety
      of
      high-performance polyamide hot-melt adhesives. We offer products with varying
      softening points, tensile strengths, viscosities and adhesion strengths. These
      products are used in a wide range of applications, from book-binding and
      adhesion of fabrics, leather, plastic and wood to cementation of metal, ceramics
      and electronic components.




2




*Polyamide
      Resins.* We
      offer
      a wide variety of alcohol-soluble and benzene-soluble polyamide resins for
      use
      in printing inks. Our alcohol-soluble resins have good glossiness, adhesion,
      heat stability and anti-freeze ability and are used primarily in various kinds
      of bucked plate plastic-based inks such as polypropylene, polyethylene,
      terylene, cellophane and paper. Our benzene-soluble polyamide resins are
      characterized by good dissolving ability, leveling and liberation, excellent
      glossiness, excellent anti-gelling properties and adhesion to plastic membranes.
      They are used primarily in gravure printing inks and are compatible with gravure
      printers that have varying rotating speed capabilities. In addition, we
      manufacture low molecular weight liquid polyamide resin, a flexibilizer and
      curing agent for epoxy resin. It is used in epoxy coating, epoxy adhesive,
      epoxy
      casting seal and epoxy varnish.




*Dimer,
      Stearic and Monomer Acids.* These
      are
      fatty acids that are used for a variety of lubricating, flexibilizing,
      surfactant and emulsifying applications. Dimer acid is used in the production
      of
      resins, lubricants, coatings and corrosion-resistant agents. Stearic acid,
      produced by hydrolysis and rectification of various kinds of vegetable oils,
      is
      widely used in plastic flexibilizers, stabilizers, surfactants and soap bases.
      Monomer acid, a by-product from dimer and oleic acid processing, is used in
      plastics, lubricants, leather agents, detergents, soaps and alkyd resins.




*Printing
      Inks.* We
      manufacture a variety of printing inks for gravure surface printing, gravure
      inner printing and flexible typographic printing on plastic, aluminum foil
      and
      paper.




The
      following table shows our total sales volume broken down by product category
      for
      the twelve-month period from January 1, 2007 through December 31, 2007. As
      shown
      in the table, during the twelve-month period ending December 31, 2007, dimer
      acid was our top selling product, accounting for 36.97% of total sales. However,
      biodiesel was our fastest growing product in terms of sales volume in
      2007.




**Products
                Sold**
            **%
                of Total Sales for the Period**1.
            Dimer
                Acid
            36.97%2.
            Biodiesel
            26.54%3.
            Polyamide
                Resin
            21.84%4.
            Vegetable
                Asphaltun
            5.30%5.
            Polyamide
                Hot Melt Adhesive
            3.36%6.
            Printing
                Ink
            3.20%7.
            Fatty
                Acid
            1.31%8.
            Stearic
                Acid
            0.66%9.
            Liquid
                Resin 651#
            0.36%10.
            Gluewater
            0.29%





The
      following table shows our total sales volume broken down by product category
      for
      the twelve-month period from January 1, 2006 through December 31, 2006. As
      shown
      in the table, during the twelve month period ended December 31, 2006, dimer
      acid
      was our top selling product, accounting for 26.15% of total sales.




**Products
                Sold**
            **%
                of Total Sales for the Period**1.
            Dimer
                Acid
            26.15%2.
            Biodiesel
            24.89%3.
            Polyamide
                Resin
            22.58%4.
            Printing
                Ink
            10.11%5.
            Fatty
                Acid
            4.77%6.
            Polyamide
                Hot Melt Adhesive
            4.62%7.
            Stearic
                Acid
            3.15%8.
            Vegetable
                Asphaltun
            2.69%9.
            Oleic
                Acid
            0.68%10.
            Gluewater
            0.35%




3




**Biodiesel
      Benefits**




*Significant
      Reductions in Greenhouse Gas and Other Emissions on a “Well-to-Wheels” Basis.* We
      believe that the main benefit derived from using biodiesel comes from the
      reduction in carbon dioxide and other emissions generated when using this
      biodegradable, low toxicity fuel.




Petroleum
      diesel, in contrast to biodiesel, produces high levels of carbon dioxide (CO2),
      a greenhouse gas that is widely believed to be a significant contributor to
      global warming. It also produces other harmful pollutants, namely:




·
            carbon
                monoxide (CO), a poisonous gas that causes smog;




·
            particulates
                that contribute to respiratory infections, including asthma;




·
            sulfur,
                which contributes to the formation of acid rain; and




·
            unburned
                aromatic hydrocarbons that create smog and may be a contributing
                cause of
                cancer.




By
      comparison, whether used in its pure form or blended with petroleum diesel,
      biodiesel produces significantly lower levels of harmful emissions of carbon
      monoxide, particulates and unburned aromatic hydrocarbons. In addition, because
      biodiesel is virtually free of sulfur, we believe that the use of biodiesel
      will
      not contribute to acid-rain pollution.




Moreover,
      according to The Office of Renewable Fuels and Co-Products of the Iowa
      Department of Agriculture and Land Stewardship, when comparing biodiesel and
      petroleum diesel, a 100% biodiesel blend (B100) lowers carbon monoxide (CO)
      emissions by 44%, particulate matter emissions by 40% and sulfate emissions
      by
      100%. A blend of blend of 20% biodiesel and 80% petroleum diesel (B20), on
      the
      other hand, lowers carbon monoxide (CO) emissions by 9%, particulate matter
      emissions by 8% and sulfate emissions by 20%. When B20 is used along with an
      oxidation catalyst, it reduces particulate matter by 45%, carbon monoxide by
      41%
      and total hydrocarbons by 65%.




*Biodegradability.* According
      to a study performed at the University of Idaho in 2004, biodiesel tends to
      degrade more rapidly than petroleum diesel.




*Improved
      Safety.* According
      to the U.S. Department of Energy, the flash point, or temperature at which
      fuel
“autocombusts” under pressure, of biodiesel blends increases as the percentage
      of biodiesel increases. Therefore, pure biodiesel or blends of biodiesel with
      petroleum diesel are safer to store, handle, and use than petroleum
      diesel.




*Better
      Lubricity* .
      According to the National Biodiesel Board, the addition of biodiesel, even
      in
      very small quantities, has been shown to provide increases in fuel lubricity
      using a variety of bench scale test methods.




4




*Alternative
      Fuel Performance* .
      According to a 1998 study jointly sponsored by the U.S. Department of
      Agriculture and the U.S. Department of Energy, biodiesel and petroleum diesel
      have very similar energy efficiencies.




**The
      Specialty Chemical and Biodiesel Markets**




We
      believe that oil price trends, global warming, and other environmental
      sustainability issues are rapidly increasing the demand for chemicals and fuels
      derived from renewable resources. Global prices for gasoline, diesel fuels
      and
      chemicals have been rising in the past few years as oil prices continue to
      increase and supply concerns accelerate. Elevated oil prices not only drive
      gasoline and diesel fuel prices higher but also create pressure on a wide range
      of petrochemical derivatives such as nylon (polyamides). In addition,
      technological innovations, profit motive, and the desire to reduce reliance
      on
      oil have moved bio-based chemistry and fuel production to the forefront of
      the
      global marketplace. As a result, we believe the economic, social, and
      environmental benefits of a new generation of bio-refinery products are rapidly
      becoming integrated into global economies.




**People’s
      Republic of China Specialty Chemicals Market**




We
      view
      the People’s Republic of China as the world’s most attractive market for
      commodity and specialty chemicals alike. We believe that the long-term demand
      for commodity and specialty chemicals is likely to grow at a faster rate in
      the
      People’s Republic of China than in North America and Western Europe. As such, we
      believe that the People’s Republic of China will be a very attractive market for
      commodity and specialty chemicals for the foreseeable future. Demand comes
      from
      both rising domestic consumption and the country’s thriving exporters. Demand
      for our specialty chemical products (printing inks, adhesives, resins, and
      intermediary substances) continues to accelerate with the rise in domestic
      consumption, expansion of the People’s Republic of China’s exports and an
      increasing global appetite for non-petroleum based, specialty chemical products.
      Building and construction continues to grow at increasing rates in the People’s
      Republic of China and domestic consumers with more disposable income are
      creating new and increased demand for a wide range of products, many of which
      contain our adhesives, inks, polyamides, resins and related
      products.




In
      addition, the People’s Republic of China’s export manufacturing base continues
      to expand. The global chemical market is experiencing fundamental changes in
      how
      it operates as economic, environmental, and political pressures force the
      industry to rely less on petroleum products. A wave of renewable or biotech
      products is already replacing petroleum-based raw materials in a wide array
      of
      markets such as plastics, fibers, adhesives, resins and more. We believe the
      main drivers behind the acceptance of chemicals derived from renewable resources
      as replacements for petrochemicals are price, performance, and environmental
      sustainability.




Petroleum,
      waste, regulatory, and environmental cost pressures are now evident throughout
      the supply chain for chemical products. As oil prices rise and companies
      continue to disassociate themselves from any chemical in their supply chain
      that
      is recognized as being hazardous or harmful to the environment, petrochemicals
      are being replaced by environmentally pleasing chemistry
      alternatives.




**People’s
      Republic of China Biodiesel Market**




The
      People’s Republic of China biodiesel industry is still very much in its infancy.
      We estimate that the current total production of biodiesel nationwide is only
      approximately 300,000 tons while the total consumption of petroleum diesel
      in
      the People’s Republic of China is in excess of 100 million tons annually. With
      soaring oil prices and worsening pollution, the People’s Republic of China is
      expected to promote low-polluting alternatives to foreign oil and we anticipate
      biodiesel being recognized as a leading near term solution. Further, we believe
      the integration of biodiesel into the fuel supply of the People’s Republic of
      China can be swift and immediate, as biodiesel can be blended at any level
      with
      petroleum diesel or used in its pure form (B100) and biodiesel also make use
      of
      the existing petroleum infrastructure; i.e., tankers, storage depots, and
      filling stations.




5




Today,
      the government of the People’s Republic of China and an increasing number of
      governments around the world are encouraging the introduction of biodiesel
      into
      their transport fuel mix to reduce harmful carbon dioxide emissions, improve
      air
      quality, and lessen dependence on imported fuels.




*People’s
      Republic of China Legislation* .
      Recently, the Standing Committee of the National People’s Congress passed “The
      Renewable Energy Law of the People’s Republic of China”. The legislation aims to
“promote the development and utilization of renewable energy, improve the energy
      structure, diversify energy supplies, safeguard energy security, protect the
      environment and realize the sustainable development of the economy and society.”
This legislation states that fuel retail businesses must begin to include
“biological liquid fuel” in their enterprises or they will suffer imposed
      fines.




*Potential
      for Increase in Diesel Engines.* The
      People’s Republic of China central government introduced an updated Auto Policy
      in 2004, which stipulates that gasoline consumption should decline 15% by 2010.
      The People’s Republic of China’s recent gasoline shortages and the enforcement
      of this new policy may be likely to increase the adoption of diesel cars over
      the next several years.




We
      believe that in comparison to gasoline-powered cars, diesel-powered cars are
      more fuel-efficient, more environmentally friendly, better suited for urban
      driving, safer, and more durable.




**Competition**




*Renewable
      Resource Chemicals*




We
      have
      several major competitors that also produce specialty chemicals from renewable
      resources. For instance, Jiangsu Yonglin Oil & Grease Chemicals Co., Ltd.,
      located in the northern part of Jiangsu Province, produces polyamide resins
      from
      oleic acid. Shanghai Jiangqiao Chemical Factory, a private company located
      in a
      suburb of Shanghai, produces dimer acid from oleic acid. Zhejiang Henghua
      Huagong Co., Ltd., located in the Zhejiang Province, manufactures alkyd resin
      and polyamide resin from oleic acid. Zhejiang Huangyan Resin Chemical Industry
      Co., Ltd., located in Zhejiang Province, manufactures polyamide resin from
      oleic
      acid.




*Biodiesel*




In
      the
      area of biodiesel production, we are aware of the existence of at least three
      main domestic competitors: Gushan Environmental Energy Ltd. with operations
      in
      Handan, Hebei Province, Fuzhou, Fujian Province, and Mianyang, Sichuan Province,
      China Biodiesel International Holding Co., Ltd., located in Longyan, and Fujian
      Province, and Wuxi Huahong Bio-fuel Co., Ltd., located in Wuxi, Jiangsu
      Province.




In
      addition, we may face competition from foreign competitors if such competitors
      choose to export their biodiesel to the People’s Republic of China.




6




**Competitive
      Advantages and Strategy**




*Chemicals*




We
      believe that our product formulations, price points, relationships,
      infrastructure, quality control standards, and reputation provide us with
      competitive advantages. We are currently able to maintain a lower cost structure
      than competitors based in the U.S. and Europe. Furthermore, we believe our
      competitive advantage in the People’s Republic of China is protected by our
      knowledge of government regulations, business practices, and strong
      relationships.




In
      comparison to our competitors in the People’s Republic of China, we believe we
      possess greater technological expertise, marketing knowledge and global
      relationships. We also view our proprietary line of multi-purpose hot-melt
      adhesives as key technological advantages. In addition, we believe domestic
      competitors typically lack the global marketing capability and reputation that
      we currently enjoy and are continuing to strengthen.




*Biodiesel*




We
      believe that we enjoy a material presence in the biodiesel industry in Fuqing
      City, Fujian Province, as there are only a handful of other companies currently
      in the country and the markets are extremely local due to transportation costs,
      some of the potential competitors are still months or even years away from
      actual production. In addition, we believe our industry relationships, contracts
      with feedstock suppliers, cost efficient manufacturing methods and an ability
      to
      sell diesel co-products to our specialty chemical customers place us at a
      competitive advantage.




**Growth
      Strategy**




With
      growing global demand for transport fuels and clean technologies, we are focused
      on increasing our biodiesel production capacity. We plan to initially expand
      our
      existing 311,000 square-foot biodiesel and specialty chemical production
      facility located in the Fujian Province, People’s Republic of China. In
      addition, we are preparing to build several new biodiesel-focused production
      plants in:




·
            Jiangyin,
                a newly developed chemical industry zone near the harbor in the Fujian
                Province (approximately 15 kilometers from our existing plant to
                obtain
                synergies, greater efficiency and cost effectiveness);




·
            in
                the Hebei Province; and/or




·
            in
                the Xinjiang Province.




As
      we
      grow and secure more customers, we will build more plants in strategic locations
      throughout the People’s Republic of China.




To
      this
      end, on December 25, 2006, we signed a contract to purchase land usage rights
      for 50 years for the construction of a new biodiesel factory located in the
      new
      Fuqing Jiangyin Industrial Park in the Fujian Province, People’s Republic of
      China. We broke ground on this new biodiesel facility on December 19, 2007,
      and
      operations at this new facility are being conducted through Fujian Zhongde
      Energy Co., Ltd., a wholly owned subsidiary that was formed on November 5,
      2007.




7




Our
      vision is to be the global market leader for the development and manufacturing
      of energy products and specialty chemicals made from renewable resources.
      Management intends to grow our business by pursuing the following
      strategies:




·
            grow
                capacity and capabilities in line with market demand increases;




·
            enhance
                our technology through innovation, research and study, and obtain
                global
                patent protection;




·
            continue
                to improve operational efficiencies and use of nearly all resource
                by-products;




·
            further
                expand into global markets and diverse industry sectors;
                and




·
            build
                a strong market reputation to foster and capture future growth in
                the
                People’s Republic of China and
                abroad.




We
      also
      plan to expand our existing refining facilities and launch additional plants,
      in
      addition to growing our specialty chemical business lines.




**Existing
      Plant (Fulong Industrial Zone)**




Our
      311,000 square-foot manufacturing facility was originally erected in 1995 with
      a
      core focus on developing and manufacturing high-quality specialty chemical
      products from renewable resources. This ISO9001-certified plant is located
      in
      Fuzhou City’s technology and industrial zone in the Fulong Industrial Zone of
      the People’s Republic of China. We are currently in the process of improving the
      value of our specialty chemical products.




We
      anticipate that expansion of this plant will be completed with minimal
      disruption to our current infrastructure and production schedules.




*Existing
      Production:*




·
            Annual
                Capacity - biodiesel: 10,000 tons or approximately 3 million
                gallons




·
            Annual
                Capacity - specialty chemicals: 18,000
                tons




*After
      Expansion:*




·
            Approximately
                $1,500,000 will be invested by us to install a high performance hot
                melt
                adhesive production line using our proprietary technology.




·
            Engineering
                effort is primarily focused on increasing biodiesel and hot-melt
                adhesive
                production yields while maintaining the current quality standards.




·
            Production
                will maintain current yields while new equipment is installed, minimizing
                production downtime and lost sales.




·
            The
                improvement project has already begun and is expected to be completed
                within three months.




8




**Sales
      and Marketing**




*Specialty
      Chemicals*




To
      date,
      we have developed relationships with current and future potential customers
      primarily through our participation and use of seminars, trade shows, industry
      conferences, websites and direct sales calls. We hope to continue to build
      on
      our success by expanding our sales force in the People’s Republic of China and
      increasing our focus on international markets. As our business expands, we
      intend to develop several sales channels - direct sales, industry-specific
      manufacturer representatives and international strategic partnerships. Our
      sales
      strategy is designed to capitalize on our reputation, current industry trends
      and new market segments that have shown the most promise.




*Biodiesel*




We
      currently plan on concentrating our sales efforts on the local market in the
      People’s Republic of China, as demand is expected to increase steadily over the
      next decade. However, as the business expands, we will evaluate global biodiesel
      prices for opportunities abroad, depending upon shipping and export costs,
      as
      biodiesel can sell for up to 50% to 100% more at the wholesale level overseas
      in
      comparison to the price in the People’s Republic of China. While we do not plan
      to rely on our ability to export biodiesel for our main growth, we do view
      the
      export opportunity as a potential enhancement to our business plan, especially
      given the higher prices that biodiesel can be sold at markets abroad. We are
      currently studying our biodiesel export options.




We
      believe that manufacturing and feedstock cost differences create opportunities
      for import/export markets and cross-border investments. Such activities could
      substantially lower the cost and increase supplies to Europe and the U.S. A
      number of documents published by the International Energy Agency (IEA) discuss
      the development of international markets for biofuels, as there are fairly
      wide
      ranges of feedstock availability and production costs among countries and
      regions.




**Intellectual
      Property**




On
      November 9, 2005, our subsidiary, Fujian Zhongde Technology Co., Ltd., filed
      an
      application (Application No. 200510019790.9) with the State Intellectual
      Property Office of the People’s Republic of China (SIPO) for its process to
      produce biodiesel from monomer acid. On November 14, 2005, SIPO accepted this
      application.




On
      January 20, 2006, Fujian Zhongde Technology Co., Ltd. received preliminary
      patent approval from SIPO for its proprietary biodiesel production
      method.




We
      also
      own a patent for Multi-purpose Polyamide Hot Melt Adhesive and its Production
      Method, China Patent Registration Number ZL00132072.6 and International Patent
      Category #C09J177/00. The patent is valid for twenty years, from December 12,
      2000 to December 11, 2020.




**Customers**




*Biodiesel*




We
      currently sell biodiesel to regional service stations in the People’s Republic
      of China. We believe that the market for biodiesel will expand and can absorb
      an
      increase in supply. Since we began selling biodiesel in December 2005 along
      with
      specialty chemicals, our best selling product has been biodiesel. In fact,
      from
      January 2006 through December 2007, sales of biodiesel accounted for
      approximately 25.89% of our total sales for that time period.




9




*Chemicals*




Our
      specialty chemical products are sold to companies domestically and exported
      globally to companies in Europe, the U.S. and Asia. We believe that high quality
      and low production costs have allowed us to gain successful entry into the
      global market and to diversify our customer base.




For
      the
      twelve-month period from January 1, 2006 through December 31, 2006, we achieved
      consolidated net sales of $13,489,710. During the same time period, our top
      ten
      customers - ranked by the sales amount sold to each customer - contributed
      $7,150,687 in revenues. The following table depicts the top ten customers for
      the twelve-month period from January 1, 2006 through December 31, 2006.




**Name
                of Customer**
            
            **Products
                Sold**
            
            **Sales
                for the Period by Customer**
            
            **%
                of Sales for the Period**1.
            
            
            Fuqing
                Zhongdong Filling Station
            
            
            Biodiesel
            
            $
            1,514,740
            
            
            11.23%2.
            
            
            Fuqing
                Risheng Filling Station
            
            
            Biodiesel
            
            $
            1,347,946
            
            
            9.96%3.
            
            
            Air
                Products and Chemicals (PTE) Ltd.
            
            
            Specialty
                Chemicals
            
            $
            1,148,578
            
            
            8.51%4.
            
            
            HBG
                Explore Corporation
            
            
            Specialty
                Chemicals
            
            $
            902,084
            
            
            6.69%5.
            
            
            Fuqing
                Zhongde Chemical Industrial Co., Ltd.Tianjin
                Branch
            
            
            Specialty
                Chemicals
            
            $
            511,436
            
            
            3.79%6.
            
            
            Micro
                Ink Co., Ltd.
            
            
            Specialty
                Chemicals
            
            $
            437,928
            
            
            3.25%7.
            
            
            Cangnan
                County Shanlian Ink Shop
            
            
            Ink
            
            $
            373,740
            
            
            2.77%8.
            
            
            Dachang
                Resins (Huizhou) Co., Ltd.
            
            
            Specialty
                Chemicals
            
            $
            332,963
            
            
            2.47%9.
            
            
            Advanced
                Chemical Co., Ltd.
            
            
            Specialty
                Chemicals
            
            $
            330,494
            
            
            2.45%10.
            
            
            Fuzhou
                Xinqiang Trading Co., Ltd.
            
            
            Specialty
                Chemicals
            
            $
            250,778
            
            
            1.86%Total
                  (Top 10)
            
            
            
            
            $
            7,150,687
            
            
            52.98%Total
                (Company)
            
            
            
            
            $
            13,489,710
            
            
            100.00%




During
      the twelve-month period from January 1, 2007 through December 31, 2007, we
      had
      consolidated net sales of $21,756,010. During the same time period, our top
      ten
      customers - ranked by the sales amount sold to each customer - contributed
      $14,701,065 in revenues. The following table depicts the top ten customers
      for
      the twelve-month period from January 1, 2007 through December 31,
      2007.




**Name
                of Customer**
            
            **Products
                Sold**
            
            **Sales
                for the Period by Customer**
            
            **%
                of Sales for the Period**1.
            
            
            Fuqing
                Zhongdong Filling Station
            
            
            Biodiesel
            
            $
            3,168,720
            
            
            14.56%2.
            
            
            Fuqing
                Risheng Filling Station
            
            
            Biodiesel
            
            $
            2,604,989
            
            
            11.97%3.
            
            
            Hangzhou
                Yangsheng Chemical Co. Ltd.
            
            
            Specialty
                Chemicals
            
            $
            1,819,939
            
            
            8.37%4.
            
            
            Dachang
                Resins (Huizhou) Co. Ltd.
            
            
            Specialty
                Chemicals
            
            $
            1,647,038
            
            
            7.57%5.
            
            
            Air
                Products and Chemicals (PTE) Ltd.
            
            
            Specialty
                Chemicals
            
            $
            1,349,820
            
            
            6.20%6.
            
            
            Micro
                Ink Co. Ltd.
            
            
            Specialty
                Chemicals
            
            $
            1,196,054
            
            
            5.50%7.
            
            
            Cray
                Valley Resins PVT., Ltd.
            
            
            Specialty
                Chemicals
            
            $
            1,027,040
            
            
            4.72%8.
            
            
            HBG
                Exports Co., Ltd.
            
            
            Specialty
                Chemicals
            
            $
            669,240
            
            
            3.08%9.
            
            
            Shanming
                Youcheng Trading Co., Sha CountyBranch
                Office
            
            
            Specialty
                Chemicals
            
            $
            624,739
            
            
            2.87%10.
            
            
            Fuzhou
                Baisheng Precision Chemical Co., Ltd.
            
            
            Specialty
                Chemicals
            
            $
            593,486
            
            
            2.73%Total
                (Top 10)
            
            
            
            
            $
            14,701,065
            
            
            67.57%Total
                (Company)
            
            
            
            
            $
            21,756,010
            
            
            100.00%




10




**Principal
      Suppliers**




During
      the twelve-month period from January 1, 2007 through December 31, 2007, we
      had
      four feedstock suppliers who supplied more than 5% of our
      feedstocks.




**Name
                of Supplier**
            **%
                of Feedstock Supplied for Period**1.
            Fuqing
                Zhongde Waste Oil Recycling Co. Ltd.
            52.91%2.
            Fujian
                Quanzhou Zhongyuan Chemical Co., Ltd.
            20.45%3.
            Xinjiang
                Guansheng Technology Co., Ltd.
            12.16%4.
            Cangzhou
                Shuanyu Chemical Co., Ltd.
            6.98%




**Regulation**




We
      are
      subject to environmental regulation by both the central government of the
      People’s Republic of China and by local government agencies. Since our
      inception, we have been in compliance with all applicable
      regulations.




Under
      the
      State Environmental Protection Administration of the People’s Republic of China,
      all chemical and biodiesel manufacturing facilities are required to obtain
      a
      Discharge Permit and a Safe Production Permit. We have both of these permits.
      These permits are valid for a period of three years and may be renewed for
      additional periods of three years. In order to renew the Safe Production Permit,
      the subject facility must not have had any accidents during the previous three
      years. In addition, the local environmental protection administration inspects
      waste-water, gas and solid waste discharges and issues an examination report
      each calendar quarter. In order to renew the Discharge Permit, the subject
      facility must have consistently passed the local government inspections for
      the
      prior three years.




In
      addition, we expect the government of the People’s Republic of China to release
      an official standard for biodiesel within one year. We will seek to qualify
      our
      products for the biodiesel standard when it is released. We believe that we
      are
      well positioned to qualify due to our early production of biodiesel as well
      as
      our longstanding history of being in operation since 1995, among other things.




11




**RISK
      FACTORS**




There
      are
      numerous and varied risks, known and unknown, that may prevent us from achieving
      our goals. You should carefully consider the risks described below and the
      other
      information included in this Annual Report, including our financial statements
      and related notes. Our business, financial condition and results of operations
      could be harmed by any of the following risks. If any of the events or
      circumstances described below were to occur, our business, financial condition
      and results of operations could be materially adversely affected. As a result,
      the trading price of our common stock could decline, and investors could lose
      part or all of their investment.




**Risks
      Related to Our Business**




***We
      have a limited history of producing biodiesel, which makes it difficult to
      evaluate our business.***




Currently,
      we have only one manufacturing facility, which began producing biodiesel in
      2005. We began selling biodiesel in December 2005. Our limited operating history
      as a manufacturer and distributor of biodiesel makes it difficult for
      prospective investors to evaluate our business. Therefore, our proposed
      operations are subject to all of the risks inherent in the initial expenses,
      challenges, complications and delays frequently encountered in connection with
      the formation of any new business, as well as those risks that are specific
      to
      the biodiesel industry. Investors should evaluate us in light of the problems
      and uncertainties frequently encountered by companies attempting to develop
      markets for new products, services, and technologies. Despite best efforts,
      we
      may never overcome these obstacles to financial success.




Our
      business is speculative and dependent upon the implementation of our business
      plan, as well as our ability to enter into agreements with third parties for
      the
      provision of necessary feedstock sources and the sale and distribution of our
      biodiesel on terms that will be commercially viable for us. There can be no
      assurance that our efforts will be successful or result in revenue or profit.
      There is no assurance that we will earn significant revenues or that investors
      will not lose their entire investment.




***Unanticipated
      problems in our engineering and construction operations may harm our business
      and viability.***




Our
      future cash flow depends on our ability to timely design, construct and complete
      two or three new biodiesel refineries. If our engineering and construction
      operations are disrupted and/or the economic integrity of these projects is
      threatened for unexpected reasons (including, but not limited to, technical
      difficulties, poor weather conditions, and business interruptions due to
      terrorism or otherwise), our business may experience a substantial setback.
      Because we are at the early stages of constructing a new facility, we are
      particularly vulnerable to events such as these. Prolonged problems may threaten
      the commercial viability of construction of our planned facilities. Moreover,
      the occurrence of significant unforeseen conditions or events in connection
      with
      construction of our new facility may require us to reexamine our business model.
      Any change to our business model may adversely affect our business.




***Our
      results of operations, financial position and business outlook will be highly
      dependent on commodity prices, which are subject to significant volatility
      and
      uncertainty, and the availability of supplies, so our results could fluctuate
      substantially.***




Our
      results are substantially dependent on commodity prices, especially prices
      for
      feedstock, specialty chemicals, biodiesel, petroleum diesel and materials used
      in the construction of our proposed refineries. As a result of the volatility
      of
      the prices for these items, our results may fluctuate substantially and we
      may
      experience periods of declining prices for our products and increasing costs
      for
      our raw materials, which could result in operating losses. Although we may
      attempt to offset a portion of the effects of fluctuations in prices by entering
      into forward contracts to supply biodiesel or purchase feedstock or other items
      or by engaging in transactions involving exchange-traded futures contracts,
      the
      amount and duration of these hedging and other risk mitigation activities may
      vary substantially over time and these activities also involve substantial
      risks.




12




The
      price
      of feedstock is influenced by market demand, weather conditions, animal
      processing and rendering plant decisions and factors affecting crop yields,
      farmer planting decisions and general economic, market and regulatory factors.
      These factors include government policies and subsidies with respect to
      agriculture and international trade, and global and local demand and supply
      as
      well as foreign currency exchange rates compared to Renminbi, which may affect
      our specialty chemical exports and some feedstock imports. The significance
      and
      relative effect of these factors on the price of feedstock is difficult to
      predict. Any event that tends to negatively affect the supply of feedstock,
      such
      as increased demand, foreign exchange rate fluctuation, adverse weather or
      crop
      disease, could increase feedstock prices and potentially harm our business.
      In
      addition, we may also have difficulty, from time to time, in physically sourcing
      feedstock on economical terms due to supply shortages. Such a shortage could
      require us to suspend operations until feedstock is available at economical
      terms, which would have a material adverse effect on our business, results
      of
      operations and financial position. The price we pay for feedstock at a facility
      could increase if an additional multi-feedstock biodiesel production facility
      is
      built in the same general vicinity or if alternative uses are found for lower
      cost feedstock.




Biodiesel
      is a commodity whose price is determined based on the price of petroleum diesel,
      world demand, supply and other factors, all of which are beyond our control.
      World prices for crude oil and biodiesel have fluctuated widely in recent years.
      We expect that prices will continue to fluctuate in the future. Price
      fluctuations will have a significant impact upon our revenue, the return on
      our
      investment in biodiesel refineries and on our general financial condition.
      Price
      fluctuations for biodiesel may also impact the investment market, and our
      ability to raise investor capital. Any future decreases in the prices of
      biodiesel or petroleum diesel fuel may have a material adverse effect on our
      financial condition and future results of operations.




***We
      may be unable to obtain the additional capital required to implement our
      business plan, which will negatively impact our ability to grow our business.***




We
      expect
      that current capital and other existing resources will be sufficient only to
      provide a limited amount of working capital. On their own, the revenues
      generated from the designing and building biodiesel refineries and the proceeds
      from our recently completed private placement of securities is not currently
      sufficient to fully fund operations and planned growth. We will require an
      estimated $11 million of additional capital to continue to expand our business
      beyond the initial phase. If we are unable to obtain required additional
      financing, we may be forced to restrain our growth plans or cut back existing
      operations.




Future
      construction and operation of biodiesel refineries, capital expenditures to
      build and operate our refineries, hiring qualified management and key employees,
      complying with licensing, registration and other requirements, maintaining
      compliance with applicable laws, production and marketing activities,
      administrative requirements, such as salaries, insurance expenses and general
      overhead expenses, legal compliance costs and accounting expenses will all
      require a substantial amount of additional capital and cash flow.




We
      will
      be required to pursue sources of additional capital through various means,
      including joint venture projects, debt financing, equity financing or other
      means. There is no assurance that we will be successful in locating a suitable
      financing transaction in a timely fashion or at all. In addition, there is
      no
      assurance that we will be successful in obtaining the capital we require by
      any
      other means. Future financings through equity investments are likely, and these
      are likely to be dilutive to the existing stockholders, as we issue additional
      shares of common stock to investors in future financing transactions. Also,
      the
      terms of securities we issue in future capital transactions may be more
      favorable for our new investors. Newly issued securities may include
      preferences, superior voting rights, the issuance of warrants or other
      derivative securities, and the issuances of incentive awards under equity
      employee incentive plans, which may have additional dilutive effects. Further,
      we may incur substantial costs in pursuing future capital and/or financing,
      including investment banking fees, legal fees, accounting fees, securities
      law
      compliance fees, printing and distribution expenses and other costs. We may
      also
      be required to recognize non-cash expenses in connection with certain securities
      we may issue, such as convertible notes and warrants, which will adversely
      impact our financial condition.




13




Our
      ability to obtain needed financing may be impaired by such factors as the
      capital markets, both generally and specifically in the biodiesel industry,
      the
      fact that we are a new enterprise without a proven operating history, the
      location of our biodiesel refineries in the People’s Republic of China and the
      price of biodiesel and oil on the commodities market, which will impact the
      amount of available asset-based financing. Furthermore, if petroleum or
      biodiesel prices on the commodities markets decrease, then our revenues will
      likely decrease and decreased revenues may increase our requirements for
      capital. Some of the contractual arrangements governing our operations may
      require us to maintain minimum capital, and we may lose our contract rights
      if
      we do not have the required minimum capital. If the amount of capital we are
      able to raise from financing activities, together with our revenues from
      operations, is not sufficient to satisfy our capital needs, even to the extent
      that we reduce our operations accordingly, we may be required to cease
      operations.




***Our
      reliance upon a limited number of feedstock suppliers may hinder our ability
      to
      be profitable.***




Eight
      feedstock suppliers collectively provide us with approximately 100% of our
      feedstock and our two largest suppliers, Fuqing Zhongde Waste Oil Recycling
      Co.,
      Ltd. and Fujian Quanzhou Zhongyuanlong Chemical Company Ltd., each supplied
      approximately 52.91% and 20.45% of our feedstock, respectively, in 2007. Should
      any of these suppliers terminate their supply relationships with us, sell to
      other buyers, or enter into the biodiesel manufacturing business in competition
      with us, we may be unable to procure sufficient feedstock to satisfy demand
      for
      our end products. Moreover, there is presently a finite number of feedstock
      suppliers within the People’s Republic of China. Thus, as demand for biodiesel
      products continues to increase, feedstock supplies will likely decrease, causing
      the price of feedstock to increase proportionally. If we are unable to obtain
      adequate quantities of feedstock at economically viable prices, our business
      could become unprofitable and investors could suffer a loss with respect to
      their investment in us.




***Price
      declines in petro-based diesel due to alternative energy discoveries or enhanced
      supply of oil could negatively impact demand for our
      biodiesel.***




Our
      biodiesel product is currently sold in the People’s Republic of China as a
      substitute to petro-based diesel As a result, demand for our biodiesel could
      be
      negatively impacted should the Chinese government lower the retail prices of
      fuel, including diesel, due to the discovery of new oil fields or energy
      technology inventions.




14




***Strategic
      relationships upon which we may rely are subject to change, leading to
      uncertainty and a negative impact on our business.***




Our
      ability to identify and enter into commercial arrangements with feedstock
      suppliers, construction contractors, equipment fabricators and customers will
      depend on developing and maintaining close working relationships with industry
      participants. Our success in this area will also depend on our ability to select
      and evaluate suitable projects, as well as to consummate transactions in a
      highly competitive environment. These realities are subject to change and may
      impair our ability to grow.




To
      develop our business, we will use the business relationships of management
      in
      order to form strategic relationships. These relationships may take the form
      of
      joint ventures with other private parties or local government bodies,
      contractual arrangements with other companies, including those that supply
      feedstock that we will use in our business, or minority investments from third
      parties. There can be no assurances that we will be able to establish these
      strategic relationships, or, if established, that the relationships will be
      maintained, particularly if members of the management team leave us. In
      addition, the dynamics of our relationships with strategic partners may require
      us to incur expenses or undertake activities we would not otherwise be inclined
      to incur or undertake in order to fulfill our obligations to these partners
      or
      maintain these relationships. If we do not successfully establish or maintain
      strategic relationships, our business may be negatively impacted.




***A
      large portion of our sales is concentrated in a few major customers; loss of
      any
      of those customers would have a material adverse impact on our
      revenues.***




Our
      five
      largest customers accounted for approximately 32.84% of our sales in 2006 and
      48.67% of our sales in 2007. Our two largest customers accounted for more than
      21.19% of sales in 2006 and for more than 26.53% of sales in 2007. If not
      replaced, the loss of any of these customers could significantly reduce our
      revenues and adversely affect the value of an investment in us.




***We
      are dependent on others for sales of a significant portion of our products,
      which may place us at a competitive disadvantage and reduce profitability.***




We
      have a
      small sales force of our own to market our biodiesel and specialty chemical
      products. As such, we expect to contract with third parties to market and
      distribute some of our specialty chemical products. We have no definitive
      agreements at this time. As a result, we will be somewhat dependent on whomever
      we contract with to market our biodiesel and specialty chemical products. There
      is no assurance that we will be able to enter into contracts with any specialty
      chemical products brokers or distributors on acceptable terms. If any of our
      distributors breaches its contract with us or does not have the ability, for
      financial or other reasons, to market all of the specialty chemicals products
      we
      produce, we will not have any other readily available means to sell our
      products. Our lack of a sufficient sales force and reliance on third parties
      to
      sell and market our products may place us at a competitive disadvantage. Our
      failure to sell all of our biodiesel or specialty chemical products may result
      in less income from sales.




***The
      success of our business depends upon the continuing contributions of our Chief
      Executive Officer and other key personnel and our ability to attract other
      employees to expand our business.***




We
      rely
      heavily on the services of Tai-ming Ou, our Chief Executive Officer, as well
      as
      several other senior management personnel. Loss of the services of any of such
      individuals would adversely impact our operations. In addition, we believe
      that
      our technical personnel represent a significant asset and provide us with a
      competitive advantage over many of our competitors. We believe that our future
      success will depend upon our ability to retain these key employees and our
      ability to attract and retain other skilled financial, engineering, technical
      and managerial personnel. For example, we presently do not have any directors
      or
      officers, other than Gary Zhao, our Chief Financial Officer, who have experience
      with preparing disclosure mandated by U.S. securities laws and we will be
      required to engage such persons, and independent directors, in order to satisfy
      the initial listing standards of the major exchanges on which we may seek to
      list our common stock. In addition, if we fail to engage qualified personnel,
      we
      may be unable to meet our responsibilities as a public reporting company under
      the rules and regulations of the Securities and Exchange Commission. We do
      not
      currently maintain any “key man” life insurance with respect to any of such
      individuals.




15




***We
      plan to grow very rapidly, which will place strains on management and other
      resources.***




We
      plan
      to grow rapidly and significantly expand our operations. This growth will place
      a significant strain on management systems and resources. We will not be able
      to
      implement our business strategy in a rapidly evolving market without an
      effective planning and management process, and, to date, we have not implemented
      sophisticated managerial, operational and financial systems and controls. We
      are
      required to manage multiple relationships with various strategic partners,
      technology licensors, users, advertisers and other third parties. These
      requirements will be strained in the event of rapid growth or in the number
      of
      third party relationships, and our systems, procedures or controls may not
      be
      adequate to support our operations and management may be unable to manage growth
      effectively. To manage our expected growth, we will be required to significantly
      improve or replace existing managerial, financial and operational systems,
      procedures and controls, and to expand, train and manage our growing employee
      base. We will be required to expand our finance, administrative and operations
      staff. We may be unable to complete in a timely manner the improvements to
      our
      systems, procedures and controls necessary to support future operations,
      management may be unable to hire, train, retain, motivate and manage required
      personnel and management may be unable to successfully identify, manage and
      exploit existing and potential market opportunities.




***Increases
      in our energy expenses will negatively impact operating results and financial
      condition.***




Our
      biodiesel and specialty chemical production costs will be dependent on the
      costs
      of the energy sources used to run our refineries. These costs are subject to
      fluctuations and variations in different locales in which we intend to operate,
      and we may not be able to predict or control these costs. If these costs exceed
      our expectations, this may adversely affect our results of operations.




***We
      may be unable to locate suitable properties and obtain the development rights
      needed to build and expand our business.***




Our
      business plan focuses on designing, building and operating biodiesel refineries
      for our own account. Although we were able to successfully enter into an
      agreement to purchase land use rights in Jiang Yin, People’s Republic of China
      to construct our second biodiesel refinery for our own account, our ability
      to
      acquire quality and reliable properties and facilities in the future may be
      unpredictable and we may be required to delay construction of our facilities,
      which will create unanticipated costs and delays. In the event that we are
      not
      successful in identifying and obtaining development rights on suitable
      properties for building and operating biodiesel refineries, our future prospects
      for profitability will likely be substantially limited, and our financial
      condition and resulting operations may be adversely affected.




16




***The
      production, sale and distribution of biodiesel are dependent on the sufficiency
      of necessary infrastructure which may not occur on a timely basis, if at all,
      and our operations could be adversely affected by infrastructure disruptions.***




Substantial
      development of infrastructure will be required by persons and entities outside
      our control for our operations, and the biodiesel industry generally, to grow.
      Areas requiring expansion include, but are not limited to:




·
            adequate
                highway or rail capacity, including sufficient numbers of dedicated
                tanker
                trucks or cars;




·
            sufficient
                storage facilities for feedstock and biodiesel;




·
            increases
                in truck fleets capable of transporting biodiesel within localized
                markets; and




·
            expansion
                of independent filling stations




Substantial
      investments required for these infrastructure changes and expansions may not
      be
      made or they may not be made on a timely basis. Any delay or failure in making
      the changes to or expansion of infrastructure could hurt the demand or prices
      for our products, impede our delivery of products, impose additional costs
      on us
      or otherwise have a material adverse effect on our results of operations or
      financial position. Our business is dependent on the continuing availability
      of
      infrastructure and any infrastructure disruptions could have a material adverse
      effect on our business.




***Our
      commercial success will depend in part on our ability to obtain and maintain
      protection of our intellectual property.***




Our
      success will depend in part on our ability to maintain or obtain and enforce
      patent and other intellectual property protection for our technologies and
      to
      preserve our trade secrets, and to operate without infringing upon the
      proprietary rights of third parties. We have obtained or developed rights to
      one
      patent and one patent application in the People’s Republic of China, and may, in
      the future, seek rights from third parties to other patent applications or
      patented technology. Significant aspects of our technology are currently
      protected as trade secrets, for which we intend to file patent applications
      when
      appropriate. There can be no assurance that a patent will issue from the patent
      application filed or that the scope of any claims granted in any patent will
      provide us with proprietary protection or a competitive advantage. We cannot
      be
      certain that the creators of our technology were the first inventors of
      inventions covered by our patent and patent application or that they were the
      first to file. Accordingly, there can be no assurance that our patent and patent
      application are valid or will afford us with protection against competitors
      with
      similar technology. The failure to obtain or maintain patent or other
      intellectual property protection on the technologies underlying our biodiesel
      refining and specialty chemical manufacturing processes may have a material
      adverse effect on our competitive position and business prospects. It is also
      possible that our technologies may infringe on patents or other intellectual
      property rights owned by others. We may have to alter our products or processes,
      pay licensing fees, defend an infringement action or challenge the validity
      of
      the patents in court, or cease activities altogether because of patent rights
      of
      third parties, thereby causing additional unexpected costs and delays to us.
      There can be no assurance that a license will be available to us, if at all,
      upon terms and conditions acceptable to us or that we will prevail in any
      intellectual property litigation. Intellectual property litigation is costly
      and
      time consuming, and there can be no assurance that we will have sufficient
      resources to pursue such litigation. If we do not obtain a license under such
      intellectual property rights, are found liable for infringement or are not
      able
      to have such patents declared invalid, we may be liable for significant money
      damages and may encounter significant delays in bringing products and services
      to market.




***We
      face significant competition, which may negatively impact our future growth.***




We
      face
      competition from other producers of biodiesel with respect to the procurement
      of
      feedstock, obtaining suitable properties for the construction of biodiesel
      refineries and selling biodiesel and related products. Such competition could
      be
      intense thus driving up the cost of feedstock and driving down the price for
      our
      products. Competition will likely increase as prices of energy on the
      commodities market, including petroleum and biodiesel, rise, as they have in
      recent years. Additionally, new companies are constantly entering the market,
      thus increasing the competition. Increased competition could also have a
      negative impact on our ability to obtain additional capital from investors.
      Larger foreign owned and domestic companies that have been engaged in this
      business for substantially longer periods of time may have access to greater
      resources. These companies may have greater success in the recruitment and
      retention of qualified employees, as well as in conducting their own refining
      and fuel marketing operations, which may give them a competitive advantage.
      In
      addition, actual or potential competitors may be strengthened through the
      acquisition of additional assets and interests. If we are unable to compete
      effectively or adequately respond to competitive pressures, this may materially
      adversely affect our results of operation and financial condition.




17




***Our
      business is subject to local legal, political, and economic factors that are
      beyond our control.***




We
      believe that the current political environment for construction of biodiesel
      refineries is sufficiently supportive to enable us to plan and implement our
      operations. However, there are risks that conditions will change in an adverse
      manner. These risks include, but are not limited to, laws or policies affecting
      mandates or incentives to promote the use of biodiesel, environmental issues,
      land use, air emissions, water use, zoning, workplace safety, restrictions
      imposed on the biodiesel industry such as restrictions on production,
      substantial changes in product quality standards, restrictions on feedstock
      supply, price controls and export controls. Any changes in biodiesel, financial
      incentives, investment regulations, policies or a shift in political attitudes
      are beyond our control and may adversely affect our business and future
      financial results.




***Our
      business will suffer if we cannot obtain or maintain necessary permits or
      licenses.***




Our
      operations require licenses, permits and in some cases renewals of these
      licenses and permits from various governmental authorities within the People’s
      Republic of China. We believe that we either hold or will be able to obtain
      all
      necessary licenses and permits to carry on the activities that we contemplate,
      and that we will be able to obtain the licenses and permits necessary for our
      future biodiesel refineries and operations. However, our ability to obtain,
      sustain, or renew such licenses and permits on acceptable terms are subject
      to
      change, as, among other things, the regulations and policies of applicable
      governmental authorities may change. Our inability to obtain, loss of, or denial
      of, extension as to any of these licenses or permits may have a material adverse
      effect on our operations and financial condition.




***Penalties
      we may incur could impair our business.***




Failure
      to comply with government regulations could subject us to civil and criminal
      penalties, require us to forfeit property rights and may affect the value of
      our
      assets. We may also be required to take corrective actions, including, but
      not
      limited to, installing additional equipment, which could require us to make
      substantial capital expenditures. We could also be required to indemnify our
      employees in connection with any expenses or liabilities that they may incur
      individually in connection with regulatory action against them. These could
      result in a material adverse effect on our prospects, business, financial
      condition and our results of operation.




***We
      are subject to financial reporting and other requirements for which our
      accounting, internal audit and other management systems and resources may not
      be
      adequately prepared.***




We
      are
      subject to reporting and other obligations under the Securities Exchange Act
      of
      1934, as amended. Under these rules, among other things, we must evaluate the
      effectiveness of our internal controls over financial reporting. These reporting
      and other obligations place significant demands on our management,
      administrative, operational, internal audit and accounting resources. We
      anticipate that as our business grows we will need to upgrade our systems;
      implement additional financial and management controls, reporting systems and
      procedures; implement an internal audit function; and hire additional
      accounting, internal audit and finance staff. If we are unable to accomplish
      these objectives in a timely and effective fashion, our ability to comply with
      our financial reporting requirements and other rules that apply to reporting
      companies could be impaired. Any failure to maintain effective internal controls
      could have a material adverse effect on our business, operating results and
      stock price.




18




***Our
      operations are susceptible to interruption from natural disasters.***




Our
      refineries are located in Fuqing City, Fujian Province of the People’s Republic
      of China. Historically, this region has suffered damage from typhoons or other
      natural disasters. Should any of these natural events occur, it would likely
      slow down our new refinery development and construction plans, thus adversely
      impacting current operations and future growth plans.




**Risks
      Related to Doing Business in the People’s Republic of
      China**




***We
      face the risk that changes in the policies of the government of the People’s
      Republic of China could have a significant impact upon our business and
      profitability.***




The
      economy of the People’s Republic of China is in a transition from a planned
      economy to a market oriented economy subject to five-year and annual plans
      adopted by the government that set national economic development goals. Policies
      of the People’s Republic of China can have significant effects on the economic
      conditions of the People’s Republic of China. The government of the People’s
      Republic of China has confirmed that economic development will follow the model
      of a market economy. Under this direction, we believe that the People’s Republic
      of China will continue to strengthen its economic and trading relationships
      with
      foreign countries and business development in the People’s Republic of China
      will follow market forces. While we believe that this trend will continue,
      there
      can be no assurance that this will be the case. A change in policies by the
      government of the People’s Republic of China could adversely affect our
      interests by, among other factors:




·
            changes
                in laws,




·
            imposition
                of new regulations or the interpretations of such regulations,




·
            confiscatory
                taxation,




·
            restrictions
                on currency conversion, imports or sources of supplies, or




·
            the
                expropriation or nationalization of private enterprises.




Although
      the government of the People’s Republic of China has been pursuing economic
      reform policies for more than two decades, there is no assurance that the
      government will continue to pursue such policies or that such policies may
      not
      be significantly altered, especially in the event of a change in leadership,
      social or political disruption, or other circumstances affecting political,
      economic and social life in the People’s Republic of China.




19




***The
      laws and regulations of the People’s Republic of China governing our current
      business operations are sometimes vague and uncertain. Any changes in these
      laws
      and regulations may have a material and adverse effect on our
      business.***




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




***A
      slowdown or other adverse developments in the economy of the People’s Republic
      of China may materially and adversely affect our customers, demand for our
      products and our business.***




Much
      of
      our operations are conducted in the People’s Republic of China. In the fiscal
      year 2007, approximately 67.54% of our revenue was generated from sales in
      the
      People’s Republic of China. Although the economy of the People’s Republic of
      China has grown significantly in recent years, we cannot assure investors that
      such growth will continue. The renewable energy industry in the People’s
      Republic of China is relatively new and growing, and we therefore do not know
      how sensitive it is to a slowdown in economic growth or other adverse changes
      in
      the economy of the People’s Republic of China. A slowdown in overall economic
      growth, an economic downturn or recession or other adverse economic developments
      in the People’s Republic of China could materially reduce the demand for our
      products and materially and adversely affect our business.




***Inflation
      in the People’s Republic of China could negatively affect our profitability and
      growth.***




While
      the
      People’s Republic of China economy has experienced rapid growth, such growth has
      been uneven among various sectors of the economy and in different geographical
      areas of the country. Rapid economic growth can lead to growth in the money
      supply and rising inflation. If prices for our products rise at a rate that
      is
      insufficient to compensate for the rise in the costs of supplies, it may have
      an
      adverse effect on profitability. In order to control inflation in the past,
      the
      People’s Republic of China has imposed controls on bank credits, limits on loans
      for fixed assets and restrictions on state bank lending. Such an austere policy
      can lead to a slowing of economic growth. On October 28, 2004, the People’s Bank
      of China, the People’s Republic of China’s central bank, raised interest rates
      for the first time in nearly a decade and indicated in a statement that the
      measure was prompted by inflationary concerns. Repeated rises in interest rates
      by the central bank would likely slow economic activity in the People’s Republic
      of China, which could, in turn, materially increase our costs and also reduce
      demand for our products.




***Governmental
      control of currency conversion may affect the value of an investment in
      us.***




The
      government of the People’s Republic of China imposes controls on the
      convertibility of Renminbi into foreign currencies and, in certain cases, the
      remittance of currency out of the People’s Republic of China. In 2007,
      approximately 67.54 % of our revenues was received in Renminbi, which is
      currently not a freely convertible currency. Shortages in the availability
      of
      foreign currency may restrict our ability to remit sufficient foreign currency
      to pay dividends, or otherwise satisfy foreign currency dominated obligations.
      Under existing People’s Republic of China foreign exchange regulations, payments
      of current account items, including profit distributions, interest payments
      and
      expenditures from the transaction, can be made in foreign currencies without
      prior approval from the People’s Republic of China State Administration of
      Foreign Exchange by complying with certain procedural requirements. However,
      approval from appropriate governmental authorities is required whenever Renminbi
      is to be converted into foreign currency and remitted out of the People’s
      Republic of China to pay capital expenses, such as the repayment of bank loans
      denominated in foreign currencies.




20




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




***The
      fluctuation of the Renminbi may materially and adversely affect investments
      in
      us.***




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




On
      July
      21, 2005, the People’s Republic of China changed its decade-old policy of
      pegging the value of the Renminbi to the U.S. dollar. Under the new policy,
      the
      Renminbi is permitted to fluctuate within a narrow and managed band against
      a
      basket of certain foreign currencies. This change in policy has resulted in
      an
      approximately 12% appreciation of the Renminbi against the U.S. dollar as of
      December 31, 2007. While the international reaction to the Renminbi revaluation
      has generally been positive, pressure remains on the People’s Republic of China
      to adopt an even more flexible currency policy, which could result in a further
      and more significant appreciation of the Renminbi against the U.S.
      dollar.




Recent
      People’s Republic of China State Administration of Foreign Exchange (“SAFE”)
      Regulations regarding offshore financing activities by residents of the People’s
      Republic of China have undergone a number of changes that may increase the
      administrative burden we face. The failure by our stockholders who are residents
      of the People’s Republic of China to make any required applications and filings
      pursuant to such regulations may prevent us from being able to distribute
      profits and could expose us and our People’s Republic of China resident
      stockholders to liability under the laws of the People’s Republic of
      China.




SAFE
      issued a public notice (the “October Notice”) effective November 1, 2005 that
      requires registration with SAFE by the People’s Republic of China resident
      stockholders of any foreign holding company of a People’s Republic of China
      entity. Without registration, the People’s Republic of China entity cannot remit
      any of its profits out of the People’s Republic of China as dividends or
      otherwise. However, it is uncertain how the October Notice will be interpreted
      or implemented regarding specific documentation requirements for a foreign
      holding company formed prior to the effective date of the October Notice, such
      as in our case. While our local counsel has advised us that only the People’s
      Republic of China resident stockholders who receive the ownership of the foreign
      holding company in exchange for ownership in the People’s Republic of China
      operating company are subject to the October Notice, there can be no assurance
      that SAFE will not require our other People’s Republic of China resident
      stockholders to make disclosure. In addition, the October Notice requires that
      any monies remitted to residents of the People’s Republic of China outside of
      the People’s Republic of China be returned within 180 days. However, there is no
      indication of what the penalty will be for failure to comply or if stockholder
      non-compliance will be considered to be a violation of the October Notice by
      us
      or otherwise affect us.




21




In
      the
      event that the proper procedures are not followed under the SAFE October Notice,
      we could lose the ability to remit monies outside of the People’s Republic of
      China and would therefore be unable to pay dividends or make other
      distributions. Our People’s Republic of China resident stockholders could be
      subject to fines, other sanctions and even criminal liabilities under the
      People’s Republic of China Foreign Exchange Administrative Regulations
      promulgated January 29, 1996, as amended.




***Our
      current tax status is uncertain, exposing us to potential
      liability.***




Pursuant
      to the relevant laws and regulations in the People’s Republic of China, Fujian
      Zhongde Technology Co., Ltd., as a wholly-owned foreign enterprise (“WOFE”) in
      the People’s Republic of China, is entitled to an exemption from the People’s
      Republic of China enterprise income tax in 2007 and 50% relief from the People’s
      Republic of China enterprise income tax for the next three years beginning
      in
      2008. However, since our new subsidiary, Fujian Zhongde Energy Co., Ltd., is
      a
      newly registered WOFE, the corporate income tax status for this new subsidiary
      is not clear at this point.




Further,
      there can be no assurance that the central government will not audit our
      previous tax returns and payments and require that we pay additional taxes
      and
      penalties in the future that could materially and adversely affect our business
      and financial condition.




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




A
      renewed
      outbreak of SARS or another widespread public health problem in the People’s
      Republic of China, where much of our revenue is derived, could have an adverse
      effect on our operations. Our operations may be impacted by a number of
      health-related factors, including quarantines or closures of some of our offices
      that would adversely disrupt our operations. Any of the foregoing events or
      other unforeseen consequences of public health problems could adversely affect
      our operations.




***Because
      our principal assets are located outside of the U.S. and all of our directors
      and officers reside outside of the U.S., it may be difficult for investors
      to
      enforce their rights based on U.S. federal securities laws against us and our
      officers and directors in the U.S. or to enforce a U.S. court judgment against
      us or them in the People’s Republic of China.***




All
      of
      our directors and officers reside outside of the U.S. In addition, Fujian
      Zhongde Technology Co., Ltd. and Fujian Zhongde Energy Co., Ltd., our operating
      subsidiaries, are located in the People’s Republic of China and substantially
      all of their assets are located outside of the U.S. It may therefore be
      difficult or impossible for investors in the U.S. to enforce their legal rights
      based on the civil liability provisions of the U.S. federal securities laws
      against us in the courts of either the U.S. or the People’s Republic of China
      and, even if civil judgments are obtained in U.S. courts, to enforce such
      judgments in the People’s Republic of China courts. Further, it is unclear if
      extradition treaties now in effect between the U.S. and the People’s Republic of
      China would permit effective enforcement against us or our officers and
      directors of criminal penalties, under the U.S. federal securities laws or
      otherwise.




22




***We
      may have difficulty establishing adequate management, legal and financial
      controls in the People’s Republic of China.***




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




**Risks
      Relating to Our Organization**




***Our
      executive officers beneficially own a substantial percentage of our outstanding
      common stock, which gives them control over certain major decisions on which
      our
      stockholders may vote, which may discourage an acquisition of
      us.***




Tai-ming
      Ou, our Chief Executive Officer, beneficially owns, in the aggregate,
      approximately 27% of our outstanding common stock and our directors and
      executive officers as a group collectively own approximately 34% of our
      outstanding shares. The interests of management may differ from the interests
      of
      other stockholders. As a result, our executive management will have the right
      and ability to exert significant influence over all corporate actions requiring
      stockholder approval, irrespective of how our other stockholders may vote,
      including the following actions:




·
            electing
                or defeating the election of directors;




·
            amending
                or preventing amendment of our Certificate of Incorporation or By-laws;




·
            effecting
                or preventing a merger, sale of assets or other corporate transaction;
                and




·
            the
                outcome of any other matter submitted to the stockholders for vote.




Our
      management’s stock ownership may discourage a potential acquirer from seeking to
      acquire shares of our common stock or otherwise attempting to obtain control
      of
      us, which in turn could reduce our stock price or prevent our stockholders
      from
      realizing a premium over our stock price.




***Because
      we became public by means of a reverse merger, we may not be able to attract
      the
      attention of major brokerage firms.***




There
      may
      be risks associated with us becoming public through a reverse merger.
      Specifically, securities analysts of major brokerage firms may not provide
      coverage of us because there is no incentive to brokerage firms to recommend
      the
      purchase of our common stock. No assurance can be given that brokerage firms
      will, in the future, want to conduct any secondary offerings on our
      behalf.




23




**Risks
      Relating to Our Common Stock**




***Our
      stock price may be volatile, so investors could lose their
      investment.***




The
      market price of our common stock is likely to be highly volatile and could
      fluctuate widely in price in response to various factors, many of which are
      beyond our control, including the following:




·
            technological
                innovations or new products and services by us or our competitors;




·
            additions
                or departures of key personnel;




·
            limited
                “public float” in the hands of a small number of persons whose sales or
                lack of sales could result in positive or negative pricing pressure
                on the
                market price for the common stock;




·
            sales
                of the common stock;




·
            our
                ability to execute our business plan;




·
            operating
                results that fall below expectations;




·
            industry
                developments;




·
            economic
                and other external factors; and




·
            period-to-period
                fluctuations in our financial results.




In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are unrelated to the operating performance
      of
      particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.




***There
      may be a limited market for our securities and we may fail to qualify for a
      listing on a national securities exchange such as the NASDAQ Stock Market or
      the
      American Stock Exchange.***




Although
      we plan on applying for listing of our common stock on a national stock exchange
      such as the NASDAQ Stock Market or the American Stock Exchange once we meet
      the
      qualifications, there can be no assurance that our initial listing application
      will be granted, when the required listing criteria will be met or when, or
      if,
      our application will be granted. Thereafter, there can be no assurance that
      trading of our common stock on such a market will be sustained or desirable.
      In
      the event that our common stock fails to qualify for initial or continued
      inclusion, our common stock could thereafter only be quoted on the OTC Bulletin
      Board or in what are commonly referred to as the “pink sheets.” Under such
      circumstances, a stockholder may find it more difficult to dispose of, or to
      obtain accurate quotations, for our common stock, and our common stock would
      become substantially less attractive to certain purchasers, such as financial
      institutions, hedge funds, and large investors.




Furthermore,
      for companies whose securities are quoted on the OTC Bulletin Board, it is
      more
      difficult to obtain coverage for significant news events because major wire
      services generally do not publish press releases about such companies, and
      to
      obtain needed capital.




***Our
      common stock is currently deemed a “penny stock,” which could make it more
      difficult for investors to sell their shares.***




Our
      common stock is currently subject to the “penny stock” rules adopted under
      section 15(g) of the Securities Exchange Act of 1934, as amended. The penny
      stock rules apply to companies whose common stock is not listed on a national
      securities exchange and trades at less than $5.00 per share or that have
      tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
      operating for three or more years). These rules require, among other things,
      that brokers who trade penny stock to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
      provide investors with certain information concerning trading in the security,
      including a risk disclosure document and quote information under certain
      circumstances. Many brokers have decided not to trade penny stocks because
      of
      the requirements of the penny stock rules and, as a result, the number of
      broker-dealers willing to act as market makers in such securities is limited.
      If
      we remain subject to the penny stock rules for any significant period, it could
      have an adverse effect on the market, if any, for our securities. Because our
      securities are currently subject to the penny stock rules, stockholders will
      find it more difficult to dispose of our securities.




24




***Provisions
      of our Certificate of Incorporation and Delaware law could deter a change of
      control, which could discourage or delay offers to acquire
      us.***




Provisions
      of our Certificate of Incorporation and Delaware law may make it more difficult
      for someone to acquire control of us or for our stockholders to remove existing
      management, and might discourage a third party from offering to acquire us,
      even
      if a change in control or in management would be beneficial to stockholders.
      For
      example, our Certificate of Incorporation allows us to issue shares of preferred
      stock without any vote or further action by stockholders.




***Our
      Certificate of Incorporation authorizes the board to create new series of
      preferred stock without further approval by stockholders, which could adversely
      affect the rights of the holders of common stock.***




Pursuant
      to our Certificate of Incorporation, our Board of Directors has the authority
      to
      fix and determine the relative rights and preferences of our preferred stock.
      The Board of Directors also has the authority to issue preferred stock without
      further stockholder approval. As a result, the Board of Directors could
      authorize the issuance of a series of preferred stock that grants holders a
      liquidation preference, the right to receive dividend payments before dividends
      are distributed to the holders of common stock and the right to have their
      shares redeemed by us, together with a premium, prior to the any redemption
      of
      our common stock. In addition, our Board of Directors could authorize the
      issuance of a series of preferred stock that has greater voting power than
      the
      common stock or that is convertible into common stock, which could decrease
      the
      relative voting power of our common stock or result in dilution to our existing
      stockholders.




***Volatility
      in our common stock price may subject us to securities litigation.***




The
      market for our common stock is characterized by significant price volatility
      when compared to seasoned issuers. We expect that our share price will continue
      to be more volatile than a seasoned issuer for the indefinite future. In the
      past, plaintiffs have often initiated securities class action litigation against
      a company following periods of volatility in the market price of its securities.
      We may, in the future, be the target of similar litigation. Securities
      litigation could result in substantial costs and liabilities and could divert
      management’s attention and resources.




***The
      elimination of monetary liability against our directors under Delaware law
      and
      the existence of indemnification rights to our directors may result in
      substantial expenditures by us and may discourage lawsuits against our
      directors.***




Our
      Certificate of Incorporation provides that, to the fullest extent that the
      General Corporation Law of the State of Delaware permits, none of our directors
      shall be personally liable to either us or our stockholders for any breach
      in
      his or her fiduciary duties as a director. This provision creates an
      indemnification obligation by us that could ultimately cause us to incur
      substantial expenditures to cover the cost of settlement or damage awards
      against our directors. This provision and resultant costs may also discourage
      us
      from bringing a lawsuit against directors for breaches of their fiduciary duties
      and may similarly discourage the filing of derivative litigation by our
      stockholders against our directors even though such actions, if successful,
      might otherwise benefit us and our stockholders.




25




**Item
                2.**
            **Description
                of Property.**




Our
      Chinese headquarters are currently located in approximately 573 square meters
      of
      office space at Fulong Industry Zone, Longtian Town, Fuqing City, Fujian, China
      35013. We own a 311,000 square-foot manufacturing facility located at the same
      location. In the opinion of our management, this facility is adequately covered
      by insurance. In the People’s Republic of China, the ownership of land belongs
      to the government of the People’s Republic of China, and private entities and
      individuals can only acquire land use rights for a certain period of time.
      Our
      land use rights for our facility started on June 1, 1998 and expire on May
      31,
      2047.




On
      December 25, 2006, we signed a contract with Fuzhou City Jiangyin Industry
      District Management Committee to purchase land usage rights for 50 years at
      a
      purchase price of 18,549,000 Renminbi, or approximately $2.5 million, for the
      construction of a new biodiesel plant (Fujian Zhongde Energy Co., Ltd.) with
      annual production capacity of 100,000 tons or 30 million gallons. 50% of the
      purchase price was paid within 10 days of signing, with an additional 30% being
      due on the 3 month anniversary of the agreement and the remaining 20% due on
      the
      6 month anniversary of the agreement. We plan to use this land usage right
      to
      construct a new biodiesel factory located in the new Fuqing Jiangyin Industrial
      Park in the Fujian Province of the People’s Republic of China. The new factory
      site is approximately 50 miles from Fuzhou, the Capital City of Fujian Province,
      and 15 miles from our existing facility. We already broke the ground on the
      new
      biodiesel facility on December 19, 2007. Work on this facility will last
      approximately 10 months and the total investment will cost $15 million,
      including $2.5 million for the land usage rights for 50 years, $8.5 million
      for
      buildings, equipment, and installation, and $4 million for working. We expect
      the construction to be completed by the end of 2008.




We
      rent
      office space at 17 Candlewood Drive, West Windsor, New Jersey, for 16,000
      Renminbi per month (approximately $2,070), pursuant to an Office Rental
      Agreement, dated February 28, 2007, with Sonia Ma. Pursuant to the terms of
      the
      Office Rental Agreement, Ms. Ma also provides us with office furniture, computer
      equipment, telephone service and voice mail at cost. The term of the Office
      Rental Agreement is for one year with an option to renew upon the mutual
      agreement of both parties.




**Item
                3.**
            **Legal
                Proceedings.**




We
      are
      not presently a party to any pending litigation nor, to the knowledge of our
      management, is any litigation threatened against us.




**Item
                4.**
            **Submission
                o****f
                Matters to a Vote of Security
                Holders.**




No
      matters were submitted during the fourth quarter of 2007 to a vote of our
      stockholders.




**PART
      II**




**Item
                5.**
            **Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity
                Securities.**




Our
      common stock has been quoted on the OTC Bulletin Board since July 6, 2006.
      From
      July 6, 2006 through October 22, 2006, our trading symbol was HXPL.OB and since
      October 23, 2006 our trading symbol has been CCGY.OB. Prior to October 23,
      2006,
      there was no active market for our common stock. The following table sets forth
      the high and low bid prices for our common stock for the periods indicated,
      as
      reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices,
      without retail mark-up, mark-down or commission, and may not represent actual
      transactions.




26




High
            
            LowFiscal
                Year 2006Fourth
                Quarter (from October 23, 2006)
            
            $
            2.70
            
            $
            0.22Fiscal
                Year 2007First
                Quarter
            
            $
            3.10
            
            $
            1.85Second
                Quarter
            
            $
            2.74
            
            $
            1.35Third
                Quarter
            
            $
            2.25
            
            $
            1.10Fourth
                Quarter
            
            $
            2.81
            
            $
            1.60Fiscal
                Year 2008First
                Quarter (through March 10, 2008)
            
            $
            2.26
            
            $
            1.60





The
      last
      reported sales price of our common stock on the OTC Bulletin Board on March
      10,
      2008 was $1.60 per share. As of March 10, 2008, there were approximately 102
      holders of record of our common stock.




We
      have
      not declared or paid any cash dividends on our common stock and do not
      anticipate declaring or paying any cash dividends in the foreseeable future.
      We
      currently expect to retain future earnings, if any, for the development of
      our
      business. Dividends may be paid on our common stock only if and when declared
      by
      our Board of Directors.




**Item
                6.**
            **Management’s
                Discussion and Analysis or Plan of
                Operation.**




*The
      following discussion should be read together with the information contained
      in
      the consolidated financial statements, pro forma financial statements and the
      related notes included elsewhere in this annual report.* *The
      following discussion highlights the principal factors that have affected our
      financial condition and results of operations as well as our liquidity and
      capital resources for the periods described. This discussion contains
      forward-looking statements. Please see “Forward-Looking Statements” and “Risk
      factors” for a discussion of the uncertainties, risks and assumptions associated
      with these forward-looking statements. The operating results for the periods
      presented were not significantly affected by inflation.*




**Company
      Overview**




We
      were
      originally incorporated in Delaware under the name “Hurley Exploration Inc.” on
      November 12, 2004 in order to conduct mineral exploration activities. On October
      13, 2006, in anticipation of our acquisition of China Clean Energy Resources,
      Ltd., we abandoned this enterprise and changed our name to China Clean Energy
      Inc. On October 24, 2006, we acquired China Clean Energy Resources, Ltd.,
      pursuant to the terms of a Share Exchange Agreement. This transaction was
      accounted for as a reverse acquisition (recapitalization), with China Clean
      Energy Resources, Ltd. deemed to be the accounting acquirer and us as the legal
      acquirer. Accordingly, the financial statements are those of China Clean Energy
      Resources, Ltd. and its subsidiary up until October 24, 2006. The basis of
      the
      assets, liabilities and retained earnings of China Clean Energy Resources,
      Ltd.,
      were carried over in the recapitalization. Upon the closing of this transaction,
      we became a Chinese renewable resource-based biodiesel and specialty chemicals
      manufacturer/distributor.




27




China
      Clean Energy Resources, Ltd. was incorporated in the British Virgin Islands
      on
      February 13, 2006, for the purpose of holding a 100% interest in Fujian Zhongde
      Technology Co., Ltd. As such, China Clean Energy Resources, Ltd. does not
      conduct any substantive operations of its own, but rather conducts its primary
      business operations through Fujian Zhongde Technology Co., Ltd., a Chinese
      company that was incorporated in the Province of Fujian, China on July 10,
      1995.




**Year** **Ended** **December
      31** **,
      2007 Compared to the** **Year** **Ended** **December
      31** **,
      200** **6** **.**




*Revenues.* During
      the year ended December 31, 2007, we had net sales of $21,756,010 (26.54% from
      biodiesel sales and 73.46% from specialty chemicals sales), as compared to
      net
      sales of $13,489,710 (24.89% from biodiesel sales and 75.11% from specialty
      chemical sales) during the year ended December 31, 2006. This was an increase
      of
      approximately 61.13%. This increase was attributable to increased production
      capacity in both the biodiesel and specialty chemical product lines, increased
      sales volume, increased sales prices for our biodiesel and exported specialty
      chemical products and an increase in our sales force.




*Gross
      Profit.* The cost
      of goods sold, which consists of direct labor, feedstock, direct materials,
      overhead and product costs, and depreciation of production facilities, was
      $15,882,799 for the year ended December 31, 2007, as compared to cost of goods
      sold of $9,699,164 for the year ended December 31, 2006. We had a gross profit
      of $5,873,211 for the year ended December 31, 2007, as compared to a gross
      profit of $3,800,186 for the year ended December 31, 2006, representing gross
      margins of approximately 27.00% and 28.15%, respectively. The increase in gross
      profit is the result of a significant increase in the selling price and sales
      volume of our biodiesel and specialty chemical export business. The decrease
      in
      our gross margin percentage is due to a decrease in Chinese government export
      tax rebates from 13% to 5% effective on July 1, 2007, for our exported specialty
      chemical products. Although all of our international customers had agreed to
      an
      average 8% price increase on our exported specialty chemical products, the
      full
      price increase only became effective in August 2007. Additionally, our feedstock
      prices have been stable over the past two years. Our feedstock costs (including
      transportation costs) ranged between $304 and $387 per ton in 2006 and between
      $307 and $397 per ton in 2007.




*Selling
      Expenses.* Selling
      expenses, which include advertising and promotion, freight charges, exporting
      expenses, wages and salaries totaled $695,007 for the year ended December 31,
      2007, as compared to $411,850 for the year ended December 31, 2006. This was
      an
      increase of approximately 68.75%. The increase is primarily due to the increase
      in our special chemical product exports (approximately $1,920,240 and $1,454,781
      in the year ended December 31, 2007 and the year ended December 31, 2006,
      respectively), related export and freight charges, and an expanded sales team.
      We believe that our cost of selling will continue to increase slightly as sales
      continue to grow and our specialty chemical export business continues to
      grow.




*General
      and Administrative Expenses.* General
      and administrative expenses totaled $1,456,985 for the year ended December
      31,
      2007, as compared to $529,377 for the year ended December 31, 2006. This was
      an
      increase of approximately 175.23%. This increase is primarily due to an increase
      in auditing, legal, investor relations, and financial advisory fees, hiring
      of
      new talent, and filings with the Securities and Exchange Commission, as compared
      to our limited expenditures as a private company for the most part of the year
      ended December 31, 2006.




*Net
      Income.* We had a
      net income of $3,359,894 for the year ended December 31, 2007, as compared
      to a
      net income of $1,269,860 for the year ended December 31, 2006. This was an
      increase of approximately 164.59%. This increase in net income was due primarily
      to the $8,266,300 increase in revenues and the $802,694 decrease in income
      taxes
      off set by increases in cost of goods sold, selling expenses, and general and
      administrative expenses of $6,183,635, $283,157 and $927,608, respectively.
      On
      March 9, 2007, our principal subsidiary, Fujian Zhongde Technology Co., Ltd.,
      received official approval from the Chinese Tax authority for a corporate income
      tax exemption in 2007 and an income tax reduction with a reduced income tax
      rate
      of 12%, as opposed to the standard tax rate of 25% between January 1, 2008
      and
      December 31, 2010. This came as a result of our WOFE (Wholly Owned Foreign
      Enterprise) status approval.




28




**Liquidity
      and Capital Resources**




*General*




As
      of
      December 31, 2007 and December 31, 2006, we had cash and cash equivalents of
      $1,133,555 and $2,241,712, respectively. The decrease in cash and cash
      equivalents was primarily due to our cost of $2,467,388 to secure land usage
      rights for our Jiangyin plant, $759,519 used for land improvements in connection
      with the Jiangyin Plant, and an $1,705,934 increase in our accounts receivables.
      This increase in account receivables was the result of an increase in specialty
      chemical exports.




The
      $2,467,388 used to purchase the land usage rights at Jiangyin industrial park,
      and the $759,519 land improvement costs are associated with our plan to build
      a
      second biodiesel refinery with an annual capacity of 100,000 tons, with
      construction having begun on December 19, 2007. Construction is expected to
      take
      approximately 10 months.




The
      $2,115,707 net cash proceeds provided by operating activities during the year
      ended December 31, 2007 was primarily due to $3,359,894 in net income, $721,509
      of depreciation and amortization expenses and a $394,961 increase in accounts
      payable and accrued liabilities. This was offset by a $1,705,934 increase in
      accounts receivable, and a $419,545 decrease in inventory.




The
      $183,236 of net cash provided by financing activities during the year ended
      December 31, 2007 was primarily due to a $189,655 increase in bank
      indebtedness.




We
      have
      historically met our liquidity and capital requirements from a variety of
      sources. These included internally generated cash, short-term borrowings from
      both related parties and financial institutions, and sales of common
      stock.




At
      the
      moment, we have only one refinery which produces both specialty chemicals and
      biodiesel products. The production capacities for specialty chemicals and
      biodiesel are at 18,000 tons per annum and 10,000 tons per annum, respectively.




On
      December 25, 2006, we entered into a contract to acquire land usage rights
      for
      50 years in Jiangyin Industrial Park, People’s Republic of China. The total
      purchase price for these land usage rights was approximately $2,500,000. 50%
      of
      the purchase price was paid in December of 2006 and January of 2007, 30% was
      paid in March of 2007, and 20% was paid in December of 2007. The contract also
      contemplated that a new affiliated company of ours will build a biodiesel
      facility with 100,000 tons per year of biodiesel production capacity. The new
      refinery will cost approximately $15,000,000. This includes $2.5 million for
      land usage rights, $8.5 million for buildings, capital equipment and
      installation, and $4 million for working capital. All operations at this
      refinery are being conducted through Fujian Zhongde Energy Co., Ltd., a wholly
      owned subsidiary that was formed on November 5, 2007.




As
      of
      now, we have received various approvals from the local Chinese government on
      our
      new biodiesel refinery at the Jiangyin Industrials park. These include: “Safety
      Approval for Risky Chemical Production project” from Fuzhou City Safe Production
      Monitoring Agency; “Approval for Fujian Zhongde Limited Environmental Impact
      from the 100,000 Biodiesel Production Facility” from Fuzhou City Environmental
      Protection Agency; “Approval for The Establishment and Construction of 100,000
      Tons additional Annual Production of Biodiesel Project” from the Jiangyin
      Industrial Park Authority of Fuzhou City; and “Approval for Foreign Investment
      Enterprise” from Foreign Trade Commission of Fuzhou City. We have also received
      final approval and business license from the Fuzhou City Industry and Commerce
      Bureau on November 5, 2007.




29




On
      November 1, 2007, the Chinese government raised the retail and wholesales prices
      for gasoline and diesel by 8%. This was to reflect a recent surge in crude
      oil
      prices above $95 per barrel. As a result, the retail price for petroleum-based
      diesel in the People’s Republic of China increased from $636 per ton to $695 per
      ton. Going forward, our wholesale price for biodiesel will be increased by
      approximately 8% from $633 per ton to $684 per ton, effective on November 1,
      2007.




*Private
      Placement*




On
      January 9, 2008, we completed a private placement, pursuant to which we issued
      10,000,000 shares of common stock and five-year warrants to purchase 5,000,000
      shares of common stock at an initial exercise price of $2.00 per share, for
      aggregate gross proceeds of $15,000,000. In connection with this private
      placement, we incurred placement agent fees of approximately $1,200,000, and
      issued the placement agent five-year warrants to purchase an aggregate of
      1,200,000 shares of common stock at an initial exercise price of $2.00 per
      share. In addition, we incurred other professional fees and expenses totaling
      approximately $90,000. The proceeds from the above financing will be used,
      in
      part, to construct our second biodiesel facility, as discussed above, as well
      as
      for working capital purposes.




**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of our financial condition presented in this section
      is
      based upon the consolidated financial statements of ours and our subsidiaries.
      These have been prepared in accordance with accounting principles generally
      accepted in the United States. During the preparation of the financial
      statements we are required to make estimates and judgment that affect the
      reported amount of assets, liabilities, revenues, expenses and the related
      disclosure of contingent assets and liabilities. On an ongoing basis, we
      evaluate our estimates, including those related to sales, returns, pricing
      concessions, bad debts, inventories, investments, fixed assets, intangible
      assets, income taxes and other contingencies. We based our estimates on
      historical experience and various other assumptions that we believe are
      reasonable under the set of current conditions. Actual results may differ from
      these estimates under a different set of assumptions or set of
      conditions.




In
      response to the Securities and Exchange Commission’s Release No. 33-8040,
“Cautionary Advice Regarding Disclosure About Critical Accounting Policy,” we
      identified the most critical accounting principals upon which our financial
      status depends. We determined that those critical accounting principles are
      related to the use of estimates, inventory valuation, revenue recognition,
      income tax , impairment of intangibles and other long-lived assets. We present
      these accounting policies in the relevant sections in this management’s
      discussion and analysis, including the Recently Issued Accounting Pronouncements
      discussed below.




*Revenue
      Recognition.* We
      recognize a sale when the revenue has been realized or realizable and has been
      earned, in accordance with Securities and Exchange Commission Staff Accounting
      Bulletin No. 104, “Revenue Recognition in Financial Statements”. Our sales are
      related to the sale of a product. Revenue for a product sale is recognized
      as
      risk and title to the product transfer to the customer, which usually occurs
      at
      the time shipment is made. Substantially all of our products are sold FOB (“free
      on board”) shipping point. Title to the product passes when the product is
      delivered to the freight carrier.




30




Sales
      revenue represents the invoiced value of goods, net of a value-added tax (VAT).
      All products that are sold in the People’s Republic of China are subject to a
      local value-added tax at a rate of 17% of the gross sales price, or at a rate
      that is approved by the local government. This VAT may be offset by a VAT paid
      on raw materials and other materials included in the cost of producing the
      finished product.




*Accounts
      Receivable, Trade and Allowance for Doubtful Accounts.* Substantial portions on our business operations are conducted in the People’s
      Republic of China. During the normal course of business, we extend unsecured
      credit to our customers. Accounts receivable and trades outstanding on December
      31, 2007 and December 31, 2006 totaled $2,795,363 and $2,191,007, respectively.
      Management reviews our accounts receivable on a regular basis to determine
      if
      the allowance for doubtful accounts is adequate. An estimate for doubtful
      accounts is recorded when collection of the full amount is no longer likely.
      As
      of December 31, 2007 and December 31, 2006, allowances for doubtful accounts
      totaled $407,593 and $228,604, respectively.




*Inventories.* Inventories are stated at the lesser of cost (first in, first out method) or
      market. We review our inventory on a regular basis or determine if any reserves
      are necessary for potential obsolescence. As of December 31, 2007 and December
      31, 2006, we determined that no reserves were necessary.




*Patent
      Expense.* We
      capitalize all direct incremental costs associated with initial patent filing
      costs and amortize the costs over the estimated remaining life of such patent.
      Patents are reviewed regularly and the remaining carrying amount of any patents
      deemed not commercial or cost effective are written off.




*Off-Balance
      Sheet Arrangements.* We have
      not entered into any third party financial guarantees. We have not entered
      into
      any derivative contracts that are indexed to our shares being classified as
      stockholder’s equity or that are not reflected in our financial statements.
      Furthermore, we do not have any retained or contingent interest in assets
      transferred to an unconsolidated entity that serves as credit, liquidity or
      market risk support to such entity. We do not have any variable interest in
      any
      unconsolidated entity that provides financing, liquidity, market risk or credit
      support to us or engages in leasing, hedging or research and development
      services with us.




*Inflation.* We
      believe that inflation has not had a material effect on our operations to
      date.




*Income
      Taxes.* We
      adopted Statement of Financial Accounting Standards No. 109, “Accounting for
      Income Taxes” (SFAS 109). SFAS 109 requires the recognition of deferred income
      tax liabilities and assets for the expected future tax consequences of temporary
      differences between income tax basis and financial reporting basis of assets
      and
      liabilities. Provision for income taxes consist of taxes currently due plus
      deferred taxes. Since we had no operations in the U.S., there is no provision
      for U.S. income tax and there were no deferred tax amounts as of December 31,
      2007 and December 31, 2006. The charge for foreign income tax is based on the
      results for the year as adjusted for nontaxable income and nondeductible
      expenses. It is calculated using tax rates that have been enacted or
      substantively enacted by the balance sheet date.




Deferred
      tax is accounted for by using the balance sheet liability method in respect
      of
      temporary differences arising from differences between the carrying amount
      of
      assets and liabilities in the financial statements and the corresponding tax
      basis used in the computation of assessable tax profit. In principal, deferred
      tax liabilities are recognized for all taxable temporary differences, and
      deferred tax assets are recognized to the extent that it is probable that
      taxable profit will be available against which deductible temporary differences
      can be utilized. Deferred tax is calculated at the tax rate that is expected
      to
      apply to the period when the asset is realized or the liability is settled.
      Deferred tax is charged or credited in the income statement, except when it
      relates to items credited or charged directly to equity, in which case the
      deferred tax is also dealt with as equity. Deferred tax assets and liabilities
      are offset when they relate to income taxes levied by the same taxation
      authority and we intend to settle current tax assets and liabilities on a net
      basis.




31




Our
      subsidiaries, Fujian Zhongde Technology Co., Ltd. and Fujian Zhongde Energy
      Co.,
      Ltd., are governed by the Income Tax Law of the People’s Republic of China
      concerning Foreign Investment Enterprises and Foreign Enterprises and various
      local income tax laws (the “Income Tax Laws”). Under the Income Tax Laws, WOFEs
      generally are subject to an income tax rate of 25% on income as reported in
      their statutory financial statements after appropriate tax adjustments, unless
      the enterprise is located in specially designated regions of cities for which
      more favorable tax rates apply.




Upon
      approval by the People’s Republic of China tax authorities, WOFE’s scheduled to
      operate for a period of 10 years or more and engage in manufacturing and
      production may be exempt from income tax for two years, commencing with their
      first profitable year of operations, after taking into account any losses
      brought forward from prior years, and thereafter with a 50% exemption for the
      next three years.




As
      Fujian
      Zhongde Technology Co., Ltd. became a WOFE starting February 20, 2006 at the
      time it merged with China Clean Energy Resources, Ltd., it received the above
      described WOFE tax benefit upon approval from the People’s Republic of China.
      Fujian Zhongde Technology Co., Ltd. was exempt from income taxes in 2007 and
      thereafter 50% exempt for the next three years beginning in 2008.




*Value
      Added Tax (VAT).* Enterprises or individuals who sell commodities, engage in repair and
      maintenance or import/export goods in the People’s Republic of China are subject
      to a value added tax in accordance with People’s Republic of China laws. The
      value added tax standard rate is 17% of the gross sales price. A credit is
      available whereby VAT paid on the purchases of semi-finished products or raw
      materials used in the production of our finished products can be used to offset
      the VAT due on sales of the finished product.




Fujian
      Zhongde Technology Co., Ltd. received a 13% refund on the VAT amount paid for
      exported products before July 1, 2007. Since July 1, 2007, the Chinese
      government had reduced the VAT refund to 5% from 13% for our exported specialty
      chemical products




**Recently
      Issued Accounting Pronouncements**




In
      September 2006, the FASB issued Statement of Financial Standards No. 157 (SFAS
      No. 157), “Fair Value Measurements.” This new standard establishes a framework
      for measuring the fair value of assets and liabilities. This framework is
      intended to provide increased consistency in how fair value determinations
      are
      made under various existing accounting standards that permit, or in some cases
      require, estimates of fair market value. SFAS No. 157 also expands financial
      statement disclosure requirements about a company’s use of fair value
      measurements, including the effect of such measures on earnings. SFAS No. 157
      is
      effective for fiscal years beginning after December 15, 2007. We are currently
      evaluating the impact, if any, that SFAS No. 157 will have on our financial
      position and results of operations.




In
      February 2007, FASB issued statement of Financial Accounting Standard No. 159
      (SFAS No. 159), “The Fair Value Option for Financial Assets and Liabilities -
      including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to
      choose to measure many financial instruments and certain other items at fair
      value. SFAS No. 159 is effective for fiscal years beginning after November
      15,
      2007. We are currently evaluating the impact, if any, SFAS No. 159 will have
      on
      our financial statements and results of operations.




32




**Item
                7.**
            **Financial
                Statements.**




See
      the
      Company’s Financial Statements beginning on page F-1.




**Item
                8.**
            **Changes****in
                and Disagreements with Accountants on Accounting and Financial
                Disclosure.**




None.




**Item
              8A.**
            **Controls
                and Procedures**




As
      required by Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”), our Chief Executive Officer and Chief Financial Officer
      carried out an evaluation under the supervision and with the participation
      of
      our management, of the effectiveness of the design and operation of our
      disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as
      of
      the end of the period covered by this report. Based on the foregoing evaluation,
      we have concluded that our disclosure controls and procedures are effective
      in
      timely alerting them to material information required to be included in our
      periodic filings with the Securities and Exchange Commission and to ensure
      that
      information required to be disclosed in our periodic filings with the Securities
      and Exchange Commission is accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, to allow
      timely decisions regarding required disclosures.




There
      have not been any changes in our internal control over financial reporting
      during the quarter ended December 31, 2007 that have materially affected, or
      are
      reasonably likely to materially affect, our internal control over financial
      reporting.




Our
      management does not expect that our disclosure controls and procedures or our
      internal control over financial reporting will necessarily prevent all fraud
      and
      material error. Our disclosure controls and procedures are designed to provide
      reasonable assurance of achieving our objectives and our Chief Executive Officer
      and Chief Financial Officer concluded that our disclosure controls and
      procedures are effective at that reasonable assurance level. Further, the design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their costs. Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that all control issues and instances of fraud,
      if any, within the Company have been detected. These inherent limitations
      include the realities that judgments in decision-making can be faulty, and
      that
      breakdowns can occur because of simple error or mistake. Additionally, controls
      can be circumvented by the individual acts of some persons, by collusion of
      two
      or more people, or by management override of the internal control. The design
      of
      any system of controls also is based in part upon certain assumptions about
      the
      likelihood of future events, and there can be no assurance that any design
      will
      succeed in achieving its stated goals under all potential future conditions.
      Over time, control may become inadequate because of changes in conditions,
      or
      the degree of compliance with the policies or procedures may
      deteriorate.




**Item
              8A(T).**
            **Management’s
                Annual Report on Internal Control Over Financial
                Reporting.**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting for the company in accordance with as defined
      in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
      over financial reporting is designed to provide reasonable assurance regarding
      the (i) effectiveness and efficiency of operations, (ii) reliability of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles, and (iii)
      compliance with applicable laws and regulations. Our internal controls framework
      is based on the criteria set forth in the Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO).




33




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




Management’s
      assessment of the effectiveness of the small business issuer’s internal control
      over financial reporting is as of the year ended December 31, 2007. We believe
      that internal control over financial reporting is effective. We have not
      identified any, current material weaknesses considering the nature and extent
      of
      our current operations and any risks or errors in financial reporting under
      current operations.




This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permits us to provide only management’s report in this
      annual report.




**Item
              8B.**
            **Other
                Informati****on.**




None




**PART
      III**




**Item
                9.**
            **Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(a) of the Exchange
                Act.**




The
      following table sets forth information regarding the members of our board of
      directors and our executive officers. All directors hold office for one-year
      terms until the election and qualification of their successors. Officers are
      elected annually by our board of directors and serve at their
      discretion.




Name
            Age
            PositionTai-ming
                Ou
            53
            Chief
                Executive Officer and Chairman of the BoardGary
                Zhao
            45
            Chief
                Financial Officer and DirectorRi-wen
                Xue
            43
            Chief
                Operating Officer and DirectorYun
                He
            40
            Vice
                President of SalesQin
                Yang
            48
            Director




34




**Biographies**




**Tai-ming
      Ou, Chief Executive Officer and Chairman of the Board.** Mr.
      Ou is
      one of our co-founders and has been our Chief Executive Officer since inception
      in 1995. Prior to our founding, Mr. Ou was the Director of General and
      Administrative Office of Fuqing First Secondary School and was responsible
      for
      building construction, repair and maintenance and purchases of teaching
      instruments, property, plant and equipment, and office stationery. Mr. Ou was
      also in charge of operating and managing a factory run by the school. Mr. Ou
      is
      a certified senior economist in the People’s Republic of China. Mr. Ou graduated
      from Fujian Normal University in 1981 with a Bachelor’s degree in mathematics.




**Gary
      Zhao, Chief Financial Officer and Director** .
      Mr.
      Zhao was appointed as our Chief Financial Officer on November 15, 2006 and
      became a Director on January 9, 2008. From July 2005 through November 14, 2006,
      Mr. Zhao was Vice President of CapGemini China, a global management consulting,
      information technology consulting and outsourcing firm. From July 2002 until
      July 2005, Mr. Zhao was a director in charge of Finance Performance Management
      and Corporate Strategy at Accenture China, where he provided financial
      management, Sarbanes-Oxley compliance and corporate strategy consulting
      services. From January 2001 until July 2002, Mr. Zhao was Chief Financial
      Officer of Chinatech International Software Ltd., a software company located
      in
      Beijing, the People’s Republic of China. Mr. Zhao received a Bachelor of Science
      in Metallurgical Engineering from Tsinghua (Qinghua) University in Beijing,
      the
      People’s Republic of China, in 1984, a Master of Science in Materials Science
      from University of Minnesota in 1989, and an MBA in Finance and Strategic
      Management from The Wharton School of the University of Pennsylvania in
      1995.




**Ri-wen
      Xue, Chief Operating Officer and Director.** Mr.
      Xue
      joined us in early 2000 as Executive Secretary to the General Manager. In this
      capacity, Mr. Xue was in charge of assisting the General Manager in dealing
      with
      daily affairs, planning and implementing our business management system,
      adjusting our organizational chart, establishing employee job descriptions
      and
      functional department duties. In October 2002, Mr. Xue was promoted to
      Production Manager and became responsible for improving production processes
      and
      technology. In December 2003, Mr. Xue was promoted to the position of Vice
      President - Production and Engineering, and Chairperson of the Board of
      Supervisors, where he was in charge of planning and carrying out new project
      development, streamlining production and engineering processes, and undertaking
      research and development, technology applications and improvements. In October
      2006, Mr. Xue became our Chief Operating Officer and a Director. Prior to
      joining us, Mr. Xue was a Pipelining Operator, Quality Control, and Local
      Assistant Manager at the Chip Copperize Corporation in Japan from April 1995
      to
      April 1999. Mr. Xue is a certified senior economist and a certified senior
      engineer in the People’s Republic of China and graduated from Fujian Finance
      College in 1985 with a Bachelor’s degree in finance.




**Yun
      He, Vice President of Sales.** Mr.
      He is
      one of our co-founders and became Sales Manager in 1995, promoting sales of
      our
      resins and printing inks in the domestic People’s Republic of China market. Mr.
      He has been our Vice President of Sales since 1997. Prior to our formation,
      Mr.
      He established an export business in 1992 and engaged in international trade
      and
      exporting local garments, food, toys, ornaments and handicrafts to Russia,
      the
      Czech Republic and Germany. Mr. He graduated from Fujian Normal University
      in
      1989 with a Bachelor’s degree in Chinese literature.




**Qin
      Yang, Director.** Ms.
      Yang
      is one of our co-founders and has been a director since inception in 1995.
      Ms.
      Yang had previously founded the Fuqing Welfare Garment Factory in 1984 and
      served as its Chief Designer and director. Ms. Yang graduated from Fujian
      Industrial Arts School in the Fujian province of the People’s Republic of China.




Mr.
      Ou
      and Ms. Yang and are husband and wife.




35




**Board
      Committees**




**Audit
      Committee** *.* We
      intend
      to establish an audit committee of the board of directors by the end of 2008,
      which will consist of soon-to-be-nominated independent directors. The audit
      committee’s duties will be to recommend to our Board of Directors the engagement
      of independent auditors to audit our financial statements and to review our
      accounting and auditing principles. The audit committee will review the scope,
      timing and fees for the annual audit and the results of audit examinations
      performed by the internal auditors and independent public accountants, including
      their recommendations to improve the system of accounting and internal controls.
      The audit committee would at all times be composed exclusively of directors
      who
      are, in the opinion of our Board of Directors, free from any relationship that
      would interfere with the exercise of independent judgment as a committee member
      and who possess an understanding of financial statements and generally accepted
      accounting principles.




**Compensation
      Committee** *.* We
      intend
      to establish a compensation committee of the Board of Directors by the end
      of
      2008. The compensation committee would review and approve our salary and
      benefits policies, including compensation of executive officers.




**Code
      of Ethics**




The
      Board
      of Directors has adopted a Code of Ethics that is applicable to all of our
      directors, officers and employees, including our Chief Executive Officer, Chief
      Financial Officer and principal accounting officer. Our Code of Ethics is
      available through our website at ww.chinacleanenergyinc.com, or in print to
      any
      stockholder who requests it from: Investor Relations, 17 Candlewood Drive,
      West
      Windsor, New Jersey 08550.




**Item
                10.**
            **Executive
                Compensation.**




**Summary
      Compensation Table**




The
      following table summarizes the annual and long-term compensation paid to
      Tai-ming Ou, our chief executive officer, who we refer to in this annual report
      as the “named executive officer.” During 2007, no executive officer received
      annual remuneration in excess of $100,000.




**Summary
      Compensation Table**




Name
                and Principal Position
            
            Year
            
            Salary
            
            All
                Other Compensation
            
            TotalTai-ming
                Ou
            
            
            2007
            
            $
            18,462
            
            
            -
            
            $
            18,462President
                and Chief Executive Officer (principal executive officer)
            
            
            2006
            
            $
            13,153
            
            
            -
            
            $
            13,153





**Employment
      Agreement**




On
      January 9, 2008, we entered into a two year employment agreement with Tai-ming
      Ou, which agreement shall be automatically renewed for additional one-year
      periods until either we or Mr. Ou, as the case may be, gives the other written
      notice of its intent not to renew the agreement at least 90 days prior to the
      end of the then current term. Pursuant to this agreement, Mr. Ou shall serve
      at
      our Chief Executive Officer and shall receive a salary of approximately $2,473
      per month, which amount shall be increased by at least 10% following the one
      year anniversary of the agreement. In addition, under this agreement, we granted
      Mr. Ou options to purchase 65,000 shares of common stock with an exercise price
      of $2.50 per share and 65,000 shares of common stock with an exercise price
      of
      $3.00 per share, with all options vesting quarterly over three years. If Mr.
      Ou’s employment is terminated without cause or he resigns for good reason, all
      unvested options shall vest and Mr. Ou will be entitled to the continuation
      of
      benefits and the payment of his salary for 12 months.




36




**Outstanding
      Equity Awards at Fiscal Year-End**




There
      were no outstanding equity awards held by our named executive officer as of
      December 31, 2007.




**2008
      Equity Incentive Plan**




On
      January 9, 2008, our board of directors and stockholders adopted the 2008 Equity
      Incentive Plan. The purpose of the 2008 Equity Incentive Plan is to provide
      an
      incentive to attract and retain directors, officers, consultants, advisors
      and
      employees whose services are considered valuable, to encourage a sense of
      proprietorship and to stimulate an active interest of such persons in our
      development and financial success. Under the 2008 Equity Incentive Plan, we
      are
      authorized to issue up to 2,000,000 stock options, 1,000,000 of which shall
      have
      an exercise price per share equal to the greater of (i) $2.50 or (ii) 100%
      of
      the fair market value of a share of common stock on the date of grant and
      1,000,000 of which shall have an exercise price per share equal to the greater
      of (i) $3.00 or (ii) 100% of the fair market value of a share of common stock
      on
      the date of grant. Under the 2008 Equity Incentive Plan, we are authorized
      to
      issue incentive stock options intended to qualify under Section 422 of the
      Internal Revenue Code of 1986, as amended, and non-qualified stock options
      and
      all options under the plan shall vest quarterly over three years. The 2008
      Equity Incentive Plan is administered by our board of directors. On January
      9,
      2008, we granted options to purchase common stock under the 2008 Equity
      Incentive Plan to the following executive officers:




**Name**
            
            **Shares
                Subject to Options**
            
            **Exercise
                Price**
            
            **Vesting
                Schedule**
            
            **Expiration**Tai-ming
                Ou
            
            
            65,000
            
            $
            2.50
            
            
            1/12
                every three months following
                the grant date
            
            
            10
                years from date of grant65,000
            
            $
            3.00
            
            
            1/12
                every three months following the grant date
            
            
            10
                years from date of grantGary
                Zhao
            
            
            500,000
            
            $
            2.50
            
            
            1/12
                every three months following the grant date
            
            
            10
                years from date of grant500,000
            
            $
            3.00
            
            
            1/12
                every three months following the grant date
            
            
            10
                years from date of grantRi-wen
                Xue
            
            
            50,000
            
            $
            2.50
            
            
            1/12
                every three months following the grant date
            
            
            10
                years from date of grant50,000
            
            $
            3.00
            
            
            1/12
                every three months following the grant date
            
            
            10
                years from date of grantYun
                He
            
            
            50,000
            
            $
            2.50
            
            
            1/12
                every three months following the grant date
            
            
            10
                years from date of grant50,000
            
            $
            3.00
            
            
            1/12
                every three months following the grant date
            
            
            10
                years from date of grant





37




**Compensation
      of Directors**




The
      following table sets forth director compensation for the year ended December
      31,
      2007.




**Director
      Compensation**




Name
            
            Fee
                Earned or Paid in Cash
            
            All
                Other Compensation
            
            TotalQin
                Yang
            
            $
            10,769
            
            
            -
            
            $
            10,769





*Narrative
      to Director Compensation Table*




Ms.
      Qin
      Yang, the wife of Tai-ming Ou, was one of our original founders in 1995 and
      has
      been one of our directors since that time. In addition, since June 2006, Ms.
      Yang has been an independent contractor, and for such services received $897
      per
      month or $10,769 per annum during the year ended December 31, 2007. In addition,
      we paid Ms. Yang a one time cash incentive award of $6,400 in February 2007
      for
      her performance and contribution to us 2006. In 2008, Ms. Yang’s monthly
      compensation as an independent contractor is anticipated to be at $1,379 per
      month or $16,552 per annum.




**Item
                11.**
            **Security
                Ownership****of
                Certain Beneficial Owners and Management and Related Stockholder
                Matters
                and Director Independence.**




The
      following table sets forth information with respect to the beneficial ownership
      of our common stock as of March 10, 2008 by:




·
            each
                person known by us to beneficially own more than 5.0% of our common
                stock;




·
            each
                of our directors;




·
            our
                named executive officer; and




·
            all
                of our directors and executive officers as a group.




The
      percentages of common stock beneficially owned are reported on the basis of
      regulations of the Securities and Exchange Commission governing the
      determination of beneficial ownership of securities. Under the rules of the
      Securities and Exchange Commission, a person is deemed to be a beneficial owner
      of a security if that person has or shares voting power, which includes the
      power to vote or to direct the voting of the security, or investment power,
      which includes the power to dispose of or to direct the disposition of the
      security. Except as indicated in the footnotes to this table, each beneficial
      owner named in the table below has sole voting and sole investment power with
      respect to all shares beneficially owned and each person’s address is c/o China
      Clean Energy Inc., Fulong Industry Zone, Longtian Town Fuqing City, Fujian,
      China 350315. As of March 10, 2008, we had 31,512,269 shares
      outstanding.




38




Name
                and Address of Beneficial Owner
            
            Number
                of Shares
              Beneficially
                Owned(1)
            
            Percentage
                of Shares
              Beneficially
                Owned(1)Tai-ming
                Ou
            
            
            8,489,850(2)
            
            
            26.9%Gary
                Zhao
            
            
            183,333(3)
            
            
            *Ri-wen
                Xue
            
            
            968,033(4)
            
            
            3.1%Qin
                Yang
            
            
            8,489,850(5)
            
            
            26.9%Nai-ming
                Yu
            
            
            2,399,250
            
            
            7.6%JLF
                Partners I, LP(6)
            
            
            4,700,854(7)
            
            
            14.9%JLF
                Partners II, LP(8)
            
            
            4,700,854(7)
            
            
            14.9%JLF
                Offshore Fund, Ltd.(9)
            
            
            4,700,854(7)
            
            
            14.9%All
                officers and directors as a group(5
                persons)
            
            
            10,769,199
            
            
            34.1%







*
            Less
                than 1%




(1)
            Shares
                of common stock beneficially owned and the respective percentages
                of
                beneficial ownership of common stock assumes the exercise of all
                options,
                warrants and other securities convertible into common stock beneficially
                owned by such person or entity currently exercisable or exercisable
                within
                60 days of March 10, 2008. Shares issuable pursuant to the exercise
                of
                stock options and warrants exercisable within 60 days are deemed
                outstanding and held by the holder of such options or warrants for
                computing the percentage of outstanding common stock beneficially
                owned by
                such person, but are not deemed outstanding for computing the percentage
                of outstanding common stock beneficially owned by any other
                person.




(2)
            Includes
                (i) 10,833 shares of common stock issuable upon the exercise of options,
                (ii) 3,518,900 shares of common stock held directly by Qin Yang and
                (iii)
                1,667 shares of common stock issuable upon the exercise of options
                held by
                Qin Yang. Tai-ming Ou and Qin Yang are husband and
                wife.




(3)
            Includes
                83,333 shares of common stock issuable upon the exercise of
                options.




(4)
            Includes
                8,333 shares of common stock issuable upon the exercise of
                options.




(5)
            Includes
                (i) 1,667 shares of common stock issuable upon the exercise of options,
                (ii) 4,958,450 shares of common stock held directly by
              Tai-ming
                Ou and (iii) 10,833 shares of common stock issuable upon the exercise
                of
                options held by Tai-ming Ou. Tai-ming Ou and Qin Yang are husband
                and
                wife.




(6)
            The
                address of JLF Partners I, LP is 2775 Via De La Valle, Suite 204,
                Del Mar,
                California 92014.




(7)
            Includes
                1,876,312 shares of common stock held by JLF Partners I, LP, 161,381
                shares of common stock held by JLF Partners II, LP and 2,663,161
                shares of
                common stock held by JLF Offshore Fund,
                Ltd.




(8)
            The
                address of JLF Partners II, LP is 2775 Via De La Valle, Suite 204,
                Del
                Mar, California 92014.




(9)
            The
                address of JLF Offshore Fund, Ltd. is 2775 Via De La Valle, Suite
                204, Del
                Mar, California 92014.




39




**Item
                12.**
            **Certain
                Relationships and Related Transactions and Director
                Independence.**




We
      review
      all relationships and transactions in which the company and our directors and
      executive officers or their immediate family members are participants to
      determine whether such persons have a direct or indirect material interest.
      Transactions that we have determined to be directly or indirectly material
      to us
      or a related person are disclosed below. We believe each transaction is on
      terms
      no less favorable to us than the terms generally available to an unaffiliated
      third-party under the same or similar circumstances.




Tai-ming
      Ou, our Chief Executive Officer and Chairman, has provided us with financing
      through a series of undocumented, unsecured, non-interest bearing demand loans.
      The last such advance made to us by Mr. Ou was for approximately $490,000 in
      September 2005. All loans provided to us by Mr. Ou were repaid in full during
      2005, except for $5,656 which was repaid to Mr. Ou in May 2006.




In
      connection with our January 9, 2008 private placement, Mr. Ou agreed to place
      1,042,012 shares of common stock held by him into an escrow account, with such
      shares to be released to the investors in such private placement should we
      fail
      to either (i) commence the production of biodiesel at our currently proposed
      production facility in Jiang Yin, People’s Republic of China on or before
      January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income
      for
      the fiscal year ending December 31, 2009. Should we successfully satisfy each
      of
      these two milestones, these shares of common stock will be returned to Mr.
      Ou.




Yun
      He,
      our Vice President of Sales, has provided us with financing through a series
      of
      undocumented, unsecured, non-interest bearing demand loans. The last such
      advance made to us by Mr. He was for approximately $242,000 in September 2005.
      All loans provided to us by Mr. He were repaid in full during 2005, except
      for
      $14,516 which was repaid to Mr. He in February 2006.




In
      connection with our January 9, 2008 private placement, Mr. He agreed to place
      235,293 shares of common stock held by him into an escrow account, with such
      shares to be released to the investors in such private placement should we
      fail
      to either (i) commence the production of biodiesel at our currently proposed
      production facility in Jiang Yin, People’s Republic of China on or before
      January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income
      for
      the fiscal year ending December 31, 2009. Should we successfully satisfy each
      of
      these two milestones, these shares of common stock will be returned to Mr.
      He.




Ri-wen
      Xue, our Chief Operating Officer and a Director, has provided us with financing
      through a series of undocumented, unsecured, non-interest bearing demand loans.
      The last such advance made to us by Mr. Xue was for approximately $198,000
      in
      September 2005. All loans provided to us by Mr. Xue were repaid in full during
      2005, except for $86,772 which was repaid to Mr. Xue in January
      2006.




In
      connection with our January 9, 2008 private placement, Mr. Xue agreed to place
      201,680 shares of common stock held by him into an escrow account, with such
      shares to be released to the investors in such private placement should we
      fail
      to either (i) commence the production of biodiesel at our currently proposed
      production facility in Jiang Yin, People’s Republic of China on or before
      January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income
      for
      the fiscal year ending December 31, 2009. Should we successfully satisfy each
      of
      these two milestones, these shares of common stock will be returned to Mr.
      Xue.




Ms.
      Qin
      Yang, one of our Directors, has provided us with financing through a series
      of
      undocumented, unsecured, non-interest bearing demand loans. The last such
      advance made to us by Ms. Yang was for approximately $168,000 in September
      2005.
      All loans provided to us by Ms. Yang were repaid in full during 2005, except
      for
      $74,376 which was repaid to Mr. Yang in January 2006.




40




In
      connection with our January 9, 2008 private placement, Gary Zhao, our Chief
      Financial Officer, agreed to place 21,015 shares of common stock held by him
      into an escrow account, with such shares to be released to the investors in
      such
      private placement should we fail to either (i) commence the production of
      biodiesel at our currently proposed production facility in Jiang Yin, People’s
      Republic of China on or before January 1, 2009 or (ii) record at least
      $14,000,000 of adjusted net income for the fiscal year ending December 31,
      2009.
      Should we successfully satisfy each of these two milestones, these shares of
      common stock will be returned to Mr. Zhao.




**Director
      Independence**




We
      do not
      currently have any independent directors.




**Item
                13.**
            **Exhibits.**




ExhibitNumber
            
            Description


2.1
            
            Share
                Exchange Agreement, dated as of October 20, 2006, by and among the
                shareholders of China Clean Energy Resources, Ltd., China Clean Energy
                Inc., Chet Kurzawski and Doug Reid (Incorporated by reference to
                Exhibit
                2.1 to the Current Report on Form 8-K of China Clean Energy Inc.
                filed
                with the Securities and Exchange Commission on October 30,
                2006)3.1
            
            Composite
                Certificate of Incorporation of China Clean Energy Inc. (Incorporated
                by
                reference to Exhibit 3.1 to the Registration Statement on Form SB-2
                of
                China Clean Energy Inc. filed with the Securities and Exchange Commission
                on February 1, 2008)3.2
            
            Amended
                and Restated By-laws of Hurley Exploration Inc. (Incorporated by
                reference
                to Exhibit 3.5 to the Current Report on Form 8-K of China Clean Energy
                Inc. filed with theSecurities
                and Exchange Commissionon
                October 30, 2006)10.1
            
            Form
                of Subscription Agreement for October 24, 2006 Private Placement
                and
                November 9, 2006 Private Placement (Incorporated by reference to
                Exhibit
                10.1 to the Current Report on Form 8-K of China Clean Energy Inc.
                filed
                with the Securities and Exchange Commission on October 30,
                2006)10.2
            
            Contract
                of Supply and Purchase of Acid Oil, dated August 2, 2006, between
                Fujian
                Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
                Collecting Corporation, Ltd. (Incorporated by reference to Exhibit
                10.2 to
                the Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on October 30, 2006)10.3
            
            Contract
                for the Transfer of the Patent, dated August 29, 2005, between Ta-ming
                Ou
                and Liang Zicai (Incorporated by reference to Exhibit 10.6 to the
                Current
                Report on Form 8-K of China Clean Energy Inc. filed with the Securities
                and Exchange Commission on October 30,
                2006)




41




ExhibitNumber
            
            Description


10.4
            
            Agreement
                on Transfer of the Patent, dated September 26, 2005, between Fujian
                Zhong
                De Technology Stock Co., Ltd. and
              Ta-ming
                Ou (Incorporated by reference to Exhibit 10.7 to the Current Report
                on
                Form 8-K of China Clean Energy Inc. filed with the Securities and
                Exchange
                Commission on October 30, 2006)10.5
            
            Amended
                and Restated Consulting Agreement, dated January 18, 2007, between
                Fujian
                Zhongde Technology Co., Ltd. and Allstar Capital Inc. (Incorporated
                by
                reference to Exhibit 10.6 to our Registration Statement on Form SB-2
                filed
                with the Securities and Exchange Commission on January 22,
                2007)10.6
            
            Engagement
                Letter, dated September 19, 2006, between China Clean Energy Resources,
                Ltd. and Westminster Securities Corporation (Incorporated by reference
                to
                Exhibit 10.7 to our Registration Statement on Form SB-2 filed with
                the
                Securities and Exchange Commission on January 22, 2007)10.7
            
            Credit
                Facility, dated February 1, 2005, between DBS Bank Ltd. and Fujian
                Zhongde
                Technology Co., Ltd. (Incorporated by reference to Exhibit 10.8 to
                our
                Registration Statement on Form SB-2 filed with the Securities and
                Exchange
                Commission on January 22, 2007)10.8
            
            Contract
                of Land and Estate Mortgage, dated March 28, 2005, between DBS Bank
                Ltd.
                and Fujian Zhongde Technology Co., Ltd. (Incorporated by reference to
                Exhibit 10.9 to our Registration Statement on Form SB-2 filed with
                the
                Securities and Exchange Commission on January 22, 2007)10.9
            
            Contract
                of Supply and Purchase of Acid Oil, dated August 2, 2006, between
                Fujian
                Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
                Collecting Corporation (Incorporated by reference to Exhibit 10.10
                to our
                Registration Statement on Form SB-2 filed with the Securities and
                Exchange
                Commission on January 22, 2007)10.10
            
            Land
                Investment Agreement, dated December 25, 2006, between Fujiang Zhongde
                Technology Co., Ltd and Fuzhou City Jiangyin Industry District Management
                Committee (Incorporated by reference to Exhibit 10.11 to our Registration
                Statement on Form SB-2 filed with the Securities and Exchange Commission
                on January 22, 2007)10.11
            
            Sales
                Contract, dated November 15, 2006, between Fujian Zhongde Technology
                Co.,
                Ltd. and Cray Valley Resins India Pvt. Ltd. (Incorporated by reference
                to
                Exhibit 10.12 to our Registration Statement on Form SB-2 filed with
                the
                Securities and Exchange Commission on January 22, 2007)10.12
            
            Supplier
                Agreement, dated March 5, 2007 between China Clean Energy Inc. and
                Fujian
                Quanzhou Zhong Yuan Long Chemistry Industry Co., Ltd. (Incorporated
                by
                reference to Exhibit 10.13 of Amendment Number 2 to the Registration
                Statement on form
              SB-2/A
                of China Clean Energy Inc. filed with the Securities and Exchange
                Commission on May 25, 2007).




42


ExhibitNumber
              
              Description


10.13
            
            Supplier
                Agreement, dated March. 06, 2007 between China Clean Energy, Inc.
                and
                Meiweike (Shaxian) Linchan Chemistry Co., Ltd. (Incorporated by reference
                to Exhibit 10.14 of to Amendment Number 2 to the Registration Statement
                on
                form SB-2/A of China Clean Energy Inc. filed with the Securities
                and
                Exchange Commission on May 25, 2007).10.14
            
            Supplier
                Agreement, dated March. 05, 2007 between China Clean Energy, Inc.
                and
                Xinjiang Guansheng Technology Chemistry Co., Ltd. (Incorporated by
                reference to Exhibit 10.15 of to Amendment Number 2 to the Registration
                Statement on form SB-2 of China Clean Energy Inc. filed with the
                Securities and Exchange Commission on May 25, 2007).10.15
            
            Form
                of Securities Purchase Agreement, dated January 9, 2008 (Incorporated
                by
                reference to Exhibit 10.1 to the Current Report on Form 8-K of China
                Clean
                Energy Inc. filed with the Securities and Exchange Commission on
                January
                10, 2008).10.16
            
            Form
                of Registration Rights Agreement, dated January 9, 2008 (Incorporated
                by
                reference to Exhibit 10.2 to the Current Report on Form 8-K of China
                Clean
                Energy Inc. filed with the Securities and Exchange Commission on
                January
                10, 2008).10.17
            
            Form
                of Class A Warrant to Purchase Common Stock (Incorporated by reference
                to
                Exhibit 10.3 to the Current Report on Form 8-K of China Clean Energy
                Inc.
                filed with the Securities and Exchange Commission on January 10,
                2008).10.18
            
            Form
                of Lock-up Agreement (Incorporated by reference to Exhibit 10.4 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.19
            
            2008
                Equity Incentive Plan (Incorporated by reference to Exhibit 10.5
                to the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.20
            
            Form
                of 2008 Incentive Stock Option Agreement (Incorporated by reference
                to
                Exhibit 10.6 to the Current Report on Form 8-K of China Clean Energy
                Inc.
                filed with the Securities and Exchange Commission on January 10,
                2008).10.21
            
            Form
                of 2008 Non-Qualified Stock Option Agreement (Incorporated by reference
                to
                Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy
                Inc.
                filed with the Securities and Exchange Commission on January 10,
                2008).10.22
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Tai-ming Ou (Incorporated by reference to Exhibit 10.8 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).




43


ExhibitNumber
              
              Description


10.23
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Gary Zhao (Incorporated by reference to Exhibit 10.9 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.24
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Ri-wen Xue (Incorporated by reference to Exhibit 10.10 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.25
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Yun He (Incorporated by reference to Exhibit 10.11 to the
                Current
                Report on Form 8-K of China Clean Energy Inc. filed with the Securities
                and Exchange Commission on January 10, 2008).14.1
            
            Code
                of Ethics21.1
            
            List
                of Subsidiaries31.1
            
            Section
                302 Certification of Principal Executive Officer31.2
            
            Section
                302 Certification of Principal Accounting Officer32.1
            
            Section
                302 Certification of Principal Executive Officer32.2
            
            Section
                302 Certification of Principal Accounting
                Officer





**Item
                14.**
            **Principal
                Accountant Fees and Services****.**




Michael
      T. Studer CPA P.C. has served as our principal accountant since October 30,
      2006
      and audited our consolidated financial statements for the years ended December
      31, 2006 and December 31, 2007. Fees billed for professional services provided
      to our Company by these firms for the fiscal years ended December 31, 2007
      and
      2006 were.




2007
            
            2006Audit
                Fees
            
            $
            102,000
            
            $
            95,000Audit-Related
                Fees
            
            $
            0
            
            $
            0Tax
                Fees
            
            $
            0
            
            $
            0All
                Other Accounting Professional Fees and Services
            
            $
            0
            
            $
            0




44


**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


Dated:
                  March 11, 2008**CHINA
                  CLEAN ENERGY INC.**/s/Gary
                ZhaoGary
                  ZhaoChief
                  Financial Officer(Principal
                  Financial Officer and Principal Accounting
                  Officer)




Pursuant
      to the requirements of the Exchange Act, this Report has been signed below
      by
      the following persons on behalf of the Registrant on March 12, 2007 in the
      capacities indicated.




**Name**
            
            **Title**/s/Tai-ming
              Ou
            
            President
                and Chief Executive Officer and Chairman of the Board of
                DirectorsTai-ming
                Ou
            
            (Principal
                  Executive Officer)/s/Gary
              Zhao
            
            Chief
              Financial Officer and DirectorGary
                Zhao
            
            (Principal
                Financial Officer andPrincipal
                Accounting Officer)/s/Yun
              He
            
            Vice
                President of Sales and DistributionYun
                He/s/Ri-wen
              Xue
            
            Chief
                Operating Officer and DirectorRi-wen
                Xue/s/Qin
              Yang
            
            DirectorQin
                Yang







**Exhibit
      Index**




ExhibitNumber
            
            Description


2.1
            
            Share
                Exchange Agreement, dated as of October 20, 2006, by and among the
                shareholders of China Clean Energy Resources, Ltd., China Clean Energy
                Inc., Chet Kurzawski and Doug Reid (Incorporated by reference to
                Exhibit
                2.1 to the Current Report on Form 8-K of China Clean Energy Inc.
                filed
                with the Securities and Exchange Commission on October 30,
                2006)3.1
            
            Composite
                Certificate of Incorporation of China Clean Energy Inc. (Incorporated
                by
                reference to Exhibit 3.1 to the Registration Statement on Form SB-2
                of
                China Clean Energy Inc. filed with the Securities and Exchange Commission
                on February 1, 2008)3.2
            
            Amended
                and Restated By-laws of Hurley Exploration Inc. (Incorporated by
                reference
                to Exhibit 3.5 to the Current Report on Form 8-K of China Clean Energy
                Inc. filed with the Securities and Exchange Commission on October
                30,
                2006)10.1
            
            Form
                of Subscription Agreement for October 24, 2006 Private Placement
                and
                November 9, 2006 Private Placement (Incorporated by reference to
                Exhibit
                10.1 to the Current Report on Form 8-K of China Clean Energy Inc.
                filed
                with the Securities and Exchange Commission on October 30,
                2006)10.2
            
            Contract
                of Supply and Purchase of Acid Oil, dated August 2, 2006, between
                Fujian
                Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
                Collecting Corporation, Ltd. (Incorporated by reference to Exhibit
                10.2 to
                the Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on October 30, 2006)10.3
            
            Contract
                for the Transfer of the Patent, dated August 29, 2005, between Ta-ming
                Ou
                and Liang Zicai (Incorporated by reference to Exhibit 10.6 to the
                Current
                Report on Form 8-K of China Clean Energy Inc. filed with the Securities
                and Exchange Commission on October 30, 2006)10.4
            
            Agreement
                on Transfer of the Patent, dated September 26, 2005, between Fujian
                Zhong
                De Technology Stock Co., Ltd. and
              Ta-ming
                Ou (Incorporated by reference to Exhibit 10.7 to the Current Report
                on
                Form 8-K of China Clean Energy Inc. filed with the Securities and
                Exchange
                Commission on October 30, 2006)10.5
            
            Amended
                and Restated Consulting Agreement, dated January 18, 2007, between
                Fujian
                Zhongde Technology Co., Ltd. and Allstar Capital Inc. (Incorporated
                by
                reference to Exhibit 10.6 to our Registration Statement on Form SB-2
                filed
                with the Securities and Exchange Commission on January 22,
                2007)







ExhibitNumber
              
              Description


10.6
            
            Engagement
                Letter, dated September 19, 2006, between China Clean Energy Resources,
                Ltd. and Westminster Securities Corporation (Incorporated by reference
                to
                Exhibit 10.7 to our Registration Statement on Form SB-2 filed with
                the
                Securities and Exchange Commission on January 22, 2007)10.7
            
            Credit
                Facility, dated February 1, 2005, between DBS Bank Ltd. and Fujian
                Zhongde
                Technology Co., Ltd. (Incorporated by reference to Exhibit 10.8 to
                our
                Registration Statement on Form SB-2 filed with the Securities and
                Exchange
                Commission on January 22, 2007)10.8
            
            Contract
                of Land and Estate Mortgage, dated March 28, 2005, between DBS Bank
                Ltd.
                and Fujian Zhongde Technology Co., Ltd. (Incorporated by reference
                to
                Exhibit 10.9 to our Registration Statement on Form SB-2 filed with
                the
                Securities and Exchange Commission on January 22, 2007)10.9
            
            Contract
                of Supply and Purchase of Acid Oil, dated August 2, 2006, between
                Fujian
                Zhongde Technology Corporation, Ltd. and Fuqing Zhongde Waste Oil
                Collecting Corporation (Incorporated by reference to Exhibit 10.10
                to our
                Registration Statement on Form SB-2 filed with the Securities and
                Exchange
                Commission on January 22, 2007)10.10
            
            Land
                Investment Agreement, dated December 25, 2006, between Fujiang Zhongde
                Technology Co., Ltd and Fuzhou City Jiangyin Industry District Management
                Committee (Incorporated by reference to Exhibit 10.11 to our Registration
                Statement on Form SB-2 filed with the Securities and Exchange Commission
                on January 22, 2007)10.11
            
            Sales
                Contract, dated November 15, 2006, between Fujian Zhongde Technology
                Co.,
                Ltd. and Cray Valley Resins India Pvt. Ltd. (Incorporated by reference
                to
                Exhibit 10.12 to our Registration Statement on Form SB-2 filed with
                the
                Securities and Exchange Commission on January 22, 2007)10.12
            
            Supplier
                Agreement, dated March 5, 2007 between China Clean Energy Inc. and
                Fujian
                Quanzhou Zhong Yuan Long Chemistry Industry Co., Ltd. (Incorporated
                by
                reference to Exhibit 10.13 of Amendment Number 2 to the Registration
                Statement on form
              SB-2/A
                of China Clean Energy Inc. filed with the Securities and Exchange
                Commission on May 25, 2007).10.13
            
            Supplier
                Agreement, dated March. 06, 2007 between China Clean Energy, Inc.
                and
                Meiweike (Shaxian) Linchan Chemistry Co., Ltd. (Incorporated by reference
                to Exhibit 10.14 of to Amendment Number 2 to the Registration Statement
                on
                form SB-2/A of China Clean Energy Inc. filed with the Securities
                and
                Exchange Commission on May 25,
                2007).







ExhibitNumber
              
              Description


10.14
            
            Supplier
                Agreement, dated March. 05, 2007 between China Clean Energy, Inc.
                and
                Xinjiang Guansheng Technology Chemistry Co., Ltd. (Incorporated by
                reference to Exhibit 10.15 of to Amendment Number 2 to the Registration
                Statement on form SB-2 of China Clean Energy Inc. filed with the
                Securities and Exchange Commission on May 25, 2007).10.15
            
            Form
                of Securities Purchase Agreement, dated January 9, 2008 (Incorporated
                by
                reference to Exhibit 10.1 to the Current Report on Form 8-K of China
                Clean
                Energy Inc. filed with the Securities and Exchange Commission on
                January
                10, 2008).10.16
            
            Form
                of Registration Rights Agreement, dated January 9, 2008 (Incorporated
                by
                reference to Exhibit 10.2 to the Current Report on Form 8-K of China
                Clean
                Energy Inc. filed with the Securities and Exchange Commission on
                January
                10, 2008).10.17
            
            Form
                of Class A Warrant to Purchase Common Stock (Incorporated by reference
                to
                Exhibit 10.3 to the Current Report on Form 8-K of China Clean Energy
                Inc.
                filed with the Securities and Exchange Commission on January 10,
                2008).10.18
            
            Form
                of Lock-up Agreement (Incorporated by reference to Exhibit 10.4 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.19
            
            2008
                Equity Incentive Plan (Incorporated by reference to Exhibit 10.5
                to the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.20
            
            Form
                of 2008 Incentive Stock Option Agreement (Incorporated by reference
                to
                Exhibit 10.6 to the Current Report on Form 8-K of China Clean Energy
                Inc.
                filed with the Securities and Exchange Commission on January 10,
                2008).10.21
            
            Form
                of 2008 Non-Qualified Stock Option Agreement (Incorporated by reference
                to
                Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy
                Inc.
                filed with the Securities and Exchange Commission on January 10,
                2008).10.22
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Tai-ming Ou (Incorporated by reference to Exhibit 10.8 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.23
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Gary Zhao (Incorporated by reference to Exhibit 10.9 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).10.24
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Ri-wen Xue (Incorporated by reference to Exhibit 10.10 to
                the
                Current Report on Form 8-K of China Clean Energy Inc. filed with
                the
                Securities and Exchange Commission on January 10,
                2008).







ExhibitNumber
              
              Description


10.25
            
            Employment
                Agreement, dated as of January 9, 2008, by and between China Clean
                Energy
                Inc. and Yun He (Incorporated by reference to Exhibit 10.11 to the
                Current
                Report on Form 8-K of China Clean Energy Inc. filed with the Securities
                and Exchange Commission on January 10, 2008).14.1
            
            Code
                of Ethics21.1
            
            List
                of Subsidiaries31.1
            
            Section
                302 Certification of Principal Executive Officer31.2
            
            Section
                302 Certification of Principal Accounting Officer32.1
            
            Section
                302 Certification of Principal Executive Officer32.2
            
            Section
                302 Certification of Principal Accounting
                Officer





**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 To
          the
          Board of Directors and Stockholders of
 China
          Clean Energy Inc.
 
 I
          have
          audited the accompanying consolidated balance sheets of China Clean Energy
          Inc. and
          subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the related
          consolidated statements of operations, changes in stockholders’ equity, and cash
          flows for the years then ended. These financial statements are the
          responsibility of the Company’s management. My responsibility is to express an
          opinion on these financial statements based on my audits.
 
 I
          conducted my audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          I plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. I believe that my audits provide a reasonable
          basis for my opinion.
 
 In
          my
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of China Clean Energy
          Inc. and
          subsidiaries as of December 31, 2007 and 2006 and the results of their
          operations and cash flows for the years then ended in conformity with accounting
          principles generally accepted in the United States.
  /s/
                    Michael T. Studer CPA P.C.
 
 Freeport,
          New York
 March
          7,
          2008
 F-1
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES****Consolidated
                  Balance Sheets****(Expressed
                  in US Dollars)**
 
 December
                    31,
                
                December
                    31,2007
                
                2006(Audited)
                
                (Audited)**ASSETS****Current
                    Assets**Cash
                    and cash equivalents
                
                $
                1,133,555
                
                $
                2,241,712Accounts
                    receivable, net of allowance for doubtful accounts of $407,593
                    and
                    $228,604, respectively
                
                
                2,795,363
                
                
                1,768,262Other
                    receivable - refundable value added taxes
                
                
                -
                
                
                24,904Other
                    receivable - recoverable corporate income taxes
                
                
                147,485
                
                
                -Inventories
                
                
                1,361,478
                
                
                941,933Advance
                    payments to suppliers
                
                
                872,974
                
                
                194,141Prepaid
                    expenses
                
                
                32,330
                
                
                37,696**Total
                    Current Assets**
                
                
                6,343,185
                
                
                5,208,648**Property
                    , plant and equipment, net**
                
                
                5,820,045
                
                
                4,692,200**Intangible
                    assets, net**
                
                
                4,879,635
                
                
                2,430,504**Deposits
                        paid in connection withcontract
                        for purchase of land use rights and related
                        costs**
                
                
                -
                
                
                95,033**Total
                    Assets**
                
                $
                17,042,865
                
                $
                12,426,385**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY****Current
                    Liabilities**Accounts
                    payable and accrued liabilities
                
                $
                781,680
                
                $
                386,719Current
                    portion of bank indebtedness
                
                
                1,231,020
                
                
                1,282,462Income
                    taxes payable
                
                
                -
                
                
                117,964Due
                    to related parties
                
                
                -
                
                
                6,419**Total
                    current liabilities**
                
                
                2,012,700
                
                
                1,793,564**Noncurrent
                    portion of bank indebtedness**
                
                
                241,097
                
                
                -**Total
                    Liabilities**
                
                
                2,253,797
                
                
                1,793,564**Commitments
                    and Contingencies**
                
                
                -
                
                
                -**Stockholders’
                    Equity**Preferred
                    stock, per value $0.0001 per share, authorized10,000,000
                    shares; issued and outstanding 0 sharesCommon
                    stock, par value $0.0001 per share, authorized
                
                
                -
                
                
                -90,000,000
                    shares; issued and outstanding 21,512,269and
                    21,512,269 shares, respectively
                
                
                2,151
                
                
                2,151Additional
                    paid-in capital
                
                
                7,053,834
                
                
                7,053,834Retained
                    earnings
                
                
                6,521,641
                
                
                3,161,747Accumulated
                    other comprehensive income (loss)
                
                
                1,211,442
                
                
                415,089**Total
                    stockholders’ equity**
                
                
                14,789,068
                
                
                10,632,821**Total
                    Liabilities and Stockholders’ Equity**
                
                $
                17,042,865
                
                $
                12,426,385
  The
                  accompanying notes are an integral part of these consolidated financial
                  statements.
 
 F-2
  **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES****Consolidated
                  Statements of Operations and Comprehensive
                  Income****(Expressed
                  in US Dollars)**
  
 Year
                  ended December 31,2007
              
              2006(Audited)
              
              (Audited)**Revenue:**Net
                  sales of products
              
              $
              21,756,010
              
              $
              13,489,710Government
                  subsidy
              
              
              -
              
              
              9,640**Total
                  revenue**
              
              
              21,756,010
              
              
              13,499,350**Operating
                  Costs and Expenses**Cost
                  of goods sold
              
              
              15,882,799
              
              
              9,699,164Selling
                  and marketing
              
              
              695,007
              
              
              411,850General
                  and administrative
              
              
              1,456,985
              
              
              529,377Expenses
                  relating to the “reverse merger” of CCER
              
              
              -
              
              
              464,550Depreciation
                  of property, plant and equipment
              
              
              77,818
              
              
              34,771Amortization
                  of intangible assets
              
              
              178,635
              
              
              204,948Total
                  operating costs and expenses
              
              
              18,291,244
              
              
              11,344,660**Income
                  from Operations**
              
              
              3,464,766
              
              
              2,154,690**Other
                  Income (Expenses)**Interest
                  incomes
              
              
              9,355
              
              
              7,001Interest
                  expenses
              
              
              (114,227
              )
              
              (89,137
              )Total
                  Other Income (Expenses)
              
              
              (104,872
              )
              
              (82,136
              )**Income
                  before Income Taxes**
              
              
              3,359,894
              
              
              2,072,554**Income
                  Taxes**
              
              
              -
              
              
              (802,694
              )**Net
                  Income**
              
              $
              3,359,894
              
              $
              1,269,860**Other
                  Comprehensive Income**Foreign
                  currency translation adjustment
              
              
              796,353
              
              
              421,948**Comprehensive
                  Income**
              
              $
              4,156,247
              
              $
              1,691,808**Earnings
                  per common share:**Basic
              
              $
              0.16
              
              $
              0.07Diluted
              
              $
              0.16
              
              $
              0.07**Weighted
                  average number of common shares:**Basic
              
              
              21,512,269
              
              
              17,017,580Diluted
              
              
              21,512,269
              
              
              17,017,580
  The
                  accompanying notes are an integral part of these consolidated financial
                  statements.
 
 F-3
  **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES****Statements
                  of Stockholders’ Equity****(Expressed
                  in US Dollars)**
  
 Common
                      StockShares
                  
                  Amount
                  
                  Additional
                      Paid-in
                    Capital
                  
                  Retained
                    Earnings
                  
                  Accumulated
                      Other
                      Comprehensive
                    Income
                  
                  TotalBalance,
                      December 31, 2005
                  
                  
                  15,995,000
                  
                  $
                  1,600
                  
                  $
                  5,610,885
                  
                  $
                  2,645,307
                  
                  $
                  (6,859
                  )
                  $
                  8,250,933Common
                      stock retained by acquirer’sstockholders
                      in connection with “reverse acquisition” of China Clean Energy Resources,
                      Ltd. (“CCER”) on October 24, 2006
                  
                  
                  2,432,269
                  
                  
                  243
                  
                  
                  (243
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -Common
                      stock issued to consultants for services rendered in connection
                      with
                      “reverse acquisition” of CCER
                  
                  
                  1,605,000
                  
                  
                  160
                  
                  
                  160,340
                  
                  
                  -
                  
                  
                  -
                  
                  
                  160,500Common
                      stock issued for cash on October 24, 2006 at $1 per share,
                      less offering
                      costs of $35,000
                  
                  
                  1,050,000
                  
                  
                  105
                  
                  
                  1,014,895
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,015,000Common
                      stock issued for cash in November 2006 at $1 per share
                  
                  
                  250,000
                  
                  
                  25
                  
                  
                  249,975
                  
                  
                  -
                  
                  
                  -
                  
                  
                  250,000Common
                      stock issued in November 2006 for services
                  
                  
                  180,000
                  
                  
                  18
                  
                  
                  17,982
                  
                  
                  -
                  
                  
                  -
                  
                  
                  18,000Net
                        income for year endedDecember 31, 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,269,860
                  
                  
                  -
                  
                  
                  1,269,860Dividends
                      declared
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (753,420
                  )
                  
                  -
                  
                  
                  (753,420
                  )Foreign
                      currency translation adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  421,948
                  
                  
                  421,948Balance
                      at December 31, 2006
                  
                  
                  21,512,269
                  
                  $
                  2,151
                  
                  $
                  7,053,834
                  
                  $
                  3,161,747
                  
                  $
                  415,089
                  
                  $
                  10,632,821Net
                      income for year ended December 31, 2007
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,359,894
                  
                  
                  -
                  
                  
                  3,359,894Foreign
                      currency translation adjustment
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  796,353
                  
                  
                  796,353Balance
                      at December 31, 2007
                  
                  
                  21,512,269
                  
                  $
                  2,151
                  
                  $
                  7,053,834
                  
                  $
                  6,521,641
                  
                  $
                  1,211,442
                  
                  $
                  14,789,068
  The
                  accompanying notes are an integral part of these consolidated financial
                  statements.
 
 F-4
  **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES****Consolidated
                  Statements of Cash Flows****(Expressed
                  in US Dollars)**
  
 Year
                  ended December 31,2007
              
              2006(Audited)
              
              (Audited)**Cash
                  Flows from Operating Activities**Net
                  income
              
              $
              3,359,894
              
              $
              1,269,860Adjustmens
                  to reconcile net income to net cashprovided
                  by (used for) operating activitiesStock-based
                  compensation
              
              
              -
              
              
              178,500Depreciation
                  of proeprty, plant and equipment
              
              
              542,875
              
              
              402,138Amortization
                  of intangible assets
              
              
              178,635
              
              
              204,948Changes
                  in operating assets and liabilitiesAccounts
                  receivable, net
              
              
              (1,705,934
              )
              
              (433,820
              )Other
                  receivables
              
              
              (122,581
              )
              
              (24,904
              )Due
                  from related parties
              
              
              -
              
              
              14,875Inventory
              
              
              (419,545
              )
              
              358,201Prepaid
                  expenses
              
              
              5,366
              
              
              (37,696
              )Accounts
                  payable and accrued liabilities
              
              
              394,961
              
              
              (286,134
              )Income
                  taxes payable
              
              
              (117,964
              )
              
              (248,389
              )**Net
                  cash provided by (used for) operating activities**
              
              
              2,115,707
              
              
              1,397,579**Cash
                  Flows from Investing Activities**Property,
                  plant and equipment additions
              
              
              (1,342,153
              )
              
              (2,063,652
              )Intangible
                  assets additions
              
              
              (2,467,388
              )
              
              (545,225
              )Deposits
                  paid in connection with contract for purchase of land use
                  rights
              
              
              -
              
              
              (95,033
              )**Net
                  cash provided by (used for) investing activities**
              
              
              (3,809,541
              )
              
              (2,703,910
              )**Cash
                  Flows from Financing Activities**Capital
                  stock issued for cash
              
              
              -
              
              
              1,265,000Increase
                  (decrease) in bank indebtedness
              
              
              189,655
              
              
              42,850Due
                  to related parties
              
              
              (6,419
              )
              
              (296,525
              )Dividends
                  paid
              
              
              -
              
              
              (753,420
              )**Net
                  cash provided by (used for) financing activities**
              
              
              183,236
              
              
              257,905**Effect
                  of exchange rate changes on cash and cash
                  equivalents**
              
              
              402,441
              
              
              115,010**Increase
                  (decrease) in cash and cash equivalents**
              
              
              (1,108,157
              )
              
              (933,416
              )**Cash
                  and cash equivalents, beginning of period**
              
              
              2,241,712
              
              
              3,175,128**Cash
                  and cash equivalents, end of period**
              
              $
              1,133,555
              
              $
              2,241,712**Supplemental
                  disclosures of cash flow information:**Interest
                  paid
              
              $
              114,227
              
              $
              89,137Income
                  taxes paid
              
              $
              -
              
              $
              1,051,083
  The
                  accompanying notes are an integral part of these consolidated financial
                  statements.
 
 F-5
 **CHINA
        CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)





**NOTE
      1 - ORGANIZATION AND BUSINESS OPERATIONS**




China
      Clean Energy, Inc. (“CCE”) was incorporated in the State of Delaware on November
      12, 2004 under the name Hurley Exploration Inc. (“Hurley”). From inception to
      October 24, 2006, Hurley was an exploration stage company.





On
      October 24, 2006, CCE acquired 100% of the issued and outstanding common shares
      of China Clean Energy Resources Limited (“CCER”) in exchange for 15,995,000
      newly issued shares of CCE common stock (the “Share Exchange”). In connection
      with the Share Exchange, CCE accepted subscriptions for a total of 1,300,000
      shares of common stock at a price of $1.00 per share and issued 1,605,000 shares
      of common stock to certain consultants for financial consulting and advisory
      services (together with the Share Exchange, the “Transaction”).




Prior
      to
      the Transaction, as adjusted for a 2.26187510124-for-1 reverse stock split
      and
      the cancellation of 8,842,222 post-split shares, CCE had 2,432,269 shares of
      common stock issued and outstanding. After the Transaction, CCE had 21,082,269
      shares of common stock outstanding and the former shareholders of CCER owned
      75.87% of the issued and outstanding shares. Accordingly, CCER is considered
      the
      acquirer for accounting purposes and the Share Exchange has been accounted
      for
      as a “reverse acquisition”.




As
      a
      result of the Share Exchange, CCER became a wholly-owned subsidiary of CCE
      and
      CCE succeeded to the business of Fujian Zhongde Technology Co., Ltd. (“Fujian
      Zhongde”). Fujian Zhongde synthesizes and distributes renewable fuel products
      and specialty chemicals to customers in both the People’s Republic of China
      (“PRC”) and abroad.




CCER
      was
      formed on February 13, 2006 under the laws of the British Virgin Islands as
      a
      holding company to own Fujian Zhongde. Fujian Zhongde was incorporated in the
      province of Fujian, China, on July 10, 1995 under the name “Fuqing City Zhongde
      Chemical Industry, Ltd.”. On December 10, 2003, it changed its name to “Fujian
      Zhong De Technology Stock Co., Ltd”. On January 20, 2006, it changed its name to
“Fujian Zhongde Technology Co., Ltd.”




On
      November 5, 2007, CCER established a new wholly-owned subsidiary, Fujian Zhongde
      Energy Co., Ltd. (“Zhongde Energy”), in Jiangyin Industrial Zone, Fuqing City,
      Fujian Province, PRC. Zhongde Energy plans to build a biodiesel refinery in
      the
      Jiangyin Industrial Park and produce and sell biodiesel products. The
      construction of its production plant is currently in progress.





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




Principles
      of Consolidation




The
      consolidated financial statements at December 31, 2007 include the accounts
      of
      CCE, CCER, Fujian Zhongde and Zhongde Energy (collectively, the “Company”). All
      inter-company balances and transactions have been eliminated in
      consolidation.




F-6


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







Basis
      of Presentation




The
      financial statements of the Company have been prepared in accordance with
      accounting principles generally accepted in the United States and are expressed
      in US dollars.




Use
      of
      Estimates




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the Unites States 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 financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.




Fair
      Value of Financial Instruments




The
      Company’s financial instruments consist of cash and cash equivalents, accounts
      receivable, other receivables, accounts payable and accrued liabilities, and
      bank indebtedness. The fair value of these financial instruments approximate
      their carrying amounts reported in the consolidated balance sheets due to the
      short term maturity of these instruments and based on interest rates of
      comparable instruments.




Foreign
      Currency Translation




The
      functional currency of CCE and CCER is the United States dollar. The functional
      currency of Fujian Zhongde and Zhongde Energy is the Chinese Renminbi (“RMB”).
      The reporting currency of the Company is the United States dollar.




Fujian
      Zhongde and Zhongde Energy assets and liabilities are translated into United
      States dollars at period-end exchange rates ($0.13710 and $0.12825 at December
      31, 2007 and 2006, respectively). Fujian Zhongde and Zhongde Energy revenues
      and
      expenses are translated into United States dollars at weighted average exchange
      rates for the periods (for Fujian Zhongde, $0.13167 and $0.12557 for the years
      ended December 31, 2007 and 2006, respectively; for Zhongde Energy, $0.13545
      for
      the period November 5, 2007 to December 31, 2007). Resulting translation
      adjustments are recorded as a component of accumulated other comprehensive
      income (loss) within stockholders’ equity.




Cash
      and Cash Equivalents




The
      Company considers all highly liquid instruments with maturities of three months
      or less at the time of issuance to be cash equivalents.




Inventories




Inventories
      are stated at the lower of cost or market. The method of determining cost is
      used consistently from year to year as the first-in, first-out (“FIFO”)
      method.




F-7


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







Property,
      Plant and Equipment




Property,
      plant and equipment are stated at cost less accumulated depreciation.
      Depreciation is calculated on a straight-line basis over the estimated useful
      lives of the respective assets (20 years for buildings, 10 years for equipment
      and machinery, and 5 years for automobiles and office equipment).




Intangible
      and Other Long-Lived Assets




Intangible
      and other long-lived assets are stated at cost, less accumulated amortization
      and impairments. Land use rights are being amortized on a straight-line basis
      over the terms of the related agreements. Patents and licenses are being
      amortized over their expected useful economic life of 10 years.




The
      Company reviews its long-lived assets for impairment whenever events or changes
      in circumstances indicate that the carrying amount of an asset may no longer
      be
      recoverable. When these events occur, the Company measures impairment by
      comparing the carrying value of the long-lived assets to the estimated
      undiscounted future cash flows expected to result from the use of the assets
      and
      their eventual disposition. If the sum of the expected undiscounted cash flows
      is less than the carrying amount of the assets, the Company would recognize
      an
      impairment loss based on the fair value of the assets.




Revenue
      Recognition




Sales
      are
      recognized when the revenue is realized or realizable, and has been earned,
      in
      accordance with the U.S. Securities and Exchange Commission’s Staff Accounting
      Bulletin No. 104, “Revenue Recognition in Financial Statements”. The Company’s
      sales are related to sales of product. Revenue for product sales is recognized
      as risk and title to the product transfer to the customer, which usually occurs
      at the time shipment is made. Substantially all of the Company’s products are
      sold FOB (“free on board”) shipping point. Title to the product passes when the
      product is delivered to the freight carrier.




Stock-Based
      Compensation




Stock-based
      compensation is accounted for at fair value in accordance with SFAS No. 123
      (R)
“Accounting for Stock-Based Compensation”. SFAS 123R requires that compensation
      cost relating to stock-based payment transactions be recognized in financial
      statements. That cost is measured based on the fair value of the equity or
      liability instruments issued on the grant date of such instruments, and is
      recognized over the period during which a party is required to provide service
      in exchange for the award (typically the vesting period). Through December
      31,
      2007, no stock options had been granted.




In
      2006,
      the Company issued a total of 1,785,000 shares of restricted stock for services
      rendered or to be rendered to the Company. 1,605,000 shares were issued to
      consultants for services rendered in connection with the “reverse acquisition”
of CCER on October 24, 2006, 30,000 shares were issued to an investor relations
      firm on November 8, 2006 as an incentive fee, 100,000 shares were issued to
      the
      Company’s chief financial officer on November 13, 2006 pursuant to the terms of
      a one year Compensation Agreement, and 50,000 shares were issued to a consultant
      on November 13, 2006 pursuant to the terms of a one year Corporate Services
      Agreement. The 100,000 shares issued to the Company’s chief financial officer
      and the 50,000 shares issued to the consultant are subject to possible
      cancellation or forfeiture in certain circumstances. The fair value of these
      issuances was determined based on the last sale quoted on the OTC Bulletin
      Board
      on the date of the respective grants, reduced by a restricted stock
      discount.




F-8


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







Income
      Taxes




Deferred
      income taxes are recognized for temporary differences between the tax bases
      of
      assets and liabilities and their reported amounts in the financial statements,
      net of operating loss carry forwards and credits, by applying enacted statutory
      tax rates applicable to future years. Deferred tax assets are reduced by a
      valuation allowance when, in the opinion of management, it is not more likely
      than not that some portion or all of the deferred tax assets will be realized.
      Current income taxes are provided for in accordance with the laws of the
      relevant taxing authorities.




Earnings
      (Loss) Per Common Share




Basic
      earnings (loss) per common share are computed on the basis of the weighted
      average number of common shares outstanding during the period.




Diluted
      earnings (loss) per share are computed on the basis of the weighted average
      number of common shares and dilutive securities (such as stock options and
      convertible securities) outstanding. Dilutive securities having an anti-dilutive
      effect on diluted earnings (loss) per share are excluded from the
      calculation.




Reclassifications




Certain
      prior year amounts have been reclassified to conform to the current year
      presentation.




**NOTE
      3 - INVENTORIES**





Inventories
      consist of:




December
                  31,
              
              December
                  31,2007
              
              2006(Audited)
              
              (Audited)Raw
                  materials
              
              $
              564,993
              
              $
              430,392Work
                  in progress and packaging material
              
              
              11,728
              
              
              24,065Finished
                  goods
              
              
              784,757
              
              
              487,476Total
                  Inventories
              
              $
              1,361,478
              
              $
              941,933




F-9


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







**NOTE
      4 - PROPERTY, PLANT AND EQUIPMENT**




Property,
      plant and equipment, net consist of:




December
                  31,
              
              December
                  31,2007
              
              2006(Audited)
              
              (Audited)Land
                  improvements
              
              $
              759,519
              
              $
              -Buildings
              
              
              2,227,928
              
              
              2,051,056Equipment
                  and machinery
              
              
              5,309,511
              
              
              4,419,551Automobiles
              
              
              37,898
              
              
              20,529Office
                  equipment
              
              
              18,100
              
              
              13,848Construction
                  in progress
              
              
              450,434
              
              
              449,346Total
              
              
              8,803,390
              
              
              6,954,330Less
                  accumulated depreciation
              
              
              (2,983,345
              )
              
              (2,262,130
              )Net
              
              $
              5,820,045
              
              $
              4,692,200





**NOTE
      5 - INTANGIBLE ASSETS**





Intangible
      assets, net consist of:




December
                  31,
              
              December
                  31,2007
              
              2006(Audited)
              
              (Audited)Land
                  use rights
              
              $
              4,550,853
              
              $
              1,949,015Patents
                  and licenses
              
              
              1,261,292
              
              
              1,179,900Total
              
              
              5,812,145
              
              
              3,128,915Less
                  accumulated amortization
              
              
              (932,510
              )
              
              (698,411
              )Net
              
              $
              4,879,635
              
              $
              2,430,504




F-10


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







**NOTE
      6 - BANK INDEBTEDNESS**





Bank
      indebtedness consists of:


December
                    31,
                
                December
                    31,2007
                
                2006(Audited)
                
                (Audited)DBS
                    Bank (Hong Kong) Limited under revolving credit agreement, interest
                    at
                    115% of PRC prime rate, secured by certain buildings and land
                    use
                    rights
                
                $
                1,028,219
                
                $
                1,282,462DBS
                    Bank (Hong Kong) Limited, interest at 115% of PRC prime rate,
                    due in
                    monthly installments of principal and interest of $19,412 through
                    January
                    2010, secured by certain buildings and land use rights
                
                
                443,898
                
                
                -Total
                
                
                1,472,117
                
                
                1,282,462Less
                    current portion
                
                
                (1,231,020
                )
                
                (1,282,462
                )Noncurrent
                    portion of bank indebtedness
                
                
                241,097
                
                $
                -


**NOTE
      7 - PENSION AND EMPLOYMENT LIABILITIES**





At
      December 31, 2007 and 2006, the Company had no liability for pension or past
      employment benefits. The Company does not have a pension or other retirement
      plan.




**NOTE
      8 - RESTRICTED NET ASSETS**





Relevant
      PRC statutory laws and regulations permit payments of dividends by Fujian
      Zhongde only out of its retained earnings, if any, as determined in accordance
      with PRC accounting standards and regulations. In addition, PRC laws and
      regulations require that annual appropriations of after-tax income should be
      set
      aside prior to payments of dividends as a reserve fund. As a result of these
      PRC
      laws and regulations, Fujian Zhongde is restricted in its ability to transfer
      a
      portion of its net assets in the form of dividends, loans or advances, which
      restricted portion amounted to approximately $7,500,000 at December 31,
      2007.





F-11


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







**NOTE
      9 - INCOME TAXES**




Income
      taxes consist of:


Years
                  ended December 31,2007
              
              2006(Audited)
              
              (Audited)Current:PRC
              
              $
              -
              
              $
              802,694United
                  States
              
              
              -
              
              
              -Total
                  current
              
              
              -
              
              
              802,694Deferred
              
              
              -
              
              
              -Total
              
              $
              -
              
              $
              802,694





Fujian
      Zhongde has been subject to a PRC 33% standard enterprise income tax. In 2006,
      Fujian Zhongde became a wholly-owned foreign enterprise (“WOFE”). PRC income tax
      laws provide that certain WOFEs may be exempt from income taxes for two years,
      commencing with their first profitable year of operations, after taking into
      account any losses brought forward from prior years, and thereafter 50% exempt
      for the next three years. In December 2006, Fujian Zhongde applied for PRC
      approval of these income tax exemptions. In March 2007, the PRC tax authorities
      approved a full income tax exemption for the year 2007 and a 12% income tax
      rate
      for years 2008, 2009 and 2010.





As
      at
      December 31, 2007, CCE had an unrecognized deferred United States income tax
      liability relating to undistributed earnings of Fujian Zhongde. These earnings
      are considered to be permanently invested in operations outside the United
      States. Generally, such earnings become subject to United States income tax
      upon
      the remittance of dividends and under certain other circumstances. Determination
      of the amount of the unrecognized deferred United States income tax liability
      with respect to such earnings is not practicable because the amount of PRC
      foreign tax credits available to offset United States income taxes will depend
      on the timing of future remittances, if any, and such timing is not known or
      predictable.





The
      provision for income taxes differs from the amount computed by applying the
      statutory United States federal income tax rate to income before income taxes.
      A
      reconciliation follows:




Years
                      endedDecember 31,2007
                
                2006(Audited)
                
                (Audited)Expected
                    tax at 35%
                
                $
                1,175,963
                
                $
                725,394Tax
                    effect of unutilized losses of CCE, CCER, and Zhongde
                    Energy
                
                
                259,772
                
                
                87,607Tax
                    effect of Fujian Zhongde income taxed at lower rate
                
                
                (1,435,735
                )
                
                (46,457
                )Permanent
                    differences
                
                
                -
                
                
                36,150Actual
                    provision for income taxes
                
                $
                -
                
                $
                802,694




F-12


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







**NOTE
      10 - RELATED PARTY TRANSACTIONS**




Fujian
      Zhongde purchases raw materials from a company whose majority stockholder is
      the
      niece of a director and significant stockholder of the Company. In the years
      ended December 31, 2007 and 2006, such purchases totaled $5,668,371 and
      $3,211,173, respectively. The Company believes that these purchases were
      transacted at terms no less favorable than those that could have been conducted
      with unaffiliated third parties.




**NOTE
      11 - SEGMENT INFORMATION**




The
      Company operates in one industry segment - the synthesization and distribution
      of renewable fuel products and specialty chemicals to customers in both the
      PRC
      and abroad. Substantially all of the Company’s identifiable assets at December
      31, 2007 were located in the PRC.





Net
      sales
      consist of:


Years
                  ended December 31,2007
              
              2006(Audited)
              
              (Audited)Specialty
                  chemicals products
              
              $
              15,982,335
              
              $
              10,130,772Biodiesel
                  products
              
              
              5,773,675
              
              
              3,358,938Total
              
              $
              21,756,010
              
              $
              13,489,710




In
      2007,
      two customers (for biodiesel products) accounted for 15% and 12%, respectively,
      of net sales.




In
      2006,
      one customer (for biodiesel products) accounted for 11% of net
      sales.




In
      2007,
      68% of net sales was generated from sales in the PRC.




F-13


**CHINA
        CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2007 and 2006
 (Audited)


**NOTE
      12 - COMMITMENTS AND CONTINGENCIES**




Contract
      for Purchase of Land Use Rights





On
      December 25, 2006, CCER executed a contract with The Bureau of Jiangyin
      Industrial Zone in Fujian Province to acquire land use rights for 50 years
      for
      certain land located in the Fujian Province of the PRC for a total purchase
      price of approximately $2,500,000.





The
      contract, which was originally expected to close in June 2007, contemplates
      that
      Zhongde will build a new biodiesel facility on the land with a total project
      cost of approximately $15,000,000. On December 22, 2007, the acquisition of
      the
      land use rights was completed.





PRC
      Risks





Substantially
      all of Fujian Zhongde’s business operations are conducted in the PRC and
      governed by PRC laws and regulations. Because these laws and regulations are
      relatively new, the interpretation and enforcement of these laws and regulations
      involve uncertainties.





The
      PRC
      government imposes controls on the convertibility of RMB into foreign currencies
      and, in certain cases, the remittance of currency out of the PRC. Under existing
      PRC foreign exchange regulations, payment of current account items, including
      profit distributions, interest payments and expenditures from the transaction,
      can be made in foreign currencies without prior approval from the PRC State
      Administration of Foreign Exchange by complying with certain procedural
      requirements. However, approval from appropriate governmental authorities is
      required where RMB is to be converted into foreign currency and remitted out
      of
      the PRC to pay capital expenses, such as the repayment of bank loans denominated
      in foreign currencies. The PRC government may also at its discretion restrict
      access in the future to foreign currencies for current account
      transactions.




**NOTE
      13 - SUBSEQUENT EVENTS**




Private
      Placement Financing for $15,000,000





On
      January 9, 2008, CCE completed a private placement, pursuant to which CCE issued
      10,000,000 shares of common stock and five-year warrants to purchase 5,000,000
      shares of common stock at an initial exercise price of $2.00 per share for
      aggregate gross proceeds of $15,000,000. In connection with this private
      placement, CCE incurred placement agent fees of approximately $1,200,000, and
      issued the placement agent five-year warrants to purchase an aggregate of
      1,200,000 shares of common stock at an initial exercise price of $2.00 per
      share.





In
      connection with the private placement, four related parties placed a total
      of
      1,500,000 shares of CCE common stock into an escrow account, with such shares
      to
      be released to the investors of this offering if the Company fails to (1)
      commence the production of biodiesel at its currently proposed production
      facility in Jiangyin, PRC on or before January 1, 2009, or (2) record at least
      $14,000,000 of adjusted net income for the fiscal year ending December 31,
      2009.
      Should the Company successfully satisfy each of these two milestones, these
      shares of CCE common stock will be returned to the four related
      parties.




F-14


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







In
      connection with the private placement, CCE entered into a registration rights
      agreement with the purchasers pursuant to which CCE agreed to provide certain
      registration rights with respect to the common stock issued and the common
      stock
      issuable upon exercise of the warrants. Specifically, CCE agreed to file a
      registration statement with the Securities and Exchange Commission covering
      the
      resale of the common stock issued and underlying the warrants on or before
      February 23, 2008 and to cause such registration statement to be declared
      effective by the Securities and Exchange Commission on or before May 8, 2008.
      If
      (i) the registration statement is not filed on or before February 23, 2008
      or
      (ii) CCE fails to file with the Securities and Exchange Commission a request
      for
      acceleration of the registration statement in accordance with Rule 461
      promulgated by the Securities and Exchange Commission pursuant to the Securities
      Act, within five trading days of the date that CCE is notified by the Securities
      and Exchange Commission that such registration statement will not be “reviewed ”
or will not be subject to further review (unless the failure to make such
      request for acceleration is the result of our determination that events
      affecting us will require the filing of an amendment to the registration
      statement), or (iii) the registration statement is not declared effective by
      the
      Securities and Exchange Commission on or before May 8, 2008, or (iv) the
      registration statement ceases to remain continuously effective for more than
      15
      consecutive calendar days or more than an aggregate of 20 calendar days during
      any 12-month period after its first effective date, then CCE is subject to
      liquidated damage payments to the holders of the shares sold in the private
      placement in an amount equal to either (i) 1% of the aggregate purchase price
      paid by such purchasers per month of delinquency or (ii) 1% of the number of
      shares of common stock purchased by such purchasers in the offering per month
      of
      delinquency. Notwithstanding the foregoing, in no event shall liquidated damages
      be paid exceed 6% of the aggregate gross proceeds of the offering or 6% of
      the
      aggregate number of shares of common stock issued in the offering, or a
      combination thereof. In addition, CCE shall not be obligated to pay liquidated
      damages with respect to any securities that CCE is unable to register pursuant
      to the authority of the Securities and Exchange Commission with respect to
      Rule
      415 of the Securities Act of 1933, as amended. Pursuant to the registration
      rights agreement, CCE must maintain the effectiveness of the registration
      statement from the effective date until the date on which all securities
      registered under the registration statement have been sold, or are otherwise
      able to be sold pursuant to Rule 144, subject to CCE’s right to suspend or defer
      the use of the registration statement in certain events.





On
      February 1, 2008, the Company filed the registration statement. On February
      8,
      2008, the registration statement was declared effective by the Securities and
      Exchange Commission.





Adoption
      of 2008 Equity Incentive Plan





On
      January 9, 2008, the Company adopted the 2008 Equity Incentive Plan. The purpose
      of the 2008 Equity Incentive Plan is to provide an incentive to attract and
      retain directors, officers, consultants, advisors and employees whose services
      are considered valuable, to encourage a sense of proprietorship and to stimulate
      an active interest of such persons in our development and financial success.
      Under the 2008 Equity Incentive Plan, CCE is authorized to issue up to 2,000,000
      stock options, 1,000,000 of which shall have an exercise price per share equal
      to the greater of (i) $2.50 or (ii) 100% of the Fair Market Value of a share
      of
      common stock on the date of grant and 1,000,000 of which shall have an exercise
      price per share equal to the greater of (i) $3.00 or (ii) 100% of the Fair
      Market Value of a share of common stock on the date of grant. Under the 2008
      Equity Incentive Plan, CCE is authorized to issue incentive stock options
      intended to qualify under Section 422 of the Internal Revenue Code of 1986,
      as
      amended, and non-qualified stock options and all options under the Plan shall
      vest quarterly over three years. The 2008 Equity Incentive Plan is administered
      by CCE’S board of directors. Effective January 9, 2008, CCE granted options to
      purchase a total of 1,700,000 shares of common stock under the 2008 Equity
      Incentive Plan, including 1,350,000 granted to Company officers and directors.
      850,000 options are exercisable at a price of $2.50 per share and 850,000
      options are exercisable at a price of $3.00 per share; all 1,700,000 options
      expire 10 years from the date of grant.




F-15


**CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2007 and 2006


(Audited)







The
      $1,872,720 fair value of the 1,700,000 stock options will be expensed ratably
      over the three year requisite service period of the respective personnel. The
      fair value of the stock options was estimated on the date of grant using the
      Black-Scholes option-pricing model with the following assumptions: exercise
      prices of $2.50 (for 850,000 stock options) and $3.00 (for 850,000 stock
      options), expected life of options of 10 years, expected volatility of 80%,
      expected dividend yield of 0%, and risk-free interest rate of 4%.




Employment
      Agreement





On
      January 9, 2008, the Company entered into a two year employment agreement with
      its Chief Executive Officer and chairman of the Board of Directors, which
      agreement shall be automatically renewed for additional one-year periods until
      either party gives the other written notice of its intent not to renew the
      agreement at least 90 days prior to the end of the then current term. Pursuant
      to this agreement, the Chief Executive Officer (the “CEO”) shall receive a
      salary of approximately $2,473 per month, which amount shall be increased by
      at
      least 10% following the one year anniversary of the agreement. If the CEO’s
      employment is terminated without cause or he resigns for good reason, all
      unvested options shall vest and the CEO will be entitled to the continuation
      of
      benefits and the payment of his salary for 12 months.





Capital
      Contribution to Fujian Zhongde Energy Co., Ltd.





On
      January 11, 2008, CCER made a capital contribution of $10,000,000 to Zhongde
      Energy to fulfill the registered capital investment requirements stipulated
      by
      the Fuqing City Foreign Trading and Economy Cooperation Bureau.





F-16