**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, 2006




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:


**Common
      Stock, par value $0.001 per share**


(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 registrant (1) has 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
      registrant’s revenues for the fiscal year ended December 31, 2006 were
      $13,489,710.




As
      of
      March 12, 2007, 6,057,069 shares of common stock of the registrant were
      outstanding, and the aggregate market value of the common stock of the
      registrant as of March 12, 2007 (based upon the $2.50 per share closing price
      of
      the common stock at that date as reported on the Over-The-Counter Bulletin
      Board), excluding 15,455,200 outstanding shares beneficially owned by directors
      and executive officers, was $15,142,672.




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







**TABLE
      OF CONTENTS**


PagePART
                  IItem
                  1.
              Description
                  of Business
              
              1Item
                  2.
              Description
                  of Property
              
              26Item
                  3.
              Legal
                  Proceedings
              
              27Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              
              27PART
                  IIItem
                  5.
              Market
                  for Common Equity, Related Stockholder Matters and SmallBusiness
                  Issuer Purchases of Equity Securities
              
              27Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              
              29Item
                  7.
              Financial
                  Statements
              
              35Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting andFinancial
                  Disclosure
              
              49Item
                  8A.
              Controls
                  and Procedures
              
              49Item
                  8B.
              Other
                  Information
              
              50PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act
              
              50Item
                  10.
              Executive
                  Compensation
              
              52Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Stockholder Matters
              
              53Item
                  12.
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              
              54Item
                  13.
              Exhibits
              
              54Item
                  14.
              Principal
                  Accountant Fees and Services
              
              56




i




**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. and its
      subsidiaries.




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. 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 vegetable oils and waste grease. Using
      this
      proprietary process, we began producing biodiesel in 2005 and commenced selling
      biodiesel commercially in December 2005.




**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.




1




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.




*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.




2




*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, 2006 through December 31, 2006. As
      shown
      in the table, during the twelve-month period ending December 31,
      2006, dimer acid was our top selling product, accounting for 26.2% of
      total sales. However,
      biodiesel was our fastest growing product in terms of sales volume during
      2006.




**Products
                Sold**
            
            **%
                of Total Sales for the Period**1.
            
            
            Dimer
                Acid
            
            
            26.2
            %2.
            
            
            Biodiesel
            
            
            24.9
            %3.
            
            
            Polyamide
                Resin
            
            
            22.6
            %4.
            
            
            Printing
                Ink
            
            
            10.1
            %5.
            
            
            Fatty
                Acid
            
            
            4.8
            %6.
            
            
            Hot-Melt
                Adhesive
            
            
            4.6
            %7.
            
            
            Stearic
                Acid
            
            
            3.1
            %8.
            
            
            Vegetable
                Asphalt
            
            
            2.7
            %9.
            
            
            Oleic
                Acid
            
            
            0.6
            %10.
            
            
            Glue
                Water
            
            
            0.4
            %Total
            
            
            100
            %





The
      following table shows our total sales volume broken down by product category
      for
      the twelve-month period from January 1, 2005 through December 31, 2005. As
      shown
      in the table, during the twelve month period ended December 31, 2005, dimer
      acid
      was our top selling product, accounting for 33.7% of total sales.




**Products
                Sold**
            
            **%
                of Total Sales for the Period**1.
            
            
            Dimer
                Acid
            
            
            33.7
            %2.
            
            
            Polyamide
                Resin
            
            
            22.6
            %3.
            
            
            Printing
                Ink
            
            
            15.5
            %4.
            
            
            Fatty
                Acid
            
            
            10.0
            %5.
            
            
            Stearic
                Acid
            
            
            7.8
            %6.
            
            
            Vegetable
                Asphalt
            
            
            4.8
            %7.
            
            
            Biodiesel
            
            
            2.4
            %8.
            
            
            Hot-Melt
                Adhesive
            
            
            1.7
            %9.
            
            
            Liquid
                Polyamide Resin
            
            
            0.7
            %10.
            
            
            Oleic
                Acid
            
            
            0.5
            %11.
            
            
            Glue
                Water
            
            
            0.4
            %Total
            
            
            100
            %





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.




*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.




4




**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 100,000 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 four
      main domestic competitors: Handan Gushan Bio-energy Co., Ltd., located in
      Handan, Hebei Province, Longyan Zhuoyue New Energy Development Co., Ltd.,
      located in Longyan, Fujian Province, Wuxi Huahong Bio-fuel Co., Ltd., located
      in
      Wuxi, Jiangsu Province and China Biodiesel International Holding Co. Limited,
      located in Longyan, Fujian 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.




**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.




6




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 near the
      Fujian Province, as there are only a handful of other companies currently in
      the
      market, some of which 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 places 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 expect to break ground on the new biodiesel facility within the next
      six to nine months.




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;




7




·
            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 expanding the
      capacity of this facility, and expect to complete the expansion within three
      months.




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: 4,800 tons or approximately 1.44 million
                gallons




·
            Annual
                Capacity - specialty chemicals: 18,000
                tons




*After
      Expansion:*




·
            Approximately
                $500,000 will be invested by us to build and install a new diesel
                platform
                next to the existing reactor. A portion of the budgeted $500,000
                has
                already been committed and spent to date.




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




·
            Biodiesel
                annual production capacity will double in size to approximately 10,000
                tons or approximately 3.0 million
                gallons.




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




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




**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.




8




*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 2006, sales of biodiesel accounted
      for approximately 25% of our total sales for that time period.




*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.




9




For
      the
      twelve-month period from January 1, 2006 through December 31, 2006, we achieved
      consolidated revenues of $13,489,710. During the same time period, our top
      ten
      customers - ranked by the sales amount sold to each customer - contributed
      $3,154,627 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
            
            $
            1,546,530
            
            
            11.23
            %2.
            
            
            Fuqing
                Risheng Filling Station
            
            
            Biodiesel
            
            $
            1,372,151
            
            
            9.96
            %3.
            
            
            Sanwa
                Chemicals Pte Ltd.
              (a
                subsidiary of Air Products & Chemicals, Inc.)
            
            
            Specialty
                Chemicals
            
            $
            1,172,683
            
            
            8.51
            %4.
            
            
            HBG
                Explore Corporation
            
            
            Specialty
                Chemicals
            
            $
            1,166,476
            
            
            8.47
            %5.
            
            
            Micro
                Ink Ltd
            
            
            Specialty
                Chemicals
            
            $
            884,429
            
            
            6.42
            %6.
            
            
            Tianjin
                Subbranch Fuqing Zhongde Chemical, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            522,169
            
            
            3.79
            %7.
            
            
            Ink
                Products Co. Ltd
            
            
            Specialty
                Chemicals
            
            $
            411,205
            
            
            2.99
            %8.
            
            
            Cangnan
                Oianku Sanlian Printing Ink Store
            
            
            Specialty
                Chemicals
            
            $
            381,584
            
            
            2.77
            %9.
            
            
            Huiyang
                Dachang Industry Co. Ltd
            
            
            Specialty
                Chemicals
            
            $
            339,951
            
            
            2.47
            %10.
            
            
            Advanced
                Chemcial Co. Ltd
            
            
            Specialty
                Chemicals
            
            $
            337,430
            
            
            2.45
            %Total
                (Top 10)
            
            
            
            
            $
            8,134,608
            
            
            59.06
            %Total
                (Company)
            
            
            
            
            $
            13,772,797
            
            
            100.00
            %




During
      the twelve-month period from January 1, 2005 through December 31, 2005, we
      had
      consolidated revenues of $10,040,188. During the same time period, our top
      ten
      customers - ranked by the sales amount sold to each customer - contributed
      $6,026,959 in revenues **.** The
      following table depicts the top ten customers for the twelve-month period from
      January 1, 2005 through December 31, 2005. Please note that none of these
      customers were biodiesel customers, as we only began selling biodiesel
      commercially in December 2005.




**Name
                of Customer**
            
            **Products
                Sold**
            
            **Sales
                for the Period by Customer**
            
            **%
                of Sales for the Period**1.
            
            
            Sanwa
                Chemicals Pte Ltd.
              (a
                subsidiary of Air Products & Chemicals, Inc.)
            
            
            Specialty
                Chemicals
            
            $
            1,846,156
            
            
            18.4
            %2.
            
            
            Micro
                Ink Ltd
            
            
            Specialty
                Chemicals
            
            $
            848,672
            
            
            8.5
            %3.
            
            
            HGB
                Explore Corporation
            
            
            Specialty
                Chemicals
            
            $
            761,526
            
            
            7.6
            %4.
            
            
            Huiyang
                Dachang Industrial, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            591,907
            
            
            5.9
            %5.
            
            
            Shanghai
                Jinyi Printing, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            551,106
            
            
            5.5
            %6.
            
            
            Fujian
                Fuqing Melida Chemical, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            333,414
            
            
            3.3
            %7.
            
            
            Tianjin
                Subbranch Fuqing Zhongde Chemical, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            309,922
            
            
            3.1
            %8.
            
            
            Fuqing
                Southern Color Printing, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            297,587
            
            
            3.0
            %9.
            
            
            Advanced
                Chemicals Pte, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            244,872
            
            
            2.4
            %10.
            
            
            Fuzhou
                Xinqiang Trading, Ltd.
            
            
            Specialty
                Chemicals
            
            $
            241,796
            
            
            2.4
            %Total
                (Top 10)
            
            
            
            
            $
            6,026,959
            
            
            63.0
            %Total
                (Company)
            
            
            
            
            $
            10,040,188
            
            
            100.00
            %




10




**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.




**Employees**




We
      have
      132 employees, 131 of which are full time employees. To the best of our
      knowledge, we are compliant with local prevailing wage, contractor licensing
      and
      insurance regulations, and have good relations with our employees.




**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.




11




**Risks
      Related to Our Business**




***We
      are in a development stage with a limited operating history, which makes it
      difficult to evaluate our business.***




We
      are
      currently in a development stage and to date have only one manufacturing
      facility. 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 planning stage 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, 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.




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.
      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, 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.




12




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 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 the two recently completed private placements of securities are not
      currently sufficient to fund operations and planned growth. We will require
      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.***




Nine
      feedstock suppliers collectively provide us with approximately 92% of our
      feedstock. 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.




***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 45% of our sales in 2005 and
      40%
      of our sales in 2006. Our largest customer accounted for 18% of sales in 2005
      and our two largest customers each accounted for over 9% of sales in 2006.
      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.




14




***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
      only
      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 biodiesel and 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 biodiesel or 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
      biodiesel or 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. Except
      for
      Gary Zhao, none of our key personnel are party to any employment agreements.
      We
      do not currently maintain any “key man” life insurance with respect to any of
      such individuals.




***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. We have a relatively short operating
      history and 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.




15




***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.




***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 refining and blending facilities to handle biodiesel.




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.




16




***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 many 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.




***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.




17




***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.***




On
      October 24, 2006 we became 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 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.




**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,




18




·
            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.




***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 and much of our
      revenue is 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.




19




***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 2006,
      approximately 67% 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.




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.




20




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 6% appreciation of the Renminbi against the U.S. dollar as of
      December 31, 2006. 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.




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 for two years. Thereafter, it is
      entitled to 50% relief from the People’s Republic of China enterprise income tax
      for the next three years. Because Fujian Zhongde Technology Co., Ltd. was
      transformed into a WOFE in February 2006, it should be entitled to such
      relief.




21




Such
      tax
      exemption status has not yet been formally approved by the local tax
      authorities. We are in the process of requesting a written confirmation. We
      understand from the authorities that the exact commencement date for the tax
      exemption period is from February 20, 2006, the date on which Fujian Zhongde
      Technology Co., Ltd. was transformed into a WOFE. However, the taxes we paid
      for
      the period from February 20, 2006 to the present will not be
      refunded.




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., our operating subsidiary, is located in the
      People’s Republic of China and substantially all of its 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.




***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.




22




**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 40% of our outstanding common stock and our directors and
      executive officers as a group collectively own approximately 49% 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 share exchange agreement, we may not be able
      to
      attract the attention of major brokerage firms.***




There
      may
      be risks associated with us becoming public through a share exchange agreement.
      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.




***Failure
      to cause a registration statement to become effective in a timely manner could
      materially adversely affect us.***




We
      agreed, at our expense, to prepare a registration statement covering the resale
      of shares of common stock issued to investors on October 24, 2006 and November
      9, 2006 and to use our best efforts to cause such registration statement to
      be
      declared effective by the Securities and Exchange Commission on or before April
      23, 2007. There are many reasons, including those over which we have no control,
      that could delay the effectiveness of the registration statement, including
      delays resulting from the Securities and Exchange Commission review process
      and
      comments raised by the Securities and Exchange Commission during that process.
      Failure to cause a registration statement to become effective in a timely manner
      could result in our payment to investors of liquidated damages equal to 1%
      of
      each investor’s aggregate stock purchase price for each 30 day period beyond
      April 23, 2007 that the registration statement has not been declared effective
      by the Securities and Exchange Commission,
      provided damages may not exceed 6% of the investors aggregate stock
      purchase price.




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, particularly following effectiveness of the
                resale
                registration statement of which this prospectus forms a
                part;




·
            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.
      At
      the present time, we do not qualify for certain of the initial listing
      requirements of the NASDAQ Stock Market or the American Stock Exchange. 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.




24




***Our
      common stock may be deemed a “penny stock,” which would make it more difficult
      for investors to sell their shares.***




Our
      common stock may be 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. If our securities are subject to the
      penny stock rules, stockholders will find it more difficult to dispose of
      our securities.




***Offers
      or availability for sale of a substantial number of shares of our common stock
      may cause the price of our common stock to decline.***




If
      our
      stockholders sell substantial amounts of common stock in the public market,
      including shares issued upon the effectiveness of a registration statement
      or upon the expiration of any statutory holding period under Rule 144 of the
      Securities Act of 1933, as amended, it could create a circumstance commonly
      referred to as an “overhang” and in anticipation of which the market price of
      our common stock could fall. The existence of an overhang, whether or not sales
      have occurred or are occurring, also could make it more difficult for us to
      secure additional financing through the sale of equity or equity-related
      securities in the future at a time and price that we deem reasonable or
      appropriate.




***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.




25




***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, and 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.




**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. 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 expect to break ground on the new
      biodiesel facility within the next six to nine months, pending completion of
      the
      new Fuqing Jiangyin Industrial Park’s infrastructure construction. Work on this
      facility will be divided into two phases of construction. The first phase will
      require approximately a $9 million investment (including $2.5 million for land
      usage rights) and will increase our biodiesel production capacity by
      approximately 50,000 tons per year. The second phase will require an additional
      $6 million investment and will increase biodiesel production capacity
      approximately by an additional 50,000 tons per year. We expect the first and
      second phases of construction to be completed by the first half of 2008 and
      end
      of 2008, respectively.




26




We
        rent
        office space at 17 Candlewood Drive West Windsor, New Jersey, for 16,000
        Renminbi per month (approximately $2,070 United States Dollars), 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
      of Matters to a Vote of Security Holders.**




No
      matters were submitted during the fourth quarter of 2006 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
      c ommon
      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 July 6, 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.




High
            
            LowFiscal
                Year 2006Third
                Quarter (from July 6, 2006)
            
            $
            0.68
            
            $
            0.23Fourth
                Quarter
            
            $
            2.70
            
            $
            0.22Fiscal
                Year 2007First
                Quarter (through March 12, 2007)
            
            $
            3.10
            
            $
            1.85





The
      last
      reported sales price of our common stock on the OTC Bulletin Board on March
      12,
      2007 was $2.50 per share. As of March 12, 2007, there were approximately 71
      holders of record of our common stock.




We
      do not
      have any equity compensation plans.




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.




**Sales
      of Unregistered Equity Securities during the Fourth Quarter ended December
      31,
      2006**




On
      October 24, 2006, we accepted subscriptions for a total of 1,050,000 shares
      of
      common stock, at a purchase price of $1.00 per share, from a group of accredited
      investors. We received gross proceeds from this closing of $1,050,000. This
      offering was made solely to “accredited investors,” as that term is defined in
      Regulation D under the Securities Act of 1933, as amended. The shares of common
      stock were not registered under the Securities Act, or the securities laws
      of
      any state, and were offered and sold in reliance on the exemption from
      registration afforded by Section 4(2) and Regulation D (Rule 506) under the
      Securities Act of 1933, as amended and corresponding provisions of state
      securities laws, which exempt transactions by an issuer not involving any public
      offering.




27




On
      October 24, 2004, pursuant to a Share Exchange Agreement with the shareholders
      of China Clean Energy Resources, Ltd., we issued 15,995,000 shares of common
      stock to the shareholders of China Clean Energy Resources, Ltd. in exchange
      for
      100% of the common shares of China Clean Energy Resources, Ltd. The issuance
      of
      these shares of common stock to the shareholders of China Clean Energy
      Resources, Ltd. pursuant to the Share Exchange Agreement was exempt from
      registration under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      October 24, 2006, we issued Yongfu Zhu 408,333 shares of common stock as
      compensation for consulting services. The issuance of these shares to such
      person was exempt from registration under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      October 24, 2006, we issued Olivia Hsin-Yu Chao 408,333 shares of common stock
      as compensation for consulting services. The issuance of these shares to such
      person was exempt from registration under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      October 24, 2006, we issued Fred Chang 204,167 shares of common stock as
      compensation for consulting services. The issuance of these shares to such
      person was exempt from registration under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      October 24, 2006, we issued Liuyi Zhang 204,167 shares of common stock as
      compensation for consulting services. The issuance of these shares to such
      person was exempt from registration under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      October 24, 2006, we issued Zuyuan Zheng 175,000 shares of common stock as
      compensation for consulting services. The issuance of these shares to such
      person was exempt from registration under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      October 24, 2006, we issued Avenndi, LLC 5,000 shares of common stock as
      compensation for consulting services. The issuance of these shares to Avenndi,
      LLC was exempt from registration under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      October 24, 2006, we issued Westminster Securities Corporation 200,000 shares
      of
      common stock as compensation for financial advisory services. The issuance
      of
      the shares to Westminster Securities Corporation was exempt from registration
      under the Securities Act of
      1933,
      as amended,pursuant to Section 4(2) thereof.




On
      November 9, 2006, we accepted a subscription for a total of 250,000 shares
      of
      common stock, at a purchase price of $1.00 per share, from an accredited
      investor. We received gross proceeds of $250,000 from the offering. This
      offering was made solely to a single “accredited investor,” as that term is
      defined in Regulation D under the Securities Act of
      1933,
      as amended. The shares of common stock were not registered under the
      Securities Act of 1933 as amended, or the securities laws of any state, and
      were
      offered and sold in reliance on the exemption from registration afforded by
      Section 4(2) and Regulation D (Rule 506) under the Securities Act of
      1933,
      as amended,and corresponding provisions of state securities laws, which
      exempt transactions by an issuer not involving any public offering.




28




**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 prospectus.* *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 “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 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 to October 24, 2006. The basis of the assets, liabilities and
      retained earnings of China Clean Energy Resources, Ltd., the accounting
      acquirer, were carried over in the recapitalization. Upon the closing of this
      transaction, we became a Chinese renewable resource-based biodiesel and
      specialty chemicals manufacturer and distributor.




China
      Clean Energy Resources, Ltd. was incorporated in the British Virgin Islands
      on
      February 13, 2006 for the sole 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** **,
      2006 Compared to the** **Year** **Ended** **December
      31** **,
      200** **5** **.**




*Revenues* .
      During
      the year ended December 31, 2006, we had net sales of $13,489,710, as compared
      to net sales of $10,040,188 during the year ended December 31, 2005, an increase
      of approximately 34.36%. This increase is attributable to our expanded sales
      force and the introduction of new products.




*Gross
      Profit* .
      Cost of
      goods sold, which consists of direct labor, overhead and product costs, was
      $9,699,164 for the year ended December 31, 2006, as compared to cost of goods
      sold of $7,270,006 for the year ended December 31, 2005. We had a gross profit
      of $3,790,546 for the year ended December 31, 2006, as compared to gross profit
      of $2,770,182 for the year ended December 31, 2005, representing gross margins
      of approximately 28.10% and 27.59%, respectively. The increase in gross profits
      is attributable to increased sales.




*Selling
      Expenses* .
      Selling
      expenses, which consist of advertising and promotion expenses, freight charges,
      exporting expenses, and wages and salaries totaled $411,850 for the year ended
      December 31, 2006, as compared to $390,259 for the year ended December 31,
      2005,
      an increase of approximately 5.53%. This increase is primarily attributable
      to
      our expanded sales team and activities that are in turn reflected in our
      increased sales. We believe that our selling expenses will continue to increase
      as sales continue to grow.




29




*General
      and Administrative and Other Operating Expenses* .
      General
      and administrative and other operating expenses totaled $1,233,646 for the
      year
      ended December 31, 2006, as compared to $373,171 for the year ended December
      31,
      2005, an increase of approximately 230.58%. This increase is primarily
      attributable to the increase in auditing, legal, investor relations, and
      financial advisory fees incurred in 2006 and our “reverse acquisition” of China
      Clean Energy Resources, Ltd. on October 24, 2006. Expenses for the year ended
      December 31, 2006, include a nonrecurring, one time charge of $464,550 for
      consulting fees paid in cash and stock relating to the “reverse acquisition” of
      China Clean Energy Resources, Ltd.




*Net
      Income* .
      We had
      a net income of $1,269,860 for the year ended December 31, 2006, as compared
      to
      net income of $1,310,211 for the year ended December 31, 2005, a decrease of
      approximately 3%. This decrease in net income was attributable to the $860,475
      increase in general and administrative and other operating expenses and the
      $122,810 increase in income taxes, offset by the $1,020,364 increase in gross
      profit. Without the nonrecurring one time charge of $464,550 relating to the
      “reverse acquisition” of China Clean Energy Resources Ltd., the net income for
      the year ended December 31, 2006 would have been $1,734,410, an increase of
      approximately 32%.




**Liquidity
      and Capital Resources**


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


As
      of
      December 31, 2006, and December 31, 2005, we had cash and cash equivalents
      of
      $2,241,712 and $3,175,128, respectively. The decrease in cash and cash
      equivalents was due primarily to the $2,703,910 used in investing activities,
      offset partially by the $1,397,579 provided by operating activities and the
      $257,905 provided by financing activities.




The
      $2,703,910 net cash used in investing activities in 2006 was primarily
      attributable to the $2,063,652 in property, plant, and equipment additions
      and
      the $545,225 addition to land use rights resulting from land levies charged
      by
      local government authorities. The property, plant and equipment additions were
      incurred to increase the production capacity of the Company’s biodiesel and
      specialty chemicals production facilities.




The
      $1,397,579 net cash provided by operating activities in 2006 was primarily
      attributable to the $1,269,860 net income, the $785,586 noncash charges for
      stock-based compensation, depreciation, and amortization, and the $358,201
      decrease in inventories, offset by the $433,820 increase in accounts receivable,
      the $286,134 decrease in accounts payable and accrued liabilities, and the
      $248,389 decrease in income taxes payable.




The
      $257,905 net cash provided by financing activities in 2006 was primarily
      attributable to $1,265,000 net proceeds from sale of common stock offset by
      $753,420 dividends paid and $296,525 in repayments of loans from related
      parties. In October and November 2006, we accepted subscriptions for a total
      of
      1,300,000 shares of common stock at a price of $1.00 per share.




On
      December 25, 2006, Fujian Zhongde executed a contract to acquire land use rights
      for 50 years for certain land located in the Fujian Province of the Peoples
      Republic of China for a total purchase price of approximately $2,400,000. 50%
      of
      the purchase price has been paid, 30% is due March 25, 2007, and 20% is due
      June
      25, 2007. The contract also contemplates that a new affiliated company of Fujian
      Zhongde will build a new biodiesel facility on this land costing approximately
      $15,000,000. Financing of the land use rights and subsequent construction costs
      is expected to come from a future private placement of the Company’s common
      stock and/or debt financing. However, there is no assurance that the Company
      will be able to secure such financing.




30




**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of our financial condition presented in this section
      are
      based upon the consolidated financial statements of us and our subsidiaries,
      which have been prepared in accordance with the generally accepted accounting
      principles in the United States. During the preparation of the financial
      statements we are required to make estimates and judgment that affect the
      reported amounts of assets, liabilities, revenues and expenses, and related
      disclosure of contingent assets and liabilities. On an ongoing basis, we
      evaluate our estimates and judgments, including those related to sales, returns,
      pricing concessions, bad debts, inventories, investments, fixed assets,
      intangible assets, income taxes and other contingencies. We base our estimates
      on historical experience and on various other assumptions that we believe are
      reasonable under current conditions. Actual results may differ from these
      estimates under different assumptions or 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 and 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 sales when the revenue is 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
      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 our products are sold FOB (“free on board”)
      shipping point. Title to the product passes when the product is delivered to
      the
      freight carrier.




Sales
      revenue represents the invoiced value of goods, net of a value-added tax (VAT).
      All of our 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 approved by the local government. This VAT may be offset by VAT paid by
      us
      on raw materials and other materials included in the cost of producing their
      finished product.




*Accounts
      Receivable, Trade and Allowance for Doubtful Accounts.* Much
      of
      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, trade outstanding at December
      31, ** 2006
      and
      2005 amounted to $2,191,007 and $1,708,224, respectively. Management ** reviews
      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 probable. As of December 31, 2006
      and
      2005, allowances for doubtful accounts were ** $228,604
      and $170,822, respectively.




*Inventories.* Inventories
      are stated at the lower of cost (first in, first out method) or at market.
      We
      review our inventory on a regular basis to determine if any reserves are
      necessary for potential obsolescence. As of ** December
      31, 2006 and 2005, we determined that no reserves were necessary.




31




*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 financial guarantees or other commitments to guarantee
      the
      payment obligations of any third parties. We have not entered into any
      derivative contracts that are indexed to our shares and 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 within the U.S., there is no
      provision for U.S. income taxes and there are no deferred tax amounts at
      December 31, 2006 and 2005. The charge for foreign income taxes 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 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 rates that are 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 in 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.




Our
      subsidiary, Fujian Zhongde Technology Co., Ltd., is 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, foreign investment enterprises (“FIE”)
      generally are subject to an income tax at an effective rate of 33% (30% state
      income taxes plus 3% local income taxes) 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 effective tax rates apply.




Upon
      approval by the People’s Republic of China tax authorities, FIE’s scheduled to
      operate for a period of 10 years or more and engaged in manufacturing and
      production 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 with a 50% exemption for the
      next three years.




32




As
      Fujian
      Zhongde Technology Co., Ltd. became a FIE starting February 20, 2006 when it
      merged with China Clean Energy Resources, Ltd., it will receive the above
      described FIE tax benefit upon approval from the People’s Republic of China. If
      the People’s Republic of China’s approval is obtained, Fujian Zhongde would be
      exempt from income taxes for two years and thereafter 50% exempt for the next
      three years.




*Value
      Added Tax (VAT)* .
      Enterprises or individuals who sell commodities, engage in repair and
      maintenance or import and 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. will get a 13% refund on the VAT amount paid for
      the first five years of the operations for exported products.




**Recently
      Issued Accounting Pronouncements**




In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued Statement No.
      156, “Accounting for Servicing of Financial Assets” (FAS 156), which amends FASB
      Statement No. 140. FAS 156 specifically provides guidance addressing the
      recognition and measurement of separately recognized servicing assets and
      liabilities, common with mortgage securitization activities, and provides an
      approach to simplify efforts to obtain hedge accounting treatment. FAS 156
      is
      effective for all separately recognized servicing assets and liabilities
      acquired or issued after the beginning of an entity’s fiscal year that begins
      after September 15, 2006, with early adoption being permitted. Our adoption
      of
      FAS 156 is not currently expected to have a material impact on our financial
      position or results of operations.




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. FIN 48 also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. The requirements
      of
      FIN 48 are effective for our fiscal year beginning January 1, 2007. Our adoption
      of FIN 48 is not currently expected to have a material impact on our financial
      position or results of operations.




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
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      158 (SFAS No. 158), “Employer’s Accounting for Defined Benefit Pension and Other
      Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and
      132(R).” SFAS No. 158 requires an employer to recognize the overfunded or
      underfunded status of its defined benefit postretirement plan (other than a
      multiemployer plan) as an asset or liability in its balance sheet and to
      recognize changes in that funded status in the year in which the changes occur
      through comprehensive income. SFAS No. 158 also requires the measurement of
      defined benefit plans assets and obligations as of the employer’s fiscal year
      end balance sheet (with limited exceptions). Under SFAS No. 158, we will be
      required to recognize the funded status of our defined benefit plans and to
      provide the required disclosures for fiscal years ending after December 15,
      2006. We are currently evaluating the impact, if any, that SFAS No. 157 will
      have on our financial position and results of operations.


33
 In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159 (SFAS No. 159), “The Fair Value Option For Financial Assets and Liabilities
        - including an amendment of FASB Statement No. 115.” SFAS No. 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, that SFAS
        No.
        159 will have on our financial position and results of operations.
  **Seasonality**
  Our
        quarterly sales and operating results may vary significantly from quarter
        to
        quarter as a result of seasonal changes in market demand as well as weather.
        Historically, sales are highest during the third and fourth quarters as a
        result
        of good weather and robust bookings in the second quarter.




34




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


**CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 **Index
          to Consolidated Financial Statements**
 PageReports
                      of Independent Registered Public Accounting Firms
                  
                  
                  36Financial
                    StatementsConsolidated
                      Balance Sheets as of December 31, 2006and
                      2005
                  
                  
                  38Consolidated
                      Statements of Operations for the yearsended
                      December 31, 2006 and 2005
                  
                  
                  39Consolidated
                      Statements of Changes in Stockholders’ Equityfor
                      the years ended December 31, 2005 and 2006
                  
                  
                  40Consolidated
                      Statements of Cash Flows for the yearsended
                      December 31, 2006 and 2005
                  
                  
                  41Notes
                      to Consolidated Financial Statements
                  
                  
                  42-48
  35
  **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 sheet of China Clean Energy
            Inc. and
            subsidiaries (the “Company”) as of December 31, 2006 and the related
            consolidated statements of operations, changes in stockholders’ equity, and cash
            flows for the year 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 audit.
 
 I
            conducted my audit 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 audit provides 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, 2006 and the results of their operations
            and
            cash flows for the year then ended in conformity with accounting principles
            generally accepted in the United States.
 
 /s/
                      Michael T. Studer CPA P.C.Freeport,
                      New York
                    March
                        8, 2007
 
 36
  **REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 To
              the
              Board of Directors and Stockholders
 China
              Clean Energy Inc, and subsidiaries
 
 We
              have
              audited the accompanying consolidated balance sheet of China Clean
              Energy Inc,
              and subsidiaries (formerly Fujian Zhong De Technology Stock Co., Ltd.)
              as of
              December 31, 2005, and the related consolidated statements of operation,
              stockholders’ equity, and cash flows for the year then ended. These financial
              statements are the responsibility of the company’s management. Our
              responsibility is to express an opinion on these financial statements
              based on
              our audits.
 
 We
              conducted our audits in accordance with the standards of the Public
              Company
              Accounting Oversight Board (United States). Those standards require
              that we plan
              and perform the audit to obtain reasonable assurance about whether
              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. We believe that our audits provide
              a
              reasonable basis for our opinion.
 
 In
              our
              opinion, the consolidated financial statements referred to above present
              fairly,
              in all material respects, the financial position of China Clean Energy
              Inc, and
              subsidiaries (formerly Fujian Zhong De Technology Stock Co., Ltd.)
              as of
              December 31, 2005, and the results of their operations and cash flows
              for the
              year then ended in conformity with U.S. generally accepted accounting
              principles.
 “Moen
                        and Company LLP”
                      (“Signed”)Vancouver,
                        British Columbia, Canada
                      May
                          31, 2006
  37
 
 **China
                  Clean Energy Inc. and Subsidiaries**
 **Consolidated
                Balance Sheets**
 December
                            31,
                          2006
                        
                        
                        December
                            31,
                          2005(Audited)
                        
                        
                        (Audited)**Assets****Current
                            Assets**Cash
                            and cash equivalents
                        
                        $
                        2,241,712
                        
                        $
                        3,175,128Accounts
                            receivable, net of allowance for doubtfulaccounts
                            of $228,604 and $170,822 respectively
                        
                        
                        1,962,403
                        
                        
                        1,537,402Other
                            receivable - refundable taxes
                        
                        
                        24,904
                        
                        
                        -Due
                            from related parties
                        
                        
                        -
                        
                        
                        14,875Inventories
                        
                        
                        941,933
                        
                        
                        1,300,134Prepaid
                            expenses
                        
                        
                        37,696
                        
                        
                        -**Total
                            Current Assets**
                        
                        
                        5,208,648
                        
                        
                        6,027,539**Property,
                            plant and equipment, net**
                        
                        
                        4,692,200
                        
                        
                        2,824,026**Intangible
                            assets, net**
                        
                        
                        2,430,504
                        
                        
                        1,981,130**Deposit
                            paid in connection with****contract
                            for purchase of land use rights**
                        
                        
                        95,033
                        
                        
                        -**Total
                            Assets**
                        
                        $
                        12,426,385
                        
                        $
                        10,832,695**Liabilities
                            and Stockholders' Equity****Current
                            Liabilities**Accounts
                            payable and accrued liabilities
                        
                        $
                        386,719
                        
                        $
                        672,853Short-term
                            bank loan
                        
                        
                        1,282,462
                        
                        
                        1,239,612Income
                            taxes payable
                        
                        
                        117,964
                        
                        
                        366,353Due
                            to related parties
                        
                        
                        6,419
                        
                        
                        302,944**Total
                            Current Liabilities**
                        
                        
                        1,793,564
                        
                        
                        2,581,762**Stockholders'
                            Equity**Common
                            stock par value $.001 per share; authorized100,000,000
                            shares; issued and outstanding 21,512,269and
                            15,995,000 shares, respectively
                        
                        
                        21,512
                        
                        
                        15,995Additional
                            paid-in capital
                        
                        
                        7,034,473
                        
                        
                        5,596,490Retained
                            earnings
                        
                        
                        3,161,747
                        
                        
                        2,645,307Accumulated
                            other comprehensive income (loss)
                        
                        
                        415,089
                        
                        
                        (6,859
                        )**Total
                            stockholders' equity**
                        
                        
                        10,632,821
                        
                        
                        8,250,933**Total
                            Liabilities and Stockholders' Equity**
                        
                        $
                        12,426,385
                        
                        $
                        10,832,695
 The
                          accompanying notes are an integral part of these financial
                          statements.
 38
  **China
                Clean Energy Inc. and Subsidiaries**
 **Consolidated
                Statements of Operations**
 Year
                          Ended
                        December
                          31,2006
                      
                      
                      2005(Audited)
                      
                      
                      (Audited)Revenue:Net
                          sales of products
                      
                      $
                      13,489,710
                      
                      $
                      10,040,188Government
                          Subsidy
                      
                      
                      9,640
                      
                      
                      43,500Total
                          revenues
                      
                      
                      13,499,350
                      
                      
                      10,083,688Operating
                          costs and expenses:Cost
                          of goods sold
                      
                      
                      9,699,164
                      
                      
                      7,270,006Selling
                          and marketing
                      
                      
                      411,850
                      
                      
                      390,259General
                          and administrative
                      
                      
                      529,377
                      
                      
                      272,553Expenses
                          relating to the "reverse acquisition" of CCER
                      
                      
                      464,550
                      
                      
                      -Depreciation
                          of property, plant and equipment
                      
                      
                      34,771
                      
                      
                      34,039Amortization
                          of intangible assets
                      
                      
                      204,948
                      
                      
                      66,579Total
                          operating costs and expenses
                      
                      
                      11,344,660
                      
                      
                      8,033,436Income
                          from operations
                      
                      
                      2,154,690
                      
                      
                      2,050,252Interest
                          income
                      
                      
                      7,001
                      
                      
                      4,334Interest
                          expense
                      
                      
                      (89,137
                      )
                      
                      (64,491
                      )Income
                          before income taxes
                      
                      
                      2,072,554
                      
                      
                      1,990,095Income
                          taxes
                      
                      
                      (802,694
                      )
                      
                      (679,884
                      )Net
                          income
                      
                      $
                      1,269,860
                      
                      $
                      1,310,211Earnings
                          per common share:Basic
                      
                      $
                      0.07
                      
                      $
                      0.08Diluted
                      
                      $
                      0.07
                      
                      $
                      0.08Weighted
                          average number of common sharesused
                          to compute earnings (loss) per common share:Basic
                      
                      
                      17,017,580
                      
                      
                      15,995,000Diluted
                      
                      
                      17,017,580
                      
                      
                      15,995,000
  The
                          accompanying notes are an integral part of these financial
                          statements.
  39
 **China
              Clean Energy Inc. and Subsidiaries**
 **Consolidated
              Statements of Stockholders' Equity**
 AccumulatedAdditional
                    
                    
                    
                    OtherCommon
                        Stock
                    
                    Paid-in
                    
                    Retained
                    
                    ComprehensiveShares
                    
                    Amount
                    
                    Capital
                    
                    Earnings
                    
                    Income
                        (loss)
                    
                    TotalBalance,
                        December 31, 2004
                    
                    
                    15,995,000
                    
                    $
                    15,995
                    
                    $
                    3,613,110
                    
                    $
                    1,335,096
                    
                    $
                    -
                    
                    $
                    4,964,201Capital
                        contributions
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,983,380
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,983,380Net
                        income for year endedDecember
                        31, 2005
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,310,211
                    
                    
                    -
                    
                    
                    1,310,211Foreign
                        currency translation adjustment
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (6,859
                    )
                    
                    (6,859
                    )Balance,
                        December 31, 2005
                    
                    
                    15,995,000
                    
                    
                    15,995
                    
                    
                    5,596,490
                    
                    
                    2,645,307
                    
                    
                    (6,859
                    )
                    
                    8,250,933Common
                              stock retained by acquirer's stockholders in connection
                              with “reverse
                              acquisition” of China Clean Energy Resources, Ltd. (“CCER”) on October 24,
                              2006
                    
                    
                    2,432,269
                    
                    
                    2,432
                    
                    
                    (2,432
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    -Common
                          stock issued to consultants for services rendered in connection
                          with
                          “reverse acquisition” of CCER
                    
                    
                    1,605,000
                    
                    
                    1,605
                    
                    
                    158,895
                    
                    
                    -
                    
                    
                    -
                    
                    
                    160,500Common
                          stock issued for cash on October 24, 2006 at $1 per share,
                          less offering
                          costs of $35,000
                    
                    
                    1,050,000
                    
                    
                    1,050
                    
                    
                    1,013,950
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,015,000Common
                          stock issued for cash in November 2006 at $1 per
                          share
                    
                    
                    250,000
                    
                    
                    250
                    
                    
                    249,750
                    
                    
                    -
                    
                    
                    -
                    
                    
                    250,000Common
                        stock issued in November 2006 for services
                    
                    
                    180,000
                    
                    
                    180
                    
                    
                    17,820
                    
                    
                    -
                    
                    
                    -
                    
                    
                    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,
                        December 31, 2006
                    
                    
                    21,512,269
                    
                    $
                    21,512
                    
                    $
                    7,034,473
                    
                    $
                    3,161,747
                    
                    $
                    415,089
                    
                    $
                    10,632,821
 The
                        accompanying notes are an integral part of these financial
                        statements.
 
 40
  **China
              Clean Energy Inc. and Subsidiaries**
 **Consolidated
              Statement of Cash Flows**
 Year
                        Ended
                      December
                          31,2006
                    
                    2005(Audited)
                    
                    (Audited)**Operating
                        activities**Net
                        income
                    
                    $
                    1,269,860
                    
                    $
                    1,310,211Adjustments
                        to reconcile net income to net cashprovided
                        by (used in) operating activities:Stock-based
                        compensation
                    
                    
                    178,500
                    
                    
                    -Depreciation
                        of property, plant and equipment
                    
                    
                    402,138
                    
                    
                    328,345Amortization
                        of intangible assets
                    
                    
                    204,948
                    
                    
                    66,579Changes
                        in operating assets and liabilities:Accounts
                        receivable, net
                    
                    
                    (433,820
                    )
                    
                    (879,454
                    )Other
                        receivable
                    
                    
                    (24,904
                    )
                    
                    -Due
                        from related parties
                    
                    
                    14,875
                    
                    
                    (359
                    )Inventories
                    
                    
                    358,201
                    
                    
                    710,030Prepaid
                        expenses
                    
                    
                    (37,696
                    )
                    
                    -Accounts
                        payable and accrued liabilities
                    
                    
                    (286,134
                    )
                    
                    (450,784
                    )Income
                        taxes payable
                    
                    
                    (248,389
                    )
                    
                    232,273Net
                        cash provided by (used in) operating activities
                    
                    
                    1,397,579
                    
                    
                    1,316,841**Investing
                        activities**Property,
                        plant and equipment additions
                    
                    
                    (2,063,652
                    )
                    
                    (237,897
                    )Intangible
                        assets acquired
                    
                    
                    (545,225
                    )
                    
                    (743,760
                    )Deposit
                        paid in connection withcontract
                        for purchase of land use rights
                    
                    
                    (95,033
                    )
                    
                    -Net
                        cash provided by (used in) investing activities
                    
                    
                    (2,703,910
                    )
                    
                    (981,657
                    )**Financing
                        activities**Net
                        proceeds from sale of common stockand
                        capital contributions
                    
                    
                    1,265,000
                    
                    
                    1,983,380Short-term
                        bank loan
                    
                    
                    42,850
                    
                    
                    695,246Due
                        to related parties
                    
                    
                    (296,525
                    )
                    
                    (384,604
                    )Dividends
                        paid
                    
                    
                    (753,420
                    )
                    
                    (741,628
                    )Net
                        cash provided by (used in) financing activities
                    
                    
                    257,905
                    
                    
                    1,552,394**Effect
                        of exchange rate changes on cash and cash
                        equivalents**
                    
                    
                    115,010
                    
                    
                    (6,859
                    )**Increase
                        (decrease) in cash and cash equivalents**
                    
                    
                    (933,416
                    )
                    
                    1,880,719**Cash
                        and cash equivalents, beginning of period**
                    
                    
                    3,175,128
                    
                    
                    1,294,409**Cash
                        and cash equivalents, end of period**
                    
                    $
                    2,241,712
                    
                    $
                    3,175,128Supplemental
                        disclosure of cash flow information:Interest
                        paid
                    
                    $
                    89,137
                    
                    $
                    64,491Income
                        taxes paid
                    
                    $
                    1,051,083
                    
                    $
                    679,884
 The
                        accompanying notes are an integral part of these financial
                        statements.
  41
  **CHINA
              CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006
  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
              1,050,000
              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.”
 
 Note
              2. Summary
              of Significant Accounting Policies
 
 Principles
              of Consolidation
 
 The
              consolidated financial statements at December 31, 2006 include the
              accounts of
              CCE, CCER, and Fujian Zhongde (collectively, the “Company”). All inter-company
              balances and transactions have been eliminated in consolidation.
 
 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.
  42
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 December
                  31, 2006
 
 Fair
              Value of Financial Instruments
 
 The
              Company’s financial instruments consist of cash and cash equivalents, accounts
              receivable, accounts payable and accrued liabilities, short-term bank
              loan, and
              due to related parties. 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.
 
 Foreign
              Currency Translation
  The
              functional currency of CCE and CCER is the United States dollar. The
              functional
              currency of Fujian Zhongde is the Chinese Renminbi (“RMB”). The reporting
              currency of the Company is the United States dollar.
 
 Fujian
              Zhongde assets and liabilities are translated into United States dollars
              at
              period-end exchange rates ($0.12825 and $0.12396 at December 31, 2006
              and 2005,
              respectively). Fujian Zhongde revenues and expenses are translated
              into United
              States dollars at weighted average exchange rates for the periods ($0.12557
              and
              $0.12396 for the years ended December 31, 2006 and 2005, respectively).
              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.
 
 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 automobile 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 term of the related agreement, which is 50 years commencing
              June 1,
              1998. 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.
  43
 **CHINA
                CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 December
                31, 2006
 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”. No stock options have been granted
              and none are outstanding.
  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.
  44
 **CHINA
                CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 December
                31, 2006
  Note
              3. Inventories
 
 Inventories
              consist of:
 December
                          312006
                      
                      2005Raw
                          materials
                      
                      $
                      430,392
                      
                      $
                      899,197Work
                          in progress and packaging material
                      
                      
                      24,065
                      
                      
                      38,143Finished
                          goods
                      
                      
                      487,476
                      
                      
                      362,794Total
                          inventories
                      
                      $
                      941,933
                      
                      $
                      1,300,134
 
 Note
              4.  Property,
              Plant and Equipment
 
 Property,
              plant and equipment, net consist of:
 December
                          31,2006
                      
                      2005Buildings
                      
                      $
                      2,051,056
                      
                      $
                      1,838,363Equipment
                          and machinery
                      
                      
                      4,419,551
                      
                      
                      2,711,679Automobile
                      
                      
                      20,529
                      
                      
                      19,364Office
                          equipment
                      
                      
                      13,848
                      
                      
                      8,726Construction
                          in progress
                      
                      
                      449,346
                      
                      
                      -Total
                      
                      
                      6,954,330
                      
                      
                      4,578,132Less
                          accumulated depreciation
                      
                      
                      (2,262,130
                      )
                      
                      (1,754,106
                      )Net
                      
                      $
                      4,692,200
                      
                      $
                      2,824,026
 45
 **CHINA
                CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 December
                31, 2006
 Note
              5. Intangible
              Assets
 
 Intangible
              assets, net consist of:
 December
                          31,2006
                      
                      2005Land
                          use rights
                      
                      $
                      1,949,015
                      
                      
                      $
                      1,313,131Patents
                          and licenses
                      
                      
                      1,179,900
                      
                      
                      
                      1,130,864Total
                      
                      
                      3,128,915
                      
                      
                      
                      2,443,995Less
                          accumulated amortization
                      
                      
                      (698,411
                      )
                      
                      
                      (462,865
                      )Net
                      
                      $
                      2,430,504
                      
                      
                      $
                      1,981,130
 
 The
              estimated amortization of intangible assets for each of the Company’s five
              succeeding fiscal years ending December 31, 2007, 2008, 2009, 2010,
              and 2011 is
              $166,715.
 
 Note
              6. Short-term
              Bank Loan
 
 The
              short-term bank loan is due DBS Bank (Hong Kong) Limited under a 10,000,000
              RMB
              ($1,282,462 translated at the December 31, 2006 exchange rate) revolving
              credit
              agreement. The loan bears interest at a rate equal to 115% of the PRC
              prime rate
              and is secured by certain buildings and land use rights owned by Fujian
              Zhongde.
 
 Note
              7.  Pension
              and Employment Liabilities
 
 At
              December 31, 2006 and 2005, the Company has no liability for pension
              or post
              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 $2,274,398 and $1,669,801 at December
              31, 2006
              and 2005, respectively.
  46
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 December
                  31, 2006
 Note
                9. Income
                Taxes
 
 Income
              taxes consist of:
 Year
                          ended December 31,2006
                      
                      2005Current:PRC
                      
                      $
                      802,694
                      
                      $
                      679,884United
                          States
                      
                      
                      -
                      
                      
                      -Total
                          current
                      
                      
                      802,694
                      
                      
                      679,884Deferred
                      
                      
                      -
                      
                      
                      -Total
                      
                      $
                      802,694
                      
                      $
                      679,884
 
 Fujian
              Zhongde has been subject to a PRC 33% standard enterprise income tax.
              In 2006,
              Fujian Zhongde become 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, but has not yet received such
              approval.
 
 At
              December 31, 2006, 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.
 
 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:
 Year
                            EndedDecember
                            31,2006
                        
                        2005Expected
                            tax at 35%
                        
                        $
                        725,394
                        
                        $
                        696,533Tax
                            effect of unutilizedlosses
                            of CCE and CCER
                        
                        
                        87,607
                        
                        
                        -Tax
                            effect of Fujian Zhongdeincome
                            taxed at lower rate
                        
                        
                        (46,457
                        )
                        
                        (39,802
                        )Permanent
                            differences
                        
                        
                        36,150
                        
                        
                        23,153Actual
                            provision for income taxes
                        
                        $
                        802,694
                        
                        $
                        679,884
  47
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 December
                  31, 2006
 Note
              10. 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, 2006 were located in the PRC.
 
 In
              2005,
              one customer accounted for 18.4% of net sales.
 
 Note
              11. Commitments
              and Contingencies
 
 Contract
              for Purchase of Land Use Rights
 
 On
              December 25, 2006, Fujian Zhongde 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 18,549,000 RMB ($2,378,909 translated at the December
              31, 2006
              exchange rate). The contract, which is expected to close in year 2007,
              contemplates a new affiliated company of Fujian Zhongde that to be
              formed
              immediately and to build a new biodiesel facility on the land costing
              approximately $15,000,000. The contract provides for payments of the
              purchase
              price in three periods: 50% (or 9,274,500 RMB) by January 4, 2007,
              another 30%
              (or 5,564,700 RMB) by March 25, 2007, and the last 20% (or 3,709,800
              RMB) by
              June 25, 2007. On December 25, 2006, Fujian Zhongde paid 741,000 RMB
              ($95,033
              translated at the December 31, 2006 exchange rate) as a deposit. On
              January 8,
              2007, Fujian Zhongde paid an additional 8,533,500 RMB to the above
              seller of the
              land use rights.
  Registration
              Rights
 
 In
              October and November 2006, CCE accepted subscriptions for a total of
              1,300,000
              shares of common stock at a price of $1.00 per share, or $1,300,000
              total. The
              subscription agreements provided registration rights to the subscribers.
              If CCE
              fails to obtain effectiveness of the Registration Statement with the
              SEC on or
              prior to 180 days after the respective closings or fails to maintain
              effectiveness of the Registration Statement for 12 months after the
              date of
              effectiveness, CCE is to pay the subscribers “default damages” (1% of the
              subscription) for each month in default up to the one year anniversary
              of the
              respective closings.
 
 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.
 48


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




Information
      for this Item was previously filed with the SEC on October 30, 2006 in our
      Current Report on Form 8-K, dated October 24, 2006.




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




Our
      Chief
      Executive Officer and Chief Financial Officer (collectively, the "Certifying
      Officers") are responsible for establishing and maintaining disclosure controls
      and procedures for us. Such officers have concluded (based upon such officers'
      evaluation of these controls and procedures as of the end of the period covered
      by this report) that our disclosure controls and procedures are effective to
      ensure that information required to be disclosed by us in this report is
      accumulated and communicated to management, including our principal executive
      officers as appropriate, to allow timely decisions regarding required
      disclosures.




The
      Certifying Officers have also indicated that there were no significant changes
      in our internal controls or other factors that could significantly affect such
      controls subsequent to the date of their evaluation and there were no corrective
      actions with regard to significant deficiencies and material weaknesses.




Our
      management, including each of the Certifying Officers, does not expect that
      our
      disclosure controls or our internal controls will prevent all errors and fraud.
      A control system, no matter how well conceived and operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control system
      are met. In addition, 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 a 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 control. The design of any systems 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. Because of these inherent limitations
      in
      a cost-effective control system, misstatements due to error or fraud may occur
      and not be detected.




49




**Item
      8B.**  **Other
      Information.**




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 of our officers and directors were
      appointed on October 24, 2006, except for Gary Zhao who was appointed Chief
      Financial Officer on November 15, 2006. 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 each officer serves at the
      discretion of the board.




Name
            
            Age
            
            PositionTai-ming
                Ou
            
            52
            
            Chief
                Executive Officer and Chairman of the BoardGary
                Zhao
            
            44
            
            Chief
                Financial OfficerRi-wen
                Xue
            
            42
            
            Chief
                Operating OfficerYun
                He
            
            39
            
            Senior
                Vice President of Sales and DistributionQin
                Yang
            
            47
            
            Director





**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.




50




**Gary
      Zhao, Chief Financial Officer.** Mr.
      Zhao
      was appointed as our Chief Financial Officer on November 15, 2006. 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.** 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 November 2006, Mr. Xue became our Chief Operating Officer. 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, Senior Vice President of Sales and Distribution.** 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 Senior Vice President of Sales and Distribution 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 are husband and wife.




**Board
      Committees**




**Audit
      Committee** *.* We
      intend
      to establish an audit committee of the board of directors, 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.




51




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




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




The
      following table sets forth certain information about compensation paid, earned
      or accrued for services by our Chief Executive Officer. None of our other
      executive officers received compensation in excess of $100,000 during the years
      ended December 31, 2005 and December 31, 2006.




**Summary
      Compensation Table**




Name
                and Principal Position
            
            Year
            
            Salary
            
            All
                Other Compensation
            
            TotalTai-ming
                Ou
              Chief
                Executive Officer
            
            
            2006
            
            $
            13,153
            
            
            -
            
            $
            13,1532005
            
            $
            12,512
            
            
            -
            
            $
            12,512





*Narrative
      Disclosure to Summary Compensation Table*




Mr.
      Tai-ming Ou was one of our original founders in 1995 and has been working as
      our
      Chief Executive Officer since that time. In 2006, Mr. Tai-ming Ou’s compensation
      was at $1,096.08 per month or $13,153 per annum. In addition, we have agreed
      to
      pay Mr. Ou a one time cash incentive award of $7,700 in February 2007 for his
      performance and contribution to us in 2006. In 2007, Mr. Tai-ming Ou’s
      compensation is anticipated to be $1,282 per month or $15,384 per
      annum.




*Compensation
      of Directors*




The
      following table sets forth director compensation for the year ended December
      31,
      2006.




**Director
      Compensation**




Name
            
            Fee
                Earned or Paid in Cash
            
            All
                Other Compensation
            
            TotalQin
                Yang
            
            $
            8,923
            
            
            -
            
            $
            8,923





*Narrative
      to Director Compensation Table*




Ms.
      Qin
      Yang, the wife of Mr. 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 entitled to receive $743 per month
      or
      $8,923 per annum. In addition, we have agreed to pay Ms. Yang a one time cash
      incentive award of $6,400 in February 2007 for her performance and contribution
      to us 2006. In 2007, Ms. Yang’s monthly compensation as an independent
      contractor is anticipated to be at $769 per month or $9,230 per
      annum.




52




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




The
      following table sets forth information regarding the number of shares of common
      stock beneficially owned as of March 12, 2007 by:




·
            Each
                person who is known by us to beneficially own 5% or more of our common
                stock;




·
            Each
                of our directors and executive officers;
                and




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




Except
      as
      otherwise set forth below, the address of each of the persons listed below
      is
      Fulong Industry Zone, Longtian Town Fuqing City, Fujian, China
      350315.




Name
                and Address of Beneficial Owner
            
            Number
                of Shares Beneficially
              Owned(1)
            
            Percentage
                of Shares Beneficially Owned(2)Directors
                and Named Executive Officers:Tai-ming
                Ou
            
            
            8,477,350
            (3)
            
            39.4
            %Qin
                Yang
            
            
            8,477,350
            (4)
            
            39.4
            %Nai-ming
                Yu
            
            
            2,399,250
            
            
            11.2
            %Dian
                Yang
            
            
            1,279,600
            
            
            5.9
            %Yun
                He
            
            
            1,119,650
            
            
            5.2
            %Daiyi
                Chen
            
            
            1,119,650
            
            
            5.2
            %Ri-wen
                Xue
            
            
            959,700
            
            
            4.5
            %Gary
                Zhao
            
            
            100,000
            (5)
            
            *All
                officers and directors as a group(5
                persons)
            
            
            10,656,700
            
            
            49.5
            %







*
            Less
                than 1%




(1)
            Unless
                otherwise indicated, includes shares owned by a spouse, minor children
                and
                relatives sharing the same home, as well as entities owned or controlled
                by the named person. Also includes options and warrants to purchase
                shares
                of common stock exercisable within sixty (60) days. Unless otherwise
                noted, shares are owned of record and beneficially by the named
                person.




(2)
            Based
                upon 21,512,269 shares of common stock on March 12, 2007, and including,
                with respect to each individual holder, rights to acquire common
                stock
                exercisable within 60 days.




(3)
            Includes
                3,518,900 shares of common stock held directly by Qin Yang, Mr. Ou’s wife,
                with respect to which Mr. Ou disclaims beneficial
                ownership.




(4)
            Includes
                4,958,450 shares of common stock held directly by Tai-Ming Ou, Ms.
                Yang’s
                husband, with respect to which Ms. Yang disclaims beneficial
                ownership.




(5)
            Represents
                100,000 shares of restricted common stock granted to Gary Zhao upon
                his
                appointment as Chief Financial Officer on November 15, 2006. Upon
                grant,
                all of these shares were subject to forfeiture by Mr. Zhao. However,
                on
                every one month anniversary of Mr. Zhao’s service as Chief Financial
                Officer, 8,333 shares cease being subject to forfeiture by Mr.
                Zhao.




53




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




Mr.
      Tai-ming Ou, our Chief Executive Officer and Chairman, beneficially owns 40%
      of
      Fuqing Zhongyi Color Printing Co., Ltd., one of our vendors who supplies us
      with
      packaging and printing materials. During the fiscal year ended December 31,
      2006
      we paid $29,712.50 to Fuqing Zhongyi Color Printing Co., Ltd. for packaging
      and
      printing materials.




Mr.
      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.




Mr.
      Yun
      He, our Vice President of Sales and Marketing, 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.




Mr.
      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.




Mr.
      Dian
      Yang, one of our principal stockholders, 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. Yang was for approximately $188,000 in September
      2005. All loans provided to us by Mr. Yang were repaid in full during 2005,
      except for $74,376 which was repaid to Mr. Yang in January 2006.




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.




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





ExhibitNumber
            
            Description2.1
            
            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
            
            Certificate
                of Incorporation of Hurley Exploration Inc. (incorporated by reference
                to
                Exhibit 3.1 to the Registration Statement on Form SB-2 of Hurley
                Exploration Inc. filed with the Securities and Exchange Commission
                on July
                26, 2005)




54




3.2
            
            Certificate
                of Amendment to Certificate of Incorporation of Hurley Exploration
                Inc.,
                effectuating a 1-for-2.26187510124 reverse stock split (incorporated
                by
                reference to Exhibit 3.3 to the Current Report on Form 8-K of China
                Clean
                Energy Inc. filed with the Securities and Exchange Commission on
                October
                30, 2006)3.3
            
            Amended
                and Restated Certificate of Incorporation of China Clean Energy Inc.
                (incorporated by reference to Exhibit 3.4 to the Current Report on
                Form
                8-K of China Clean Energy Inc. filed with the Securities and Exchange
                Commission on October 30, 2006)3.4
            
            By-laws
                of Hurley Exploration Inc. (incorporated by reference to Exhibit
                3.1 to
                the Registration Statement on Form SB-2 of Hurley Exploration Inc.
                filed
                with the Securities and Exchange Commission on July 26,
                2005)3.5
            
            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
            
            Compensation
                Agreement, dated as of October 13, 2006, between China Clean Energy
                Inc.
                and Gary Zhao (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 November 16, 2006)10.6
            
            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 SEC on January 22, 2007)




55




10.7
            
            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 SEC
                on January 22, 2007)10.8
            
            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 SEC on January
                22,
                2007)10.9
            
            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 SEC
                on January 22, 2007)10.10
            
            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 SEC on January
                22,
                2007)10.11
            
            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 SEC on January 22,
                2007)10.12
            
            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
                SEC on January 22, 2007)21.1
            
            List
                of Subsidiaries (incorporated by reference to Exhibit 21.1 to the
                Current
                Report on Form 8-K of China Clean Energy Inc. filed with the Securities
                and Exchange Commission on October 30, 2006)31.1
            
            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 year ended December
      31, 2006. Moen and Company LLP audited the consolidated financial statements
      of
      the Company for the year ended December 31, 2005. Fees billed for professional
      services provided to our Company by these firms for the fiscal years ended
      December 31, 2006 and 2005 were.




56




2006
            
            2005Audit
                Fees
            
            $
            95,000
            
            $
            50,000Audit-Related
                Fees
            
            $
            0
            
            $
            0Tax
                Fees
            
            $
            0
            
            $
            0All
                Other Accounting Professional Fees and Services
            
            $
            0
            
            $
            0




57


**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 12, 2007


**CHINA
                CLEAN ENERGY INC.**/s/
                Gary ZhaoGary
                Zhao
              Chief
                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 OfficerTai-ming
                Ou
            
            (Principal
                Executive Officer)/s/
                Gary Zhao
            
            Chief
                Financial OfficerGary
                Zhao
            
            (Principal
                Financial Officer and
              Principal
                Accounting Officer)/s/
                Yun He
            
            Senior
                Vice President of Sales and DistributionYun
                He/s/
                Ri-wen Xue
            
            Chief
                Operating OfficerRi-wen
                Xue/s/
                Qin Yang
            
            DirectorQin
                Yang





58




**Exhibit
      Index**





ExhibitNumber
            
            Description2.1
            
            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
            
            Certificate
                of Incorporation of Hurley Exploration Inc. (incorporated by reference
                to
                Exhibit 3.1 to the Registration Statement on Form SB-2 of Hurley
                Exploration Inc. filed with the Securities and Exchange Commission
                on July
                26, 2005)3.2
            
            Certificate
                of Amendment to Certificate of Incorporation of Hurley Exploration
                Inc.,
                effectuating a 1-for-2.26187510124 reverse stock split (incorporated
                by
                reference to Exhibit 3.3 to the Current Report on Form 8-K of China
                Clean
                Energy Inc. filed with the Securities and Exchange Commission on
                October
                30, 2006)3.3
            
            Amended
                and Restated Certificate of Incorporation of China Clean Energy Inc.
                (incorporated by reference to Exhibit 3.4 to the Current Report on
                Form
                8-K of China Clean Energy Inc. filed with the Securities and Exchange
                Commission on October 30, 2006)3.4
            
            By-laws
                of Hurley Exploration Inc. (incorporated by reference to Exhibit
                3.1 to
                the Registration Statement on Form SB-2 of Hurley Exploration Inc.
                filed
                with the Securities and Exchange Commission on July 26,
                2005)3.5
            
            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)




59




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
            
            Compensation
                Agreement, dated as of October 13, 2006, between China Clean Energy
                Inc.
                and Gary Zhao (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 November 16, 2006)10.6
            
            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 SEC on January 22, 2007)10.7
            
            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 SEC
                on January 22, 2007)10.8
            
            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 SEC on January
                22,
                2007)10.9
            
            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 SEC
                on January 22, 2007)10.10
            
            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 SEC on January
                22,
                2007)10.11
            
            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 SEC on January 22,
                2007)10.12
            
            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
                SEC on January 22, 2007)21.1
            
            List
                of Subsidiaries (incorporated by reference to Exhibit 21.1 to the
                Current
                Report on Form 8-K of China Clean Energy Inc. filed with the Securities
                and Exchange Commission on October 30,
                2006)




60




31.1
            
            Section
                302 Certification of Principal Executive Officer31.2
            
            Section
                302 Certification of Principal Accounting Officer32.1
            
            Section
                906 Certification of Principal Executive Officer32.2
            
            Section
                906 Certification of Principal Accounting
                Officer





61