SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549




FORM
10-Q




þ           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
quarterly period ended June 30,
2010




or




q           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period
from                to                  .




Commission
File Number 000-51753




SINO
CLEAN ENERGY INC.


(Exact
name of registrant as specified in its charter)





Nevada
            
            75-2882833(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





Room 1502,
Building D, Wangzuo International City Building


No. 3
Tangyuan Road, Gaoxin District


Xi'an, Shaanxi Province,
People’s Republic of China


(Address
of Principal Executive Offices including zip code)


+86 29
8844-7960


(Registrant’s
Telephone Number, Including Area Code)




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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every, Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). *Yes q  No q* The registrant has not
yet been phased into the interactive data requirements.




Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company





Large
      Accelerated Filer q
            Accelerated
      Filer q
            Non-Accelerated
      Filer q
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company þ




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




As of
August 11, 2010, 16,756,531 shares of the issuer’s common stock, par value
$0.001, were outstanding.









Table of
Contents





PagePART  I
       FINANCIAL INFORMATION
            
            3ITEM
      1
            FINANCIAL
      STATEMENTS
            
            3ITEM
      2
            MMANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            
            17ITEM
      3
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            22ITEM
      4
            CONTROLS
      AND PROCEDURES
            
            22PART  II
       OTHER INFORMATION
            
            23ITEM
      6
            EXHIBITS
            
            23SIGNATURES
            
            23





2




PART
I





FINANCIAL
INFORMATION


Item
1.  Financial Statements





Sino Clean Energy Inc. and
    SubsidiariesCondensed
      Consolidated Balance Sheets




June
      30,2010
            
            
            December
      31,2009(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            25,575,339
            
            
            $
            18,302,558Accounts
      receivable, net
            
            
            9,870,866
            
            
            
            3,655,473Inventories
            
            
            744,717
            
            
            
            892,609Prepaid
      inventories
            
            
            4,780,173
            
            
            
            5,453,095Prepaid
      expenses
            
            
            8,716
            
            
            
            259,627Tax
      recoverable
            
            
            --
            
            
            
            138,495Other
      receivables
            
            
            29,389
            
            
            
            65,584Land
      use right - current portion
            
            
            38,952
            
            
            
            38,739Total
      current assets
            
            
            41,048,152
            
            
            
            28,806,180Property,
      plant and equipment, net
            
            
            15,416,876
            
            
            
            12,557,691Land
      use right – non current portion
            
            
            1,768,811
            
            
            
            1,778,562Goodwill
            
            
            762,018
            
            
            
            762,018Prepayments
      and deposits
            
            
            1,478,701
            
            
            
            729,328Total
      assets
            
            $
            60,474,558
            
            
            $
            44,633,779LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIENCY)Current
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            4,086,817
            
            
            $
            2,672,211Taxes
      payable
            
            
            2,688,277
            
            
            
            1,577,249Amount
      due to directors
            
            
            73,466
            
            
            
            73,466Derivative
      liabilities
            
            
            18,130,524
            
            
            
            16,752,858Total
      current liabilities
            
            
            24,979,084
            
            
            
            21,075,784Convertible
      notes, net of discount
            
            
            -
            
            
            
            1,615,025Derivative
      liabilities
            
            
            -
            
            
            
            28,404,181Total
      liabilities
            
            
            24,979,084
            
            
            
            51,094,990Commitments
      and ContingenciesShareholders'
      Equity (Deficiency)Preferred
      stock, $0.001 par value,50,000,000
      shares authorized,none
      issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.001 par value,30,000,000
      shares authorized,16,557,000
      and 10,850,613 issuedand
      outstanding as of June 30, 2010and
      December 31, 2009 respectively
            
            
            16,557
            
            
            
            10,850Additional
      paid-in capital
            
            
            37,700,930
            
            
            
            25,432,804Accumulated
      deficit
            
            
            (6,401,607
            )
            
            
            (35,802,987
            )Statutory
      reserves
            
            
            1,758,553
            
            
            
            1,758,553Accumulated
      other comprehensive income
            
            
            2,421,041
            
            
            
            2,139,569Total
      Shareholders' equity (deficiency)
            
            
            35,495,474
            
            
            
            (6,461,211
            )Total
      liabilities and shareholders' equity (deficiency)
            
            $
            60,474,558
            
            
            $
            44,633,779





See
accompanying notes to condensed consolidated financial statements.




3




Sino
Clean Energy Inc. and Subsidiaries


Condensed
Consolidated Statements of Income and Other Comprehensive Income


(Unaudited)





Three
      months ended
              June
      30,
            
            
            Six
      months ended
              June
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Revenue
            
            $
            24,149,761
            
            
            $
            8,314,500
            
            
            $
            48,658,765
            
            
            $
            16,092,777Cost
      of goods sold
            
            
            (14,779,016
            )
            
            
            (5,534,929
            )
            
            
            (29,179,193
            )
            
            
            (10,883,036
            )Gross
      profit
            
            
            9,370,745
            
            
            
            2,779,571
            
            
            
            19,479,572
            
            
            
            5,209,741Selling
      expenses
            
            
            1,136,019
            
            
            
            2,261
            
            
            
            2,047,098
            
            
            
            5,820General
      and administrative expenses
            
            
            626,053
            
            
            
            432,412
            
            
            
            1,345,235
            
            
            
            981,311Income
      from operations
            
            
            7,608,673
            
            
            
            2,344,898
            
            
            
            16,087,239
            
            
            
            4,222,610Other
      income (expense)Interest
      and finance costs
            
            
            (13,591
            )
            
            
            (596,098
            )
            
            
            (10,458,154
            )
            
            
            (1,081,845
            )Expense
      related to escrow shares
            
            
            -
            
            
            
            (120,166
            )
            
            
            -
            
            
            
            (240,333
            )Interest
      income
            
            
            19,353
            
            
            
            7,285
            
            
            
            32,224
            
            
            
            11,271Gain
      on extinguishment of derivative liability
            
            
            -
            
            
            
            989,260
            
            
            
            28,404,181
            
            
            
            989,260Change
      in fair value of derivative liabilities
            
            
            2,862,263
            
            
            
            (1,779,968
            )
            
            
            (1,377,666
            )
            
            
            (1,200,990
            )Sundry
      income
            
            
            4,688
            
            
            
            -
            
            
            
            4,688
            
            
            
            -Total
      other income (expense)
            
            
            2,872,713
            
            
            
            (1,499,687
            )
            
            
            16,605,273
            
            
            
            (1,522,637
            )Income
      before provision for income taxes
            
            
            10,481,386
            
            
            
            845,211
            
            
            
            32,692,512
            
            
            
            2,699,973Provision
      for income taxes
            
            
            1,540,627
            
            
            
            303,382
            
            
            
            3,291,132
            
            
            
            592,668Net
      income
            
            
            8,940,759
            
            
            
            541,829
            
            
            
            29,401,380
            
            
            
            2,107,305Other
      comprehensive incomeForeign
      currency translation adjustment
            
            
            269,266
            
            
            
            12,010
            
            
            
            281,472
            
            
            
            8,694Comprehensive
      income
            
            $
            9,210,025
            
            
            $
            553,839
            
            
            $
            29,682,852
            
            
            $
            2,115,999Weighted
      average number of shares-
      Basic
            
            
            16,557,000
            
            
            
            9,532,061
            
            
            
            14,714,742
            
            
            
            9,376,630-
      Diluted
            
            
            19,216,041
            
            
            
            9,910,926
            
            
            
            17,161,540
            
            
            
            9,806,755Income
      per common share-
      Basic
            
            $
            0.54
            
            
            $
            0.06
            
            
            $
            2.00
            
            
            $
            0.22-
      Diluted
            
            $
            0.47
            
            
            $
            0.05
            
            
            $
            1.71
            
            
            $
            0.21




See
accompanying notes to condensed consolidated financial statements.




4




Sino-Clean
      Energy Inc. and SubsidiariesCondensed
      Consolidated Statements of Changes in Shareholders’ Equity
      (Deficiency)For
      the six months ended June 30, 2010(Unaudited)AccumulatedCommon
      stock
            
            
            Additional
            
            
            
            
            
            
            
            otherpaid-in
            
            
            Statutory
            
            Accumulated
            
            
            comprehensiveShares
            
            
            Amount
            
            
            capital
            
            
            reserves
            
            
            Deficit
            
            
            income
            
            
            TotalBalance,
      January 1, 2010
            
            
            10,850,613
            
            
            $
            10,850
            
            
            $
            25,432,804
            
            
            $
            1,758,553
            
            
            $
            (35,802,987)
            
            
            $
            2,139,569
            
            
            $
            (6,461,211)Shares
      issued for exercise of warrants and options
            
            
            62,632
            
            
            
            63
            
            
            
            173,917
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            173,980Fair
      value of options granted
            
            
            --
            
            
            
            --
            
            
            
            18,152
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            18,152Shares
      issued upon conversion of notes payable
            
            
            5,643,755
            
            
            
            5,644
            
            
            
            12,076,057
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            12,081,701Net
      income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            29,401,380
            
            
            
            --
            
            
            
            29,401,380E
      Foreign currency translation gain
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            281,472
            
            
            
            281,472Balance,
      June 30, 2010
            
            
            16,557,000
            
            
            $
            16,557
            
            
            $
            37,700,930
            
            
            $
            1,758,553
            
            
            $
            (6,401,607)
            
            
            $
            2,421,041
            
            
            $
            35,495,474




See
accompanying notes to condensed consolidated financial statements.




5




Sino Clean Energy Inc. and
    SubsidiariesCondensed
      Consolidated Statements of Cash Flows(Unaudited)




Six
      months ended June 30,2010
            
            
            2009Cash
      flows from operating activities:Net
      income
            
            $
            29,401,380
            
            
            $
            2,107,305Adjustments
      to reconcile net income to cashprovided
      by operating activities:
            
            
            
            
            
            
            -Depreciation
      and amortization
            
            
            1,008,832
            
            
            
            713,062Amortization
      of deferred debt issuance costs
            
            
            -
            
            
            
            217,102Amortization
      of discount on convertible notes
            
            
            8,601,975
            
            
            
            753,025Fair
      value of common stock issued for payment of interest
    expense
            
            
            1,864,701
            
            
            
            -Gain
      on extinguishment of derivative liabilities
            
            
            (28,404,181)
            
            
            
            (989,260)Expense
      related to escrow shares
            
            
            -
            
            
            
            240,333Fair
      value of common stock issued for services
            
            
            -
            
            
            
            454,935Change
      in fair value of derivative liabilities
            
            
            1,377,666
            
            
            
            1,200,990Fair
      value of vested options
            
            
            18,152
            
            
            
            -Change
      in operating assets and liabilities :Accounts
      receivable
            
            
            (6,215,393)
            
            
            
            (1,213,446
            )Other
      receivables
            
            
            36,195
            
            
            
            (6,444
            )Inventories
            
            
            147,892
            
            
            
            (167,440
            )Prepaid
      inventories
            
            
            672,922
            
            
            
            819,974Prepaid
      expenses
            
            
            250,911
            
            
            
            60,994Tax
      recoverable
            
            
            138,495
            
            
            
            -Refundable
      advance
            
            
            -
            
            
            
            731,861Government
      grant receivable
            
            
            -
            
            
            
            146,314Accounts
      payable and accrued expenses
            
            
            236,559
            
            
            
            429,654Taxes
      payable
            
            
            1,111,028
            
            
            
            255,041Net
      cash provided by operating activities
            
            
            10,247,134
            
            
            
            5,754,000Cash
      flows from investing activities :Prepayments
      and deposits
            
            
            (97,320)
            
            
            
            47,880Purchase
      of property, plant and equipment
            
            
            (2,606,556)
            
            
            
            -Net
      cash (used in) provided by  investing activities
            
            
            (2,703,876)
            
            
            
            47,880-Cash
      flows from financing activities:Prepayments
      and deposits related to deferred offering costs
            
            
            (652,053)
            
            
            
            -Payment
      of advances from director
            
            
            -
            
            
            
            (395,066
            )Cash
      received from exercise of warrants and options
            
            
            173,980
            
            
            
            -Net
      cash used in financing activities
            
            
            (478,073)
            
            
            
            (395,066
            )Effect
      of foreign currency translation
            
            
            207,596
            
            
            
            29,997Net
      increase in cash and cash equivalents
            
            
            7,272,781
            
            
            
            5,436,811-Cash
      and cash equivalents, beginning of period
            
            
            18,302,558
            
            
            
            3,914,306Cash
      and cash equivalents, end of period
            
            $
            25,575,339
            
            
            $
            9,351,117Supplemental
      disclosure informationCash
      paid for interest
            
            $
            -
            
            
            
            -Cash
      paid for taxes
            
            $
            2,641,771
            
            
            $
            406,427Supplemental
      non-cash investing and financing activitiesIssuance
      of shares upon conversion of convertible notes
            
            $
            10,217,000
            
            
            $
            448,520Cumulative
      effect of change in accounting principle, reclassification of warrants and
      conversion feature to derivative liability
            
            $
            -
            
            
            $
            4,589,792




See
accompanying notes to the condensed consolidated financial
statements.




6




Sino
Clean Energy Inc. and Subsidiaries


Notes to
Condensed Consolidated Financial Statements


For the
Six Months Ended June 30, 2010 (Unaudited)





1. ORGANIZATION AND BUSINESS
ACTIVITIES





Overview




Sino
Clean Energy Inc. (the “Company”, “we” or “our”) is a holding company that,
through its subsidiaries, based upon total third
party sales revenue in China,is a leading commercial producer and
distributor of coal-water slurry fuel (“CWSF”) in China. CWSF is a clean fuel
that consists of fine coal particles suspended in water.  Our CWSF
products are mainly used to fuel boilers and furnaces to generate steam and heat
for residential and industrial applications.  We sell our products in
China and our customers include industrial, commercial, residential and
government organizations. Our strong reputation in the CWSF industry in China,
together with our established track record for consistently delivering products
in large quantities, has enabled us to expand our customer base.  We
primarily use washed coal to produce CWSF. We acquire the raw materials for each
of our production facilities primarily from three nearby coal
mines.  We have established strong relationships with our suppliers
and our ability to purchase large quantities of raw materials has allowed us to
achieve favorable pricing and delivery terms.





Corporate
Organization and History




We were
originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July
11, 2000. In September 2001, we purchased Endo Networks, Inc., a Canadian
software developer, and changed our name to “Endo Networks, Inc.” on November 5,
2001. We re-domiciled to the State of Nevada on December 13, 2001.




On
October 20, 2006 we consummated a share exchange transaction with Hangson, a
British Virgin Islands company, the stockholders of Hangson and a majority of
our stockholders.  We issued a total of 2,600,000 shares of our common
stock to the Hangson Stockholders and a consultant in the transaction, in
exchange for 100% of the common stock of Hangson.  As a result of the
transaction we became engaged in the CWSF business, through the operations of
Suo’ang BST and Shaanxi Suo’ang New Energy.  On January 4, 2007, we
changed our name from “Endo Networks, Inc.” to “China West Coal Energy Inc.”,
and then on August 15, 2007, we changed our name again to our present name, Sino
Clean Energy Inc.




Hangson
was a holding company that controlled Suo'ang BST and Suo'ang BST's 80%-owned
subsidiary Suo'ang New Energy, through a series of contractual arrangements. The
remaining 20% of Suo'ang New Energy was owned by Mr. Peng Zhou, a member of our
board of directors and, at that time, the chief operating officer of Suo'ang
BST. Suo'ang BST, through Suo'ang New Energy, commenced CWSF production in July
2007. Although Hangson was entitled to acquire the remaining 20% of Suo'ang New
Energy from Mr. Zhou, the transfer was not completed and Mr. Zhou remained as
the record shareholder of Suo'ang New Energy.
  In 2009,
we effected a reorganization of our corporate structure in order to make Suo'ang
New Energy a wholly-owned subsidiary which included entering into a series of
agreements transferring the contractual arrangements, through which Hangson
controlled Suo'ang BST, to Suoke Clean Energy.
  On
September 15, 2009, Suo'ang BST and Hangson entered into a share transfer
agreement with Suoke Clean Energy pursuant to which Suo'ang BST and Hangson
agreed to transfer 100% of the equity interests in Suo'ang New Energy to Suoke
Clean Energy. However, since Mr. Zhou still owned 20% of Suo'ang New Energy, on
November 10, 2010, Suo'ang BST and Hangson entered into a subsequent share
transfer agreement with Suoke Clean Energy to transfer 80% of Suo'ang New
Energy's equity interests to Suoke Clean Energy and, Mr. Zhou, with Hangson's
consent, entered into a share transfer agreement with Suoke Clean Energy to
transfer the remaining 20% equity interest of Suo'ang New Energy. On November
12, 2009, Suo'ang New Energy received a new business license from the Tongchuan
Administration for Industry and Commerce, which reflected that the acquisition
of 100% of the equity of Suo'ang New Energy by Suoke Clean Energy had been
completed. As a result we were able, through Suoke Clean Energy to own 100% of
the equity interests of Suo'ang New Energy. On October 12, 2009, Suo'ang New
Energy established a wholly-owned subsidiary to conduct the CWSF business in
Shenyang, Liaoning Province.
  On
December 31, 2009, we entered into a series of termination agreements to
terminate the contractual arrangements by and among Suoke Clean Energy, Suo'ang
BST and certain stockholders of Suo'ang BST. We no longer needed to keep such
contractual arrangements in place due to the fact that Suo'ang BST was no longer
engaged in any substantial business operations. In connection with the
termination agreements, certain assets held by Suo'ang BST, such as office
equipment, vehicles, bank deposits, and accounts receivable, were transferred to
Suoke Clean Energy. Employees of Suo'ang BST signed new employment contracts
with Suoke Clean Energy. All rights and obligations under certain business
operation agreements and research and development contracts between Suo'ang BST
and third parties were assigned to Suo'ang New Energy. Hangson has had no
substantive operations of its own after the transfer and termination of the
contractual arrangements.
  On June
30, 2009, Hangson acquired all of the outstanding shares of Wiscon, a limited
liability company incorporated in Hong Kong under the Companies Ordinance. On
December 31, 2009, Hangson transferred all of the outstanding shares of Wiscon
to Sino Clean Energy Inc. As a result, Wiscon became a direct wholly-owned
subsidiary of Sino Clean Energy Inc.




Effective
May 7, 2010, the Company announced a reverse stock split pursuant to which each
ten shares of Company's common stock then issued and outstanding was
automatically converted into one share of the Company’s common
stock.  All share and per share amounts in the accompanying condensed
consolidated financial statements have been adjusted to reflect the reverse
stock split as if it had occurred at the beginning of the earliest period
presented.




7





2. SUMMARY OF SIGNIFICANY ACCOUNTING
POLICIES





Basis of presentation and
consolidation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the United States Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s 2009 Annual Report on Form 10-K for the fiscal year
ended December 31, 2009, filed with the SEC. The results of operations for
interim periods are not necessarily indicative of the results expected for a
full year or for any future period.





The
consolidated condensed financial statements include the financial statements of
the Company, its wholly owned subsidiaries Wiscon, Tongchuan Suoke Clean
Energy, Shaanxi Suo’ang New Energy and Shenyang Suo’ang New Energy.
 Intercompany accounts and transactions have been eliminated in
consolidation.





Use of
estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.





Revenue
recognition





Revenues
of the Company are from sales of CWSF. Sales are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectibility is reasonably assured.  Revenues are
presented net of value added tax (“VAT”). In our revenue arrangements, physical
delivery is the point in time when customer acceptance occurs since title and
risk of loss are transferred to the customer.  No return allowance is
made as products are normally not returnable upon acceptance by the
customers.




Accounts
receivable





Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts. The Company uses the aging method to
estimate the valuation allowance for anticipated uncollectible receivable
balances.  Under the aging method, bad debts determined by management
are based on historical experience as well as the current economic climate and
are applied to customers' balances categorized by the number of months the
underlying invoices have remained outstanding.  The
valuation allowance balance is adjusted to the amount computed as a result
of the aging method.  When facts subsequently become available to
indicate that an adjustment to the allowance should be made, this is recorded as
a change in estimate in the current year. As of June 30, 2010 and December 31,
2009, accounts receivable were net of allowances of zero and zero,
respectively.


.


Fair value of financial
instruments





Fair
value measurements are determined using authoritative guidance issued by the
FASB, with the exception of the application of the guidance to non-recurring,
non-financial assets and liabilities as permitted. Fair value is defined in the
authoritative guidance as the price that would be received to sell an asset or
paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at
the measurement date. A fair value hierarchy was established, which prioritizes
the inputs used in measuring fair value into three broad levels as follows
:




8





Level 1—Quoted
prices in active markets for identical assets or liabilities.





Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.





Level 3—Unobservable
inputs based on the Company's assumptions.





The
Company is required to use observable market data if available without undue
cost and effort.





The
following table presents certain investments and liabilities of the Company’s
financial assets measured and recorded at fair value on the Company’s
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of June 30, 2010 and December 31, 2009.





June 30, 2010
      (Unaudited)Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalFair
      value of warrants
            
            $
            --
            
            
            $
            --
            
            
            $
            18,130,524
            
            
            $
            18,130,524




December
      31, 2009Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalFair
      value of convertible note conversion feature
            
            
            --
            
            
            
            --
            
            
            $
            28,404,181
            
            
            $
            28,404,181Fair
      value of warrants
            
            
            --
            
            
            
            --
            
            
            $
            16,752,858
            
            
            $
            16,752,858--
            
            
            
            --
            
            
            $
            45,157,039
            
            
            $
            45,157,039





Derivative financial
instruments





The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair
value and is then re-valued at each reporting date, with changes in the fair
value reported in the consolidated statements of operations. For stock-based
derivative financial instruments, the Company uses both the Black-Scholes-Merton
and Binomial option pricing models to value the derivative instruments at
inception and on subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period.  Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.





Stock based
compensation





The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs.  Stock-based compensation is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the requisite
service period.  Options vest and expire according to terms established at
the grant date.





Income per common
share





Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. The diluted earnings per share calculation give effect to all
potentially dilutive common shares outstanding during the period using the
treasury stock method for warrants and options and the if-converted method for
convertible debentures.




9





As of
June 30, 2010, common stock equivalents were composed of warrants convertible
into 4,063,982 shares of the Company's common stock, and options convertible
into 60,000 shares of the Company’s common stock.  As of June 30, 2009,
common stock equivalents were composed of warrants convertible into 926,143
shares of the Company's common stock, debentures convertible into 890,433 shares
of the Company's common stock and options convertible into 10,000 shares of the
Company’s common stock.





The
following is a reconciliation of the numerator and denominator used in the
calculation of basic and diluted earnings per share.





Three
      months ended
              June
      30
            
            
            Six
      months ended
              June
      302010
            
            
            2009
            
            
            2010
            
            
            2009NumeratorNet
      income
            
            $
            8,940,759
            
            
            $
            541,829
            
            
            $
            29,401,380
            
            
            $
            2,107,305DenominatorWeighted
      average shares outstanding-basic
            
            
            16,557,000
            
            
            
            9,532,061
            
            
            
            14,714,742
            
            
            
            9,376,630Effect
      of dilutive instruments:Warrants
      and options
            
            
            2,659,041
            
            
            
            378,865
            
            
            
            2,446,798
            
            
            
            430,125Weighted
      average shares outstanding-diluted
            
            
            19,216,041
            
            
            
            9,910,926
            
            
            
            17,161,540
            
            
            
            9,806,755





Foreign currency
translation





The accompanying condensed consolidated
financial statements are presented in United States dollars. The functional
currency of the Company is the Renminbi (RMB). Capital accounts of the condensed
consolidated financial statements are translated into United States dollars from
RMB at their historical exchange rates when the capital transactions occurred.
Assets and liabilities are translated at the exchange rate as of balance sheet
date. Income and expenditures are translated at the average exchange rate of the
period





June
      30, 2010
            
            
            December
      31, 2009
            
            
            June
      30, 2009Period
      end RMB : US$ exchange rate
            
            
            6.7909
            
            
            
            6.8172
            
            
            
            6.8319Average
      period RMB : US$ exchange rate
            
            
            6.8251
            
            
            
            6.8259
            
            
            
            6.8343





The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.





Deferredofferingcosts





Deferred
offeringcosts, consisting of legal,
accounting and filing fees relating to an offering are capitalized. Thedeferredofferingcosts will be offset against offering proceeds in the event the
offering is successful. In the event the offering is unsuccessful or is
abandoned, thedeferredofferingcosts will be expensed.  As of June 30, 2010
and December 31, 2009, deferred offering costs of $687,053 and $35,000,
respectively, are included in Prepayments and Deposits in the accompanying
condensed consolidated balance sheets.




10




Income
taxes





The
Company uses asset and liability approach for financial accounting and reporting
for income taxes that allows recognition and measurement of deferred tax assets
based upon the likelihood of realization of tax benefits in future
years.  Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.  A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will
either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain.





Research and
Development





Research
and development costs are expensed as incurred.  For the six months
ended June 30, 2010 and 2009, research and   development expenses
totaled $147,518 and $0, respectively and are included in the General and
Administrative expenses in the accompanying condensed consolidated statements of
income and other comprehensive income.





Concentrations





Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and unsecured trade accounts
receivable.





Cash
denominated in Renminbi (“RMB”) with a US dollar equivalent of $24,702,112 and
$18,275,847 at June 30, 2010 and December 31, 2009, respectively, was held in
accounts at financial institutions located in the PRC.  In addition,
the Company maintains funds in bank accounts in the US which at times may exceed
the federally insured balance of $250,000.  The Company and its
subsidiaries have not experienced any losses in such accounts and do not believe
the cash is exposed to any significant risk.  .





For the
six months ended June 30, 2010, one customer, Shenyang Haizhong Heat Resource,
Ltd., (“Shenyang Haizhong”) accounted for 47% of sales and at June 30, 2010,
accounted for 68% of accounts receivable.  Shenyang Haizhong is a
subsidiary of Qingdao Haizhong Enterprise Co. (“Haizhong Boiler"), which the
Company has an exclusive sales agency agreement to distribute CWSF
boilers.  The Company also has an exclusive agreement with
Shenyang Haizhong to supply it with CWSF.  Shenyang Haizhongis
the sole supplier of heat to the commercial and residential customers in the new
economic zone in Shenyang, Liaoning
Province.  For the six months ended June 30, 2010 and 2009, there were
no other customers who accounted for 10% or more of sales or accounts
receivable.





For the three months ended
June 30, 2010, Shenyang Haizhong accounted for 31% of sales. For the
three months ended June 30, 2010 and 2009, there were no other customers who
accounted for 10% or more of sales.





For the
six months ended June 30, 2010, three vendors accounted for 85% of total
purchases (33%, 30% and 22% respectively).  At June 30, 2010, two
vendors accounted for 100% of accounts payable and one vendor accounted for 92%
of prepaid coal.  For the six months ended June 30, 2009, two vendors
accounted for 100% of total purchases (85% and 15% respectively).  At
June 30, 2009, one vendor accounted for 100% of prepaid coal.





Reclassifications





In
presenting the Company’s condensed consolidated statement of income and other
comprehensive income for the three and six months ended June 30, 2009, the
Company presented $152,597 and $191,291 respectively of commission income as
part of Other Income (Expense).  In presenting the Company’s condensed
consolidated statement of income and other comprehensive income for the three
and six months ended June 30, 2010, the Company has reclassified the commission
income to revenue.




Recently issued Accounting
Pronouncements





In
April 2010, the Financial Accounting Standards Board (FASB) issued new
accounting guidance in applying the milestone method of revenue recognition to
research or development arrangements. Under this guidance management may
recognize revenue contingent upon the achievement of a milestone in its
entirety, in the period in which the milestone is achieved, only if the
milestone meets all the criteria within the guidance to be considered
substantive. This standard is effective on a prospective basis for research and
development milestones achieved in fiscal years, beginning on or after
June 15, 2010. Early adoption is permitted; however, adoption of this
guidance as of a date other than January 1, 2011 will require the Company
to apply this guidance retrospectively effective as of January 1, 2010 and
will require disclosure of the effect of this guidance as applied to all
previously reported interim periods in the fiscal year of adoption. As the
Company plans to implement this standard prospectively, the effect of this
guidance will be limited to future transactions. The Company does not expect
adoption of this standard to have a material impact on its financial position or
results of operations as it has no material research and development
arrangements which will be accounted for under the milestone
method.




11





In
January 2010, the FASB issued new accounting guidance which requires new
disclosures regarding transfers in and out of Level 1 and Level 2 fair value
measurements, as well as requiring presentation on a gross basis of information
about purchases, sales, issuances and settlements in Level 3 fair value
measurements. The guidance also clarifies existing disclosures regarding level
of disaggregation, inputs and valuation techniques. The new guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009.  Disclosures about purchases, sales, issuances
and settlements in the roll forward of activity in Level 3 fair value
measurements are effective for fiscal years beginning after December 15,
2010.  As this guidance requires only additional disclosure, there
should be no impact on the consolidated financial statements of the Company upon
adoption.




In April
2010, the FASB issued new accounting guidance to clarify that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity.  The
amendments are effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010.  The Company does
not expect adoption of this standard will have a material impact on
its consolidated financial statements.


In
October 2009, a new accounting consensus was issued for
multiple-deliverable revenue arrangements. This consensus amends existing
revenue recognition accounting standards. This consensus provides accounting
principles and application guidance on whether multiple deliverables exist, how
the arrangement should be separated and the consideration allocated. This
guidance eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. Previously the existing accounting consensus required that the fair value
of the undelivered item be the price of the item either sold in a separate
transaction between unrelated third parties or the price charged for each item
when the item is sold separately by the vendor. Under the existing accounting
consensus, if the fair value of all of the elements in the arrangement was not
determinable, then revenue was deferred until all of the items were delivered or
fair value was determined. This new approach is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company is in the process of
evaluating whether the adoption of this standard will have a material effect on
its financial position, results of operations or cash flows.





In June
2009, the FASB issued authoritative guidance on consolidation of variable
interest entities.  The new guidance is intended to improve financial
reporting by requiring additional disclosures about a company’s involvement in
variable interest entities.  This new guidance is effective for fiscal
years and interim periods beginning after November 15, 2009.  The
Company adopted this guidance effective January 1, 2010, and it had no impact on
the consolidated financial statements of the Company.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the Securities Exchange Commission (the
"SEC") did not or are not believed by management to have a material impact on
the Company's present or future consolidated financial statements.





3. INVENTORIES





Inventories
consist of the following at:





June
      30,
            
            
            December
      31,2010
            
            
            2009(unaudited)Raw
      materials
            
            $
            396,732
            
            
            $
            635,536Finished
      goods
            
            
            347,985
            
            
            
            257,073$
            744,717
            
            
            $
            892,609




The
Company has contracts with coal mines to deliver coal for use in the production
of CWSF. At times, the Company may make payments in advance of delivery and
accounts for these prepayments as prepaid inventory. At June 30, 2010 and
December 31, 2009, prepaid inventories totaled $4,780,173 and $5,453,095,
respectively.





4  PROPERTY, PLANT AND
EQUIPMENT




Property,
plant and equipment consist of the following:





June
      30, 2010
            
            
            December
      31, 2009(unaudited)Buildings
            
            $
            2,812,390
            
            
            $
            2,564,638Plant
      and machinery
            
            
            15,264,317
            
            
            
            11,762,449Office
      equipment
            
            
            77,243
            
            
            
            76,639Motor
      vehicles
            
            
            262,328
            
            
            
            148,02018,416,278
            
            
            
            14,551,746Less:
      Accumulated depreciation and amortization
            
            
            (2,999,402)
            
            
            
            (1,994,055
            )$
            15,416,876
            
            
            $
            12,557,691





Depreciation
expense for the six months ended June 30, 2010 and 2009 was $989,410 and
$693,729, respectively.





5. CONVERTIBLE NOTES





Convertible
notes consist of the following at:




June
      30,
            
            
            December
      31,2010
            
            
            2009(unaudited)10%
      convertible notes
            
            $
            --
            
            
            $
            10,217,000Valuation
      discount
            
            
            --
            
            
            
            (8,601,975
            )Convertible
      notes, net
            
            
            --
            
            
            
            1,615,025Less
      current portion
            
            
            --
            
            
            
            --Long
      term portion
            
            $
            --
            
            
            $
            1,615,025





12




In July
2009, the Company issued $11,592,000 of 10% senior secured convertible notes
(the “Notes”) and issued warrants (the “Warrants”) to purchase up to 6,101,054
shares of common stock of the Company in a private placement.  The
Notes bore interest at 10% per annum, were due in 2012, were unsecured, and were
personally guaranteed by the Company’s Chief Executive Officer and certain
shareholders.  The holders of the Notes had the right at any time to
convert all or part of the outstanding principal amount of the Notes and any
accrued and unpaid interest into common shares of the Company at the then
effective conversion price, initially set at $1.90 per share.  In
2009, $1,375,000 of the convertible notes was converted at the stated conversion
price of $1.90 per share into 723,684 shares of the Company’s common
stock.  During the first quarter of 2010, the balance of the notes of
$10,217,000 was converted at the stated conversion price of $1.90 per share into
5,377,368 shares of the Company’s common stock.  On March
5, 2010, the Company issued 266,387 shares of common stock to all holders
of notes outstanding as of March 5, 2010, as consideration for their forfeiture
of certain rights and interest payments. The fair
value of the additional 266,387 shares of common stock was $1,864,701 on the
date the shares were issued, and is included in interest expense in the
accompanying June 30, 2010 condensed consolidated financial
statements.
  At
December 31, 2009, the Company had recorded a derivative liability of
$28,404,181 related to the conversion feature of the convertible
notes.   When the notes converted, the derivative liability was
extinguished and a gain on extinguishment of the derivative was
recorded.  Also upon conversion, the unamortized balance of the note
discount of $8,601,975 was fully amortized and included in interest expense in
the accompanying condensed consolidated financial statements.





6. DERIVATIVE
LIABILITIY





At June
30, 2010 and December 31, 2009, derivative liabilities were made up of the
following valued based on the Black-Scholes-Merton and bi-nominal valuation
techniques with the following assumptions:




June
      30,
              2010
            
            
            December
      31,
              2009(Unaudited)Conversion feature:Risk-free
      interest rate
            
            
            --
            
            
            
            1.5
            %Expected
      volatility
            
            
            .--
            
            
            
            148.47
            %Expected
      life (in years)
            
            --
            
            
            2.75
      yearsExpected
      dividend yield
            
            
            --
            
            
            
            --Warrants:Risk-free
      interest rate
            
            
            0.59
            %
            
            
            1.32
            %Expected
      volatility
            
            
            123.79
            %
            
            
            148.47
            %Expected
      weighted average life (in years)
            
            1.94
      years
            
            
            2.81
      yearsExpected
      dividend yield
            
            
            0
            
            
            
            0Fair Value:Conversion
      feature
            
            $
            --
            
            
            $
            28,404,181Warrants
            
            
            18,130,524
            
            
            
            16,752,858$
            18,130,524
            
            
            $
            45,157,039





The
risk-free interest rate was based on rates established by the Federal Reserve
Bank, the Company uses the historical volatility of its common stock, and the
expected life of the instruments is determined by the expiration date of the
instrument.  The expected dividend yield was based on the fact that
the Company has not paid dividends to common shareholders in the past and does
not expect to pay dividends to common shareholders in the future.





At
December 31, 2009, the Company had recorded a derivative liability of
$28,404,181 related to the conversion feature of the convertible
notes.   When the notes converted, the derivative liability was
extinguished and a gain on extinguishment of the derivative was recorded. For
the three months ended June 30, 2010 and 2009, change in derivative liability
was $2,862,263 and $(1,779,968), respectively. For the six months ended June 30,
2010 and 2009, change in derivative liability was $(1,377,666) and $(1,200,990),
respectively.




13





7. COMMON STOCK





During
the six months ended June 30, 2010, the Company issued 5,377,368 shares of
common stock upon conversion of $10,217,000 of convertibles notes.  On March
5, 2010, the Company issued 266,387 shares of common stock to all holders
of notes outstanding as of March 5, 2010, as consideration for their forfeiture
of certain rights and interest payments.The
fair value of the additional 266,387 shares of common stock was $1,864,701 on
the date the shares were issued, and is included in interest expense in the
accompanying June 30, 2010 condensed consolidated financial
statements.





.During
the six months ended June 30, 2010, the Company issued 62,632 shares of common
stock upon exercise of options and warrants for total proceeds of
$173,980.





8.  WARRANTS AND
OPTIONS





The
following table summarizes stock warrants and option activity for the six months
ended June 30, 2010:




Number of
              Shares underlying
              Warrants
              and Options
            
            
            Weighted
              Average
              Exercise PriceWarrants
      and options outstanding at January 1, 2010
            
            
            4,413,744
            
            
            $
            2.51Warrants
      and options granted
            
            
            60,000
            
            
            $
            7.38Warrants
      and options exercised
            
            
            (62,632)
            
            
            $
            2.78Warrants
      and options expired
            
            
            (287,130)
            
            
            $
            1.50Warrants
      and options outstanding at June 30, 2010
            
            
            4,123,982
            
            
            $
            2.66





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




Outstanding
      Warrants and Options
            
            
            Exercisable
      Warrants and OptionsExercise
      price
            
            
            Number
      of shares
              underlying
      warrants and
              options
            
            
            Weighted
              average
              remaining
              contractual
      life
              (years)
            
            
            Number
      of shares
              underlying
      warrants and
              options
      exercisable
            
            
            Weighted
              average
              exercise
      price$
            1.50
            
            
            
            603,304
            
            
            
            1.21
            
            
            
            603,304
            
            
            $
            1.50$
            2.28
            
            
            
            427,074
            
            
            
            2.33
            
            
            
            427,074
            
            
            $
            2.28$
            2.50
            
            
            
            35,710
            
            
            
            0.22
            
            
            
            35,710
            
            
            $
            2.50$
            2.85
            
            
            
            2,997,894
            
            
            
            1.97
            
            
            
            2,997,894
            
            
            $
            2.85$
            4.35
            
            
            
            10,000
            
            
            
            1.62
            
            
            
            10,000
            
            
            $
            4.35$
            7.98
            
            
            
            50,000
            
            
            
            1.95
            
            
            
            -
            
            
            $
            -$
            2.66
            
            
            
            4,123,982
            
            
            
            
            
            
            
            4,073,982
            
            
            $
            2.59





At June
30, 2010, the aggregate intrinsic value of the warrants and options outstanding
and exercisable was $14,703,227.





The
warrants have an initial exercise price ranging from $1.50 to $2.85 per share,
and are subject to full ratchet anti-dilution adjustments in the event that the
Company issues additional equity, equity linked securities or securities
convertible into equity, at a purchase price less than the then applicable
Conversion Price or the Exercise Price.





On
February 12, 2010, the Company granted to its Chief Financial Officer an option
to purchase 10,000 shares of common stock.  The options have an
exercise price of $4.35 per share, an expiration date of 2 years from the date
of grant, and vested immediately.  The Company determined the fair
value of the options on the date of grant was $18,152 using the Black-Scholes
option pricing model with the following assumptions: expected volatility,
114.35%; risk-free interest rate, 0.38%; expected weighted average life, 1 year;
and expected dividend yield, 0%.  The Company has recorded $18,152 as
fair value of the options granted during the six months ended June 30,
2010.




14





On June
11, 2010, the Company granted to its Corporate Development consultant an option
to purchase 50,000 shares of common stock. The options vest upon the completion
of a public offering of the Company’s common stock, have an exercise price of
$7.98 per share and an expiration date of 2 years from the grant
date. During the six months ended June 30, 2010, the Company did not
complete a public offering of its common stock and no expense was recognized
related to these options.





9.  INCOME
TAXES





Companies
in the PRC are generally subject to PRC Enterprise Income Tax at a uniform tax
rate of 25% under the China's Unified Enterprise Income Tax Law ("New EIT Law"),
which took effect from January 1, 2008.  The New EIT Law provides
a five-year transition period from its effective date for those enterprises
which were established before the promulgation date of the New EIT Law and which
were entitled to a preferential EIT treatment. Accordingly, Shenyang Suo'ang New
Energy is subject to the uniform tax rate of 25%. Shaanxi Suo'ang New Energy is
entitled to two years tax holiday for 2007 and 2008 and 50% reduction on its EIT
rate for the 2009, 2010 and 2011.





The
Company has not recorded a provision for U.S. federal income tax for the three
and six month period ended June 30, 2010 and 2009 due to a net operating loss
carry forward in the United States of America. At June 30, 2010 and 2009, the
Company had net operating loss carryforwards in the United States of America of
approximately $2,336,000 and $655,000, respectively, which begin to expire in
2028. The deferred tax asset created by the net operating loss has been offset
by a 100% valuation allowance. At June 30, 2010 and 2009, there were no other
significant deferred tax assets or deferred tax liabilities.





Income
tax expense consists of the following for the:





Three
      months ended June 30
            
            
            Six
      months ended June 302010
            
            
            2009
            
            
            2010
            
            
            2009Current-PRC
      Enterprise Income Tax
            
            $
            1,540,627
            
            
            $
            303,382
            
            
            $
            3,291,132
            
            
            $
            592,668Deferred
      tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      income tax expense
            
            
            1,540,627
            
            
            
            303,382
            
            
            
            3,291,132
            
            
            
            592,668


The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the:




Three
      months ended June 30,
              
              
              Six
      monthsended
      June 30,2010
              
              
              2009
              
              
              2010
              
              
              2009U.S.
      statutory rate
              
              
              34
              %
              
              
              34
              %
              
              
              34
              %
              
              
              34
              %Permanent
      differences
              
              
              (9
              )%
              
              
              14
              %
              
              
              (17
              )%
              
              
              8
              %Tax
      holiday
              
              
              (3
              )%
              
              
              (9
              )%
              
              
              (2
              )%
              
              
              (16
              )%Effect
      of statutory rate differential
              
              
              (7
              )%
              
              
              (3
              )
      %
              
              
              (5
              )%
              
              
              (4
              )%Effective
      tax rate
              
              
              15
              %
              
              
              36
              %
              
              
              10
              %
              
              
              22
              %




Permanent
differences are related to gain (loss) on change in the value of derivatives and
the extinguishment of the derivatives liabilities.




Effective
January 1, 2007, the Company adopted authoritative guidance issued by the
FASB for uncertainty in income taxes. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under ASC 740-10, we
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. ASC 740-10 also
provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of June 30, 2010, the Company does not have a
liability for unrecognized tax uncertainties except as described below. The
Company and its Chinese subsidiaries have never been subject to a tax
examination and all years are open to examination by the tax
authorities.




15





The
Company was delinquent in filing its U.S. federal income tax returns for its
taxable years ended September 30, 2007 and 2008 and information reports for
its bank accounts located in the PRC for 2006, 2007, and 2008. There is no U.S
taxable income for the applicable years and the Company believes that its
failure to file the information reports was not willful.  Accordingly,
no provision has been made for U.S. income taxes and the Company has recorded
its estimate of total penalties that may be assessed for the delinquent U.S. tax
returns and reports in the accompanying condensed consolidated financial
statements.





The
Company enjoys certain tax holidays under the New EIT Law. For the three and six
months ended June 30, 2010, the tax holidays decreased income tax expense by
approximately $364,154 and $739,906, respectively, and the benefit of the tax
holiday on net income per share (basic) was approximately $0.02 and $0.05,
respectively.  For the three and six months ended June 30, 2009, the
tax holidays decreased income tax expense by approximately $242,256 and
$437,873, respectively, and the benefit of the tax holiday on net income per
share (basic) was approximately $0.05 and $0.05, respectively.





10.  RELATED PARTY
TRANSACTIONS





Amounts
due to related parties consisted of the following at:




June
      30,
                2010
                (unaudited)
              
              
              December
      31,
                2009Due
      to executive officer and director :Mr.
      Baowen Ren
              
              $
              73,466
              
              
              $
              73,466





Amounts
due to executive officer and director are non-interest bearing, unsecured, and
due on demand.




11. COMMITMENTS




Tongchuan
facility





We have
entered into an agreement with Tongchuan City Investment and
Development Co., Ltd. ("TCID") to develop a new heat supply company
for the purpose of providing heating for the new district in Tongchuan. TCID has
stated that 15 new heat supply plants will need to be built to supply an area of
16.4 million square meters. The first three plants are expected to be built
and operational by the end of 2010, with the remaining plants expected to be
completed over the following five to seven years. The newly formed heat supply
company will require an investment of $12.5 million by TCID, for which it
will receive an 85% stake in the new company, and $2.2 million by Suo'ang
New Energy, for which it will receive a 15% stake in the new company. As of
August 10, 2010, we have not made any investment in the heat supply
company.





Nanning
facility





In
November 2009, through our subsidiary, Suoke Clean Energy, we entered into a
memorandum of understanding with the local government of Nanning, Guangxi
Province, pursuant to which we plan to establish a 500,000 metric ton per annum
CWSF production facility in the city of Nanning. We expect to commence
construction on the facility in third quarter 2010, with a view to commencing
commercial production by 2011. As of August 10, 2010, we have not entered into
any contracts or commitments related to the Nanning facility
construction.





16





Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations.





The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this item. In addition to
historical information, the following discussion contains certain
forward-looking statements within the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as “may”, “will”, “could”, “expect”,
“anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar
terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially
from those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the “Risk
Factors” section of the Company's Annual Report on Form 10-K filed with the
SEC on April 9, 2010.  We undertake no obligation to update publicly
any forward-looking statements for any reason even if new information becomes
available or other events occur in the future.




Our
financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
were translated into U.S. Dollars at various pertinent dates and for pertinent
periods.





In
this Quarterly Report on Form 10-Q, references to “we”, “our”, “us”, the
“Company” or the “Registrant” refer to Sino Clean Energy Inc., a Nevada
corporation, and its subsidiaries and affiliated companies.




Overview




Sino
Clean Energy Inc. (sometimes referred to in this annual report as “Company”,
“we” or “our”) is a holding company that, through its subsidiaries, based upon total third
party sales revenue in China,is a leading commercial producer and
distributor of coal-water slurry fuel (“CWSF”) in China. CWSF is a clean fuel
that consists of fine coal particles suspended in water.  Our CWSF
products are mainly used to fuel boilers and furnaces to generate steam and heat
for residential and industrial applications.  We sell our products in
China and our customers include industrial, commercial, residential and
government organizations. Our strong reputation in the CWSF industry in China,
together with our established track record for consistently delivering products
in large quantities, has enabled us to expand our customer base.  We
primarily use washed coal to produce CWSF. We acquire the raw materials for each
of our production facilities primarily from three nearby coal
mines.  We have established strong relationships with our suppliers
and our ability to purchase large quantities of raw materials has allowed us to
achieve favorable pricing and delivery terms.





Critical
Accounting Policies and Estimates





Use of
Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.




Revenue
Recognition





Sales are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectibility is reasonably assured.  Revenues are
presented net of value added tax (“VAT”). In our revenue arrangements, physical
delivery is the point in time when customer acceptance occurs since title and
risk of loss are transferred to the customer.  No return allowance is
made as products are normally not returnable upon acceptance by the
customers.




17




Accounts
receivable





Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts. The Company uses the aging method to
estimate the valuation allowance for anticipated uncollectible receivable
balances.  Under the aging method, bad debts determined by management
are based on historical experience as well as the current economic climate and
are applied to customers' balances categorized by the number of months the
underlying invoices have remained outstanding.  The
valuation allowance balance is adjusted to the amount computed as a result
of the aging method.  When facts subsequently become available to
indicate that an adjustment to the allowance should be made, this is recorded as
a change in estimate in the current year. As of June 30, 2010 and December 31,
2009, accounts receivable were net of allowances of zero and zero,
respectively.





Derivative
Financial Instruments





The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value
reported in the condensed consolidated statements of operations. For stock-based
derivative financial instruments, the Company uses both the Black-Scholes-Merton
and Binomial option pricing models to value the derivative instruments at
inception and on subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period.  Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.




Stock
based Compensation





The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs. Stock-based compensation is measured at the grant date, based on the fair
value of the award, and is recognized as expense over the requisite service
period. Options vest and expire according to terms established at the grant
date.





We
estimate the fair value of stock options and warrants using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value
of options that have no vesting restrictions and are fully transferable. This
model requires the input of subjective assumptions, including the expected price
volatility of the underlying stock and the expected life of stock options.
Projected data related to the expected volatility of stock options is based on
the average volatility of the trading prices of comparable companies and the
expected life of stock options is based upon the average term and vesting
schedules of the options. Changes in these subjective assumptions can materially
affect the fair value of the estimate, and therefore the existing valuation
models do not provide a precise measure of the fair value of our employee stock
options.




We
estimate the fair value of shares of common stock issued for services based on
the closing price of our common stock on the date shares are
granted.





Recent
accounting pronouncements





In
April 2010, the Financial Accounting Standards Board (FASB) issued new
accounting guidance in applying the milestone method of revenue recognition to
research or development arrangements. Under this guidance management may
recognize revenue contingent upon the achievement of a milestone in its
entirety, in the period in which the milestone is achieved, only if the
milestone meets all the criteria within the guidance to be considered
substantive. This standard is effective on a prospective basis for research and
development milestones achieved in fiscal years, beginning on or after
June 15, 2010. Early adoption is permitted; however, adoption of this
guidance as of a date other than January 1, 2011 will require the Company
to apply this guidance retrospectively effective as of January 1, 2010 and
will require disclosure of the effect of this guidance as applied to all
previously reported interim periods in the fiscal year of adoption. As the
Company plans to implement this standard prospectively, the effect of this
guidance will be limited to future transactions. The Company does not expect
adoption of this standard to have a material impact on its financial position or
results of operations as it has no material research and development
arrangements which will be accounted for under the milestone
method.




In April
2010, the FASB issued new accounting guidance to clarify that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity.  The
amendments are effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010.  The Company does
not expect adoption of this standard will have an effect on our
consolidated results of operation or our financial position.


18





In
January 2010, the FASB issued new accounting guidance which requires new
disclosures regarding transfers in and out of Level 1 and Level 2 fair value
measurements, as well as requiring presentation on a gross basis of information
about purchases, sales, issuances and settlements in Level 3 fair value
measurements. The guidance also clarifies existing disclosures regarding level
of disaggregation, inputs and valuation techniques. The new guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009.  Disclosures about purchases, sales, issuances
and settlements in the roll forward of activity in Level 3 fair value
measurements are effective for fiscal years beginning after December 15,
2010.  As this guidance requires only additional disclosure, there
should be no impact on the consolidated financial statements of the Company upon
adoption.




In April
2010, the FASB issued new accounting guidance to clarify that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity.  The
amendments are effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010.  The Company does
not expect adoption of this standard will have a material impact on
its consolidated financial statements.


In
October 2009, a new accounting consensus was issued for
multiple-deliverable revenue arrangements. This consensus amends existing
revenue recognition accounting standards. This consensus provides accounting
principles and application guidance on whether multiple deliverables exist, how
the arrangement should be separated and the consideration allocated. This
guidance eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. Previously the existing accounting consensus required that the fair value
of the undelivered item be the price of the item either sold in a separate
transaction between unrelated third parties or the price charged for each item
when the item is sold separately by the vendor. Under the existing accounting
consensus, if the fair value of all of the elements in the arrangement was not
determinable, then revenue was deferred until all of the items were delivered or
fair value was determined. This new approach is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company is in the process of
evaluating whether the adoption of this standard will have a material effect on
its financial position, results of operations or cash flows.





In June
2009, the FASB issued authoritative guidance on consolidation of variable
interest entities.  The new guidance is intended to improve financial
reporting by requiring additional disclosures about a company’s involvement in
variable interest entities.  This new guidance is effective for fiscal
years and interim periods beginning after November 15, 2009.  The
Company adopted this guidance effective January 1, 2010, and it had no impact on
the consolidated financial statements of the Company.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the Securities Exchange Commission (the
"SEC") did not or are not believed by management to have a material impact on
the Company's present or future consolidated financial statements.





Results
of Operations





Three
month period ended June 30, 2010 compared to three month period ended June 30,
2009




The following tables set
forth key components of our results of operations for the periods
indicated.




Three
      months ended June 30,(Unaudited)2010
            
            
            2009Revenue
            
            $
            24,149,761
            
            
            $
            8,314,500Cost of goods
      sold
            
            
            (14,779,016
            )
            
            
            (5,534,929
            )Gross
    profit
            
            
            9,370,745
            
            
            
            2,779,571Selling
      expenses
            
            
            1,136,019
            
            
            
            2,261General and
      administrative expenses
            
            
            626,053
            
            
            
            432,412Income from
      operations
            
            
            7,608,673
            
            
            
            2,344,898Other income
      (expenses)Interest and finance
      costs
            
            
            (13,591
            )
            
            
            (596,098
            )Expense related to
      escrow shares
            
            
            -
            
            
            
            (120,166
            )Interest
      income
            
            
            19,353
            
            
            
            7,285Change in fair value
      of derivative liabilities
            
            
            2,862,263
            
            
            
            (1,779,968
            )Gain on
      extinguishment of derivative liability
            
            
            -
            
            
            
            989,260Sundry
    income
            
            
            4,688
            
            
            
            -Total other income
      (expenses)
            
            
            2,872,713
            
            
            
            (1,499,687
            )Income before
      provision for income taxes
            
            
            10,481,386
            
            
            
            845,211Provision for income
      taxes
            
            
            1,540,627
            
            
            
            303,382Net income
            
            
            8,940,759
            
            
            
            541,829Other comprehensive
      incomeForeign currency
      translation adjustment
            
            
            269,266
            
            
            
            12,010Comprehensive
      income
            
            $
            9,210,025
            
            
            $
            553,839




Revenue.
During the three-month period ended June 30, 2010, we had revenues from sales of
our coal-water slurry fuel of $24,149,761 as compared to revenues of $8,314,500
during the three-month period ended June 30, 2009, an increase of
190%. This significant increase is primarily attributable to the increased
production from the production line added in late 2009, which led to an increase
in sales to existing customers.  The annual production capacity as at
June 30, 2010 was 850,000 tonnes after the commencement of our new CWSF
production plant in Shenyang with annual output capacity of 300,000 tonnes and
200,000 production line added in Tongchuan , as compared to 350,000 tones as at
June 30 2009 . At June 30 , 2010 we had 43 customers under CWSF supply
agreements totaling approximately 600,000 tonnes per year , as compared to 27
customers totaling approximately 400,000 tonnes of CWSF per year as at June 30 ,
2009. We believe that our sales and number of customers in 2010 as compared to
2009 are indicative of the growing market acceptance of CWSF.




19





Cost of Goods
Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, depreciation of plant and machinery, was $14,779,016 for the
three-month period ended June 30, 2010, as compared to $5,534,929 for the same
period of 2009, an increase of 167%. The increase in cost of goods sold is in
line with our increase in sales. However, gross profit margin improved from 33%
in 2009 to 39% in 2010 mainly as a result of better pricing of CWSF in
Shenyang.





Selling
Expenses. Selling
expenses totaled $1,136,019 for the three-month period ended June 30, 2010, as
compared to $2,261 for the three-month period ended June 30, 2009. This increase
is mainly in transportation cost as a result of the growth of our business in
2010.





General and
Administrative Expenses.General and administrative
expenses totaled $626,053 for the three-month period ended June 30, 2010, as
compared to $432,412 for the three-month period ended June 30, 2009, an increase
of 45%. This increase was primarily caused by our expansion in operation
and the increased expenses related to being a public company.





Income from
Operations. Our
income from operations for the three months ended June 30, 2010 was $7,608,673,
an increase of 224% as compared to $2,344,898 for the same period in 2009, in
line with the increase in sales over period.





Other
Income. Other income totaled $2,872,713 for the three-month period
ended June 30, 2010, mainly as the result of the change in fair value of the
derivative liabilities of $2,862,263 as compared to other expense of $1,499,687
for the three-month period ended June 30, 2009, primarily caused by the loss on
change in fair value of derivative liabilities of $1,779,968 which was partially
set off by the gain on extinguishment of derivative liability of $989,260 in
2009.





Provision for
income taxes.    For the three month period ended
June 30, 2010 and 2009, our provision for income taxes was $1,540,627 and
$303,382, respectively. The increase in income taxes reflects the increase in
taxable income from our operations in China. For the three months ended June 30,
2010 and 2009, our effective tax rate was 15% and 36%, respectively, of income
before provision for income taxes. In 2010 and 2009, our effective tax rate was
reduced by 16% and increased by 11%, respectively, due to expenses related to
financings and derivatives that are classified as permanent differences.
Additionally, in 2010 and 2009, our effective tax rate was reduced by 3% and 9%,
respectively, for certain tax holidays we enjoy in the PRC.





Net
Income. We had
net incomeof
$8,940,759 for the three-month period ended June 30, 2010, as compared to net
income of$541,829
for the same period in 2009.  The increase in net income is primarily
attributable to the increase in sales in 2010.





Six
month period ended June 30, 2010 compared to six month period ended June 30,
2009




The following tables set
forth key components of our results of operations for the periods
indicated.
  Six months
      ended June 30,(Unaudited)2010
              
              
              2009Revenue
              
              $
              48,658,765
              
              
              $
              16,092,777Cost of goods
      sold
              
              
              (29,179,193
              )
              
              
              (10,883,036
              )Gross
    profit
              
              
              19,479,572
              
              
              
              5,209,741Selling
      expenses
              
              
              2,047,098
              
              
              
              5,820General and
      administrative expenses
              
              
              1,345,235
              
              
              
              981,311Income from
      operations
              
              
              16,087,239
              
              
              
              4,222,610Other income
      (expenses)Interest and finance
      costs
              
              
              (10,458,154
              )
              
              
              (1,081,845
              )Expense related to
      escrow shares
              
              
              -
              
              
              
              (240,333
              )Interest
      income
              
              
              32,224
              
              
              
              11,271Change in fair value
      of derivative liabilities
              
              
              (1,377,666
              )
              
              
              (1,200,990
              )Gain on
      extinguishment of derivative liability
              
              
              28,404,181
              
              
              
              989,260Sundry
    income
              
              
              4,688
              
              
              
              -Total other income
      (expenses)
              
              
              16,605,273
              
              
              
              (1,522,637
              )Income before
      provision for income taxes
              
              
              32,692,512
              
              
              
              2,699,973Provision for income
      taxes
              
              
              3,291,132
              
              
              
              592,668Net income
              
              
              29,401,380
              
              
              
              2,107,305Other comprehensive
      incomeForeign currency
      translation adjustment
              
              
              281,472
              
              
              
              8,694Comprehensive
      income
              
              $
              29,682,852
              
              
              $
              2,115,999


Revenue. During the six-month period
ended June 30, 2010, we had revenues from sales of our coal water mixture of
$48,658,765 as compared to revenues of $16,092,777 during the six-month period
ended June 30, 2009, an increase of 202%.   This increase is mainly
attributable to increase in the revenue and number of customers, from 27 for the
six months ended June 30, 2009, to 43 for the same period in 2010.





Cost of Goods
Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, depreciation of plant and machinery, was $29,179,193 for the six-month
period ended June 30, 2010, as compared to $10,883,036 for the same period of
2009, an increase of 168%. The increase in cost of sales sold is in line with
the increase in sales. However, gross profit margin improved from 32% in 2009 to
40% in 2010 mainly as a result of better pricing of CWSF in
Shenyang.




20





Selling
Expenses. Selling expenses totaled $2,047,098 for the six-month period
ended June 30, 2010, as compared to $5,820 for the six-month period ended June
30, 2009.  This increase in selling expenses is mainly due to increase
in transportation cost as a result of the growth of our business in 2010
..





General and
Administrative Expenses.General and administrative
expenses totaled $1,345,235 for the six-month period ended June 30, 2010, as
compared to $981,311 for the six-month period ended June 30, 2009, an increase
of 37%. This increase was primarily caused by our expansion in operations
and the expenses related to being a public company.


.


Income from
Operations. Our
income from operations for the six months ended June 30, 2010 was $16,087,239,
an increase of 281% as compared to $4,222,610 for the same period in 2009, in
line with the increase in sales.




Other Income
(Expense). Other income totaled $16,605,273  for the
six-month period ended June 30, 2010, as compared to other expense of $1,522,637
for the six-month period ended June 30, 2009, primarily caused by the gain on
extinguishment of derivative liability of $28,404,181 which was partially set
off by the interest expense of $10,458,154 in 2010.





Provision for
income taxes.    For the six month period ended June
30, 2010 and 2009, our provision for income taxes was $3,291,132 and $592,668,
respectively. The increase in income taxes reflects the increase in taxable
income from our operations in China. For the six months ended June 30, 2010 and
2009, our effective tax rate was 10% and 22%, respectively, of income before
provision for income taxes. In 2010 and 2009, our effective tax rate was reduced
by 22% and increased by 4%, respectively, due to expenses related to financings
and derivatives that are classified as permanent differences. Additionally, in
2010 and 2009, our effective tax rate was reduced by 2% and 16%, respectively,
for certain tax holidays we enjoy in the PRC.





Net
Income. We had
net incomeof
$29,401,380 for the six-month period ended June 30, 2010, as compared to net
income of$2,107,305 for the same
period in 2009.  The increase in net income is primarily attributable
to the increase in sales in the first six months of 2010 and gain on
extinguishment of derivative liability.





Liquidity
and Capital Resources





For the
six-month period ended June 30, 2010, we generated $10,247,134 from operating
activities, as compared to $5,754,000 that we generated from operating
activities for the six-month period ended June 30, 2009.  This
increaseis
primarily due to the increase in sales proceeds.





For the
six-month period ended June 30, 2010, we used $2,703,876 in investing
activities, of which $2,606,556 was used in the purchase of property, plant and
equipment, as compared to the net cash provided by investing activities of $
47,880 for the six-month period ended June 30, 2009.





For the
six-month period ended June 30, 2010, we used $478,073 in financing activities,
primarily in prepayment and deposits.





As of
June 30, 2010, we had cash and cash equivalents of $25,575,339.  Our
total current assets were $41,048,152 and our total current liabilities were
$24,979,084 which resulted in a net working capital of $16,069,068.





We had no
capital expenditure commitments outstanding as of June 30, 2010 in relation to
the purchase of machinery.





We
believe that we have sufficient cash flow to meet our obligations on a
timely basis in the foreseeable future.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.




21





Inflation





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





Item 3.  Quantitative and Qualitative Disclosures about
Market Risk





Not
applicable.





Item
4.  Controls and Procedures





We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation as required by Rule 13a-15(d) under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2010.





Based
upon their evaluation and subject to the foregoing, the Chief Executive Officer
and Chief Financial Officer concluded that as of June 30, 2010 our disclosure
controls and procedures were not effective because of the material weaknesses
described below.  A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
registrant's annual or interim financial statements will not be prevented or
detected on a timely basis.  In its assessment of the Company’s
internal control over financial reporting during the period covered by this
report, our management concluded that our internal control over financial
reporting was subject to the following material weaknesses:





1.           Although
we have hired additional accounting and operations personnel, we are still in
the process of developing proper financial reporting procedures and policies for
(i) accounting for complex and non-routine transactions; (ii) closing our
financial statements at the end of a period; (iii) disclosure requirements and
process for SEC reporting.




2.           As
a small company, we do not have sufficient personnel to set up adequate review
function at each reporting level.





3.           As
of June 30, 2010, we have not kept a complete set of ledgers for our
parent company. The parent company has no physical operations and has been
mainly functioning as a pass-through legal entity for financing our
subsidiary companies that are operating overseas.




In April
2010, we engaged Ernst and Young Shanghai to carry out a review of our existing
internal control system with an aim to rectify any material internal control
weakness identified by the evaluation.





Change in internal
control





There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the quarter ended June 30,
2010 that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.




22




PART
II




OTHER
INFORMATION







ITEM 6 EXHIBITS




The
exhibits listed on the Exhibit Index are filed as part of this
report.




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




SINO
      CLEAN ENERGY INC.Dated:
      August 13, 2010
            By:
            /s/
      Baowen RenName:
      Baowen RenTitle:
      Chief Executive Officer




EXHIBIT
INDEX





Exhibit
      No.
            
            Description31.1
            
            Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            
            Certification
      by Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.




23