UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


[X]
            Quarterly
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934





For the
quarterly period ended:September 30, 2008





Or




[__]
            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 of origination)
              
              (I.R.S.
      Employer Identification
Number)





Room
      2205, Suite A, Zhengxin Building
                  No. 5 Gaoxin1st Road, Gao Xin
      District
                  Xi’an,
      Shaanxi Province
                  People’s Republic of China
                
                N/A(Address
      of principal executive offices)
                
                (Zip
      code)(029) 8209-1099(Registrant’s
      telephone number, including area
code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [__]





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





Large
accelerated filer
[   ]                                                                                                                              Accelerated filer
[  ]





Non-accelerated
filer   [   ] (Do not check if a smaller reporting
company)                                                                                                                                      Smaller
reporting company [X]





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




Yes
[   ] No [X]
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS:
 
 Indicate
the number of shares outstanding of each issuer’s classes of common stock, as of
the latest practicable date: 94,514,750issued
and outstanding as of November 12, 2008.
 
 Transitional
Small Business Disclosure Form (Check one): Yes [   ] No
[X]





Table of Contents




TABLE OF CONTENTS


TO
QUARTERLY REPORT ON FORM 10-Q


FOR
QUARTER ENDED SEPTEMBER 30, 2008








PART
      I
              FINANCIAL INFORMATION
              PageItem
      1.
              Financial Statements (unaudited)
              4Consolidated Balance Sheet
              5Consolidated Statements of Income (Operations) and Other
      Comprehensive Income
              6Consolidated Statements of Shareholders’
      Equity
              7Consolidated Statements of Cash Flows
              8Notes to the Consolidated Financial
      Statements
              9Item
      2.
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              25Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              29Item
      4.
              Controls and Procedures
              29





PART
      II
              OTHER INFORMATION
              30Item
      1.
              Legal Proceedings
              30Item
      1A.
              Risk Factors
              30Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              30Item
      3.
              Defaults Upon Senior Securities
              30Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              30Item
      5.
              Other Information
              30Item
      6.
              Exhibits
              30Signatures
              
              32

















































































-2-
 Table of Contents





CAUTION
REGARDING FORWARD-LOOKING INFORMATION





All
statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for
Sino Clean Energy Inc., other than statements of historical facts, that address
future activities, events or developments are forward-looking statements,
including, but not limited to, statements containing the words “believe,”
“anticipate,” “expect” and words of similar import.  These statements
are based on certain assumptions and analyses made by us in light of our
experience and our assessment of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances.  However, whether actual results will conform
to the expectations and predictions of management is subject to a number of
risks and uncertainties that may cause actual results to differ
materially.





Such
risks include, among others, the following: national and local general economic
and market conditions: our ability to sustain, manage or forecast our growth;
raw material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other factors referenced in this and previous
filings.





Consequently,
all of the forward-looking statements made in this Form 10-Q are qualified by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations.  As used in this Form 10-Q, unless the context
requires otherwise, “we” or “us” or “Registrant” or the “Company” means Sino
Clean Energy Inc. and its subsidiaries.


















































































-3-
 Table of Contents





PART I - FINANCIAL INFORMATION





Item
1.                      Financial
Statements








SINO
      CLEAN ENERGY INC. AND SUBSIDIARIESConsolidated
      Financial StatementsFor
      the Periods Ended September 30, 2008 and
2007













-4-
 Table of Contents




SinoClean Energy Inc. and
SubsidiariesConsolidated
      Balance Sheets(Amounts
      expressed in U.S. Dollars)ASSETSSeptember
      30,
                                                                                        
                                                                                        
                                                                                        December
      31,2008
                                                                                        
                                                                                        
                                                                                        2007(Unaudited)
                                                                                        
                                                                                        
                                                                                        (Audited)Current
      assetsCash
      and cash equivalent
                                                                                        
                                                                                        $
                                                                                        2,533,999
                                                                                        
                                                                                        
                                                                                        $
                                                                                        2,832,132Accounts
      receivable, net (Note 2(d))
                                                                                        
                                                                                        
                                                                                        6,242,716
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,068,303Deposits
      and prepayments (Note 6)
                                                                                        
                                                                                        
                                                                                        732,420
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,542,929Other
      receivables
                                                                                        
                                                                                        
                                                                                        160,829
                                                                                        
                                                                                        
                                                                                        
                                                                                        138,523Prepaid
      land use right - current portion (Note 10)
                                                                                        
                                                                                        
                                                                                        38,845
                                                                                        
                                                                                        
                                                                                        
                                                                                        36,285Government
      grant receivable (Note 7)
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        411,000Assets
      on discontinued operationOther
      receivable - related (Note 21 (b))
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        141,795Inventories
      (Note 8)
                                                                                        
                                                                                        
                                                                                        293,101
                                                                                        
                                                                                        
                                                                                        
                                                                                        40,959Total
      current assets
                                                                                        
                                                                                        
                                                                                        10,001,910
                                                                                        
                                                                                        
                                                                                        
                                                                                        7,211,926Deferred
      debt issuance cost, net (Note 15)
                                                                                        
                                                                                        
                                                                                        209,519
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Property,
      plant and equipment, net (Note 9)
                                                                                        
                                                                                        
                                                                                        5,915,779
                                                                                        
                                                                                        
                                                                                        
                                                                                        5,435,804Prepaid
      land use right - non current portion (Note 10)
                                                                                        
                                                                                        
                                                                                        1,810,955
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,718,744Goodwill
      (Notes 3 and 11)
                                                                                        
                                                                                        
                                                                                        410,869
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Intangible
      assets, net (Note 12)
                                                                                        
                                                                                        
                                                                                        1,268
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,478Total
      assets
                                                                                        
                                                                                        $
                                                                                        18,350,300
                                                                                        
                                                                                        
                                                                                        $
                                                                                        14,367,952
  LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      47,043
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      41,827Accrued
      expenses and other payables (Note 13)
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      735,079
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      893,732Amount
      due to a director (Note 21(a))
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      1,178
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      8,527Obligations
      under capital leases (Note 14)
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      13,450
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -Taxes
      payable
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      150,031
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      130,332Deposit
      on sales of property (Note 21 (c))
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      1,507,000Total
      current liabilities
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      946,781
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      2,581,418Non-current
      liabilitiesConvertible
      debentures (Note 15)
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      383,856
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -Obligations
      under capital leases (Note 14)
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      4,265
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -Total
      non-current liabilities
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      388,121
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -Total
      liabilities
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      1,334,902
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      2,581,418Minority
      interest
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      352,789Commitments
      and Contingencies (Note 22)Shareholders'
      EquityPreferred
      stock, $0.001 par value,50,000,000
      shares authorized,nil
      issued and outstanding
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      -Common
      stock, $0.001 par value,200,000,000
      shares authorized,92,181,750
      and 84,681,750 issued and outstandingas
      of September 30, 2008 and December 31, 2007respectively
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      92,182
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      84,682Additional
      paid-in capital
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      11,312,205
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      9,153,174Retained
      earnings
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      3,166,608
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      686,482Statutory
      reserves (Note 18)
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      348,309
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      348,309Accumulated
      other comprehensive income
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      2,096,094
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      1,161,098Total
      shareholders' equity
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      17,015,398
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      11,433,745Total
      liabilities and shareholders' equity
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      18,350,300
                                                                                                                                                                      
                                                                                                                                                                      
                                                                                                                                                                      $
                                                                                                                                                                      14,367,952
  -5-
 Table of Contents





Sino Clean Energy Inc. and SubsidiariesConsolidated
      Statements of Income (Operations) and Other Comprehensive
      IncomeFor
      the three months and nine months ended September 30, 2008 and
      2007(Amounts
      expressed in U.S. Dollars)(Unaudited)Three
      months ended September 30,
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            Nine
      months ended September 30,2008
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2007
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2008
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2007Revenue
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            3,419,941
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            234,639
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            9,156,293
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            234,639Cost
      of goods sold
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (2,297,227
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (181,563
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (6,227,606
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (181,563
                                                                                                                                                            )Gross
      profit
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,122,714
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            53,076
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2,928,687
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            53,076Selling
      expenses
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            3,106
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            17,229
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            7,871
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            19,009General
      and administrative expenses
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            204,915
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            197,371
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            590,719
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            330,282Income
      (loss) from operations
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            914,693
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (161,524
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2,330,097
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (296,215
                                                                                                                                                            )Other
      income (expenses)Rental
      income, net of outgoings
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            230
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            79,843
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -Interest
      income
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            8,026
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            3,449
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            19,537
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            13,372Commission
      income
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            80,072
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            224,947
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -Sundry
      income (expenses)
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            78
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            6,471
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            26,921
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (131
                                                                                                                                                            )Other
      income (expenses)
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (7,601
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            137,339Gain
      on disposal of property (Note 21(c))
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            95
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            33,095
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -Government
      grant
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            141,614
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            141,614
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -Total
      other income
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            230,115
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2,319
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            525,957
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            150,580Income
      (loss) before provision for income taxes
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,144,808
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (159,205
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2,856,054
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (145,635
                                                                                                                                                            )Provision
      for income taxes (Note 19)
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            71
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            24,779
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -Net
      income (loss) before minority interest
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            1,144,737
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (159,205
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            2,831,275
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (145,635
                                                                                                                                                            )Less:
      Minority interest
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            11,099
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (351,149
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            21,190Net
      income (loss)
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,144,737
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (148,106
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2,480,126
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (124,445
                                                                                                                                                            )Other
      comprehensive incomeForeign
      currency translation adjustment
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            124,319
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            116,066
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            934,996
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            385,813Comprehensive
      income (loss)
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            1,269,056
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (32,040
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            3,415,122
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            261,368Weight
      average number of shares-
      Basic and diluted
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            92,181,750
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            84,681,750
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            92,181,750
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            84,681,750Income
      (loss) per common share (Note 20)-
      Basic and diluted
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            0.0124
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (0.0017
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            0.0269
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (0.0015
                                                                                                                                                            )





-6-
 Table of Contents






SinoClean Energy Inc. and
    SubsidiariesConsolidated
      Statements of Shareholders' Equity(Amount
      expressed in U.S. Dollars except number of shares)Common
      stock
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (Accumulated
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Accumulated(par
      value $0.1208)
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Additional
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Statutory
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Statutory
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      deficits)
      /
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      otherpaid-in
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      capital
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      welfare
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Retained
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      comprehensiveShares
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Amount
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      capital
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      reserves
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      reserves
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      earnings
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      income
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      TotalBalance,
      January 1, 2007 (audited)
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      84,681,750
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      84,682
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      9,153,174
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      232,206
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      116,103
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (330,456
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      432,312
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      9,688,021Net
      loss
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (124,445
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (124,445
                                                                                                                                                                                      )Foreign
      currency translation gain
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      385,813
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      385,813Balance,
      September 30, 2007 (Unaudited)
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      84,681,750
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      84,682
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      9,153,174
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      232,206
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      116,103
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (454,901
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      818,125
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      9,949,389Net
      income
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,141,383
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,141,383Foreign
      currency translation gain
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      342,973
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      342,973Balance,
      December 31, 2007  (audited)
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      84,681,750
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      84,682
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      9,153,174
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      232,206
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      116,103
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      686,482
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,161,098
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      11,433,745Issuance
      of share
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      7,500,000
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      7,500
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,141,351
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,148,851Benefical
      conversion feature of debenture
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      986,921
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      986,921Warrants
      issued to placement agent
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      30,759
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      30,759Net
      income
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2,480,126
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2,480,126Foreign
      currency translation gain
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      934,996
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      934,996Balance,
      September 30, 2008 (Unaudited)
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      92,181,750
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      92,182
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      11,312,205
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      232,206
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      116,103
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      3,166,608
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      2,096,094
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      17,015,398


-7-
 Table of Contents





Sino CleanEnergy Inc. and SubsidiariesConsolidated
      Statements of Cash Flows(Amounts
      expressed in U.S. Dollars)(Unaudited)Period
      ended September 30,2008
                                                                            
                                                                            
                                                                            2007Cash
      flows from operating activities:Net
      income
                                                                            
                                                                            $
                                                                            2,480,126
                                                                            
                                                                            
                                                                            $
                                                                            (124,445
                                                                            )Adjustments
      to reconcile net income to cashprovided
      by operating activities:Minority
      interest
                                                                            
                                                                            
                                                                            351,149
                                                                            
                                                                            
                                                                            
                                                                            (21,190
                                                                            )Net
      income from discontinued operations
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (137,339
                                                                            )Amortization
      of deferred debenture expenses
                                                                            
                                                                            
                                                                            8,399
                                                                            
                                                                            
                                                                            
                                                                            -Discount
      on debenture
                                                                            
                                                                            
                                                                            35,127
                                                                            
                                                                            
                                                                            
                                                                            -Depreciation and amortization
                                                                            
                                                                            
                                                                            175,399
                                                                            
                                                                            
                                                                            
                                                                            40,607Gain on disposal of property
                                                                            
                                                                            
                                                                            (33,095
                                                                            )
                                                                            
                                                                            
                                                                            -(Increase)
      decrease in assets:Accounts
      receivable
                                                                            
                                                                            
                                                                            (4,923,476
                                                                            )
                                                                            
                                                                            
                                                                            (248,645
                                                                            )Deposits
      and prepayments
                                                                            
                                                                            
                                                                            1,921,371
                                                                            
                                                                            
                                                                            
                                                                            (2,633,573
                                                                            )Other
      receivables
                                                                            
                                                                            
                                                                            (14,227
                                                                            )
                                                                            
                                                                            
                                                                            207,656Prepaid
      land use rights
                                                                            
                                                                            
                                                                            28,031
                                                                            
                                                                            
                                                                            
                                                                            -Receipt
      from government grant
                                                                            
                                                                            
                                                                            411,000
                                                                            
                                                                            
                                                                            
                                                                            -Other
      receivables - discontinued operations
                                                                            
                                                                            
                                                                            141,795
                                                                            
                                                                            
                                                                            
                                                                            -Inventories
                                                                            
                                                                            
                                                                            (240,670
                                                                            )
                                                                            
                                                                            
                                                                            (28,160
                                                                            )Increase
      (decrease) in liabilities:Accounts
      payable
                                                                            
                                                                            
                                                                            2,187
                                                                            
                                                                            
                                                                            
                                                                            148,429Advance
      from customers
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            602,864Accrued
      expenses and other payable
                                                                            
                                                                            
                                                                            (198,852
                                                                            )
                                                                            
                                                                            
                                                                            105,435Taxes
      payables
                                                                            
                                                                            
                                                                            10,143
                                                                            
                                                                            
                                                                            
                                                                            37,730Net
      cash provided by discontinued operations
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            69,729Net
      cash provided from (used in) operating activities
                                                                            
                                                                            
                                                                            154,407
                                                                            
                                                                            
                                                                            
                                                                            (1,980,902
                                                                            )Cash
      flows from investing activities:Amount
      due from a director
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            133,255Purchase
      of property, plant and equipment
                                                                            
                                                                            
                                                                            (2,791,475
                                                                            )
                                                                            
                                                                            
                                                                            (1,187,120
                                                                            )Net
      cash used in investing activities
                                                                            
                                                                            
                                                                            (2,791,475
                                                                            )
                                                                            
                                                                            
                                                                            (1,053,865
                                                                            )Cash
      flows from financing activities:(Payment
      to ) advance from a director
                                                                            
                                                                            
                                                                            (7,427
                                                                            )
                                                                            
                                                                            
                                                                            74,515Proceeds
      from disposal of property
                                                                            
                                                                            
                                                                            1,025,437
                                                                            
                                                                            
                                                                            
                                                                            -Issuance
      of convertible debenture
                                                                            
                                                                            
                                                                            1,148,491
                                                                            
                                                                            
                                                                            
                                                                            -Capital
      element of capital lease
                                                                            
                                                                            
                                                                            44,423
                                                                            
                                                                            
                                                                            
                                                                            -Obligations
      under capital leases
                                                                            
                                                                            
                                                                            (27,318
                                                                            )
                                                                            
                                                                            
                                                                            -Net
      cash provided by financing activities
                                                                            
                                                                            
                                                                            2,183,606
                                                                            
                                                                            
                                                                            
                                                                            74,515Effect
      of foreign currency translation
                                                                            
                                                                            
                                                                            155,329
                                                                            
                                                                            
                                                                            
                                                                            120,880Net decrease
      in cash and cash equivalents
                                                                            
                                                                            
                                                                            (298,133
                                                                            )
                                                                            
                                                                            
                                                                            (2,839,372
                                                                            )Cash
      and cash equivalents, beginning of period
                                                                            
                                                                            
                                                                            2,832,132
                                                                            
                                                                            
                                                                            
                                                                            4,450,557Cash
      and cash equivalents, end of period
                                                                            
                                                                            $
                                                                            2,533,999
                                                                            
                                                                            
                                                                            $
                                                                            1,611,185Supplemental
      Disclosure InformationInterest
      paid
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            -Income
      taxes paid
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            -Major
      non-cash transactionIssuance
      of share in exchange of equity interest (Note 3)$
                                                                            1,500,000
                                                                            
                                                                            
                                                                            $
                                                                            -
   -8-
 Table of Contents


1.
            CORPORATIONREORGANZATIONAND BUSINESS
      ACTIVITIES





Sino
      Clean Energy Inc. (the “Company”) was originally incorporated in Texas as
      “Discount Mortgage Services, Inc.” on July 11, 2000. In November 2001, the
      Company changed its name to Endo Networks, Inc. and was redomiciled to the
      State of Nevada in December 2002. On January 4, 2007, the Company changed
      its name to “China West Coal Energy Inc.” Further on August 15, 2007, the
      Company changed its name to “Sino Clean Energy
  Inc”.




Prior to
December 2006, the Company had principally been engaged in production and sales
of coal-polymer (“COPO”) resin products. In December 2006, the Company decided
to cease its operations in manufacturing COPO products and shift all its
resources towards the production and sale of “coal-water mixture”
products.





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




a.
            Basis of presentation
      and consolidation





The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.





The
      consolidated financial statements include the financial statements of the
      Company, its wholly owned subsidiary Hangson Ltd. (“Hangson”), its
      variable interest entity (VIE) Shaanxi Suo’ang Biological Science
      & Technology Co., Ltd. (“Suo’ang Biological”) and Suo’ang Biological’s
      subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New
      Energy”). All significant inter-company transactions and balances among
      the Company, Hangson, Suo’ang Biological and Suo’ang New Energy are
      eliminated upon consolidation.





b.
            Use of
      estimates





The
      preparation of consolidated financial statements in conformity with
      generally accepted accounting principles 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. Significant estimates include estimates of accruals
      and determination of fair values for assets
  disposed.





c.
            Cash and cash
      equivalents





Cash
      and cash equivalents consist of cash on hand, bank deposits and deposit in
      an escrow account.  Deposit in the escrow account was $885,057
      as of September 30, 2008. The fund held in the escrow account was released
      to the Company in late October
2008.





d.
            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 period. As
      of September 30, 2008 and December 31, 2007, accounts receivable were net
      of allowances of $5,747 and $5,368,
  respectively.





-9-
 Table of Contents





e.
            Inventories





Inventories
      are stated at the lower of cost, as determined on a weighted average
      basis, or net realizable value. Costs of inventories include purchase and
      related costs incurred in bringing the products to their present location
      and condition.





f.
            Property, plant and
      equipment





Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Gains or losses on disposals are reflected as gain or loss in the
year of disposal. The cost of improvements that extend the life of plant,
property and equipment are capitalized. These capitalized costs may include
structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.





Depreciation
      or amortization for financial reporting purposes is provided using the
      straight-line method over the estimated useful lives of the assets as
      follows:




Buildings
              the
      shorter of the useful life or the lease termLeasehold
      improvements
              the
      shorter of the useful life or the lease termPlant
      and machinery
              10
      yearsOffice
      equipment
              5
      yearsMotor
      vehicles
              3
      years





g.
            Construction in
      progress





Construction
      in progress includes direct costs of factory buildings. Construction in
      progress is not depreciated until such time as the assets are completed
      and put into operational use.





h.
            Prepaid land use
      rights





Prepaid
      land use right is expensed over the term of 50
  years.





i.
            Goodwill





The
      Company accounts for acquisitions of business in accordance with SFAS No.
      141 “Business Combinations”, which may result in the recognition of
      goodwill. Goodwill represents the excess of the purchase price over the
      fair value of net assets acquired in business combinations accounted for
      under the purchase method. Goodwill is not subject to amortization but
      will be subject to periodic evaluation for impairment. Goodwill is stated
      in the consolidated balance sheet at cost less accumulated impairment
      loss.





j.
            Impairment





(i)           Long-lived
Assets





The
Company reviews and evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. Impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis are less than the carrying amount of the
assets, including goodwill, if any. An impairment loss is measured and recorded
based on discounted estimated future cash flows. In estimating future cash
flows, assets are grouped at the lowest level for which there is identifiable
cash flows that are largely independent of future cash flows from other asset
groups.








-10-
 Table of Contents





(ii)           Goodwill





Impairment
of goodwill is tested at least annually at the reporting unit. The test consists
of two steps. Firstly, the Company identifies potential impairment by comparing
the fair value of the reporting unit to its carrying amount, including goodwill.
If the fair value of the reporting unit is greater than its carrying amount,
goodwill is not considered impaired. Secondly, if there is impairment identified
in the first step, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit’s goodwill over the implied fair value of
goodwill. The implied fair value of goodwill is determined by allocating the
fair value of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No 141, “Business Combinations”. If the
carrying value of a reporting unit exceeds its estimated fair value, the Company
compares the implied fair value of the reporting unit’s goodwill to its carrying
amount, and any excess of the carrying value over the fair value is charged to
earnings. The Company’s fair value estimates are based on numerous assumptions
and it is possible that actual fair value will be significantly different than
the estimates.





k.
            Comprehensive
      income





SFAS
      No. 130, Reporting Comprehensive Income, requires disclosure of all
      components of comprehensive income and loss on an annual and interim
      basis. Comprehensive income and loss is defined as the change in equity of
      a business enterprise during a period from transactions and other events
      and circumstances from non-owner sources. The Company had other
      comprehensive income of $934,996 and $385,813 for the periods ended
      September 30, 2008 and 2007, respectively. The other comprehensive income
      arose from the changes in foreign currency exchange
  rate.





l.
            Fair value of
      financial instruments





The
      Company believes that the carrying values of its cash and cash
      equivalents, accounts receivable, accounts payable, other receivables and
      other payables as of September 30, 2008 and December 31, 2007 approximate
      to their respective fair values due to the short-term nature of those
      instruments.





m.
            Revenue
      recognition





Revenues
      of the Company arising from sales of coal water
  mixture.





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). No return allowance is made as products are
normally not returnable upon acceptance by the customers.





n.
            Income (loss) per
      common share





Income
      (loss) per common share is computed by dividing income available to common
      shareholders by the weighted average number of common shares outstanding
      for the periods.





o.
            Income
      taxes





The
      Company accounts for income taxes in accordance with SFAS No. 109,
      Accounting for Income Taxes. SFAS No. 109 requires an asset and liability
      approach for financial accounting and reporting for income taxes and
      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.








-11-
 Table of Contents








p.
            Foreign currency
      translation





The
      reporting currency of the Company is the United States Dollars. All assets
      and liabilities accounts have been translated into United States Dollars
      using the current exchange rate at the balance sheet date. Capital stock
      is recorded at historical rates. Revenue and expenses are translated using
      the average exchange rate in the period. The resulting gain and loss has
      been reported as other comprehensive income within the shareholder's
      equity.





q.
            Related
      parties





Parties
      are considered to be related to the Company if the parties, directly or
      indirectly, through one or more intermediaries, control, are controlled
      by, or are under common control with the Company. Related parties also
      include principal owners of the Company, its management, members of the
      immediate families of principal owners of the Company and its management
      and other parties with which the Company may deal if one party controls or
      can significantly influence the management or operating policies of the
      other to an extent that one of the transacting parties might be prevented
      from fully pursuing its own separate interests. A party which can
      significantly influence the management or operating policies of the
      transacting parties or which has an ownership interest in one of the
      transacting parties and can significantly influence the other to an extent
      that one or more of the transacting parties might be prevented from fully
      pursuing its own separate interests is also a related
    party.





r.
            Recently issued
      accounting pronouncements





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
      (“SFAS 157”), to define fair value, establish a framework for measuring
      fair value in accordance with generally accepted accounting principles and
      expand disclosures about fair value measurements. SFAS 157 requires
      quantitative disclosures using a tabular format in all periods (interim
      and annual) and qualitative disclosures about the valuation techniques
      used to measure fair value in all annual periods. The provisions of this
      Statement shall be effective for financial statements issued for fiscal
      years beginning after November 15, 2007 and interim periods within those
      fiscal years. The Company is required to adopt the provisions of this
      statement as of January 1, 2008. The Company determined that
      the adoption of this standard had no material effect on its
      financial statements.





In
      September 2006, the FASB issued Statement No. 158, “Employers' Accounting
      for Defined Benefit Pension and Other Postretirement Plans - An amendment
      of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). This
      Statement enhances disclosure regarding the funded status of an
      employer's defined benefit postretirement plan by (a) requiring companies
      to include the funding status in comprehensive income, (b) recognize
      transactions and events that affect the funded status in the financial
      statements in the year in which they occur, and (c) at a measurement date
      of the employer's fiscal year-end. Statement No. 158 effective for fiscal
      year ending after December 15, 2008, and is not expected to apply to the
      Company.





In
      February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities Including an Amendment of FASB
      Statement No. 115" (“SFAS 159”). SFAS 159 permits entities to choose to
      measure many financial instruments and certain other items at fair values.
      SFAS 159 is effective for fiscal years after November 15, 2007. The
      Company determined that the adoption of this standard had
      no material effect on its financial
statements.







-12-
 Table of Contents








In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No. 141 (revised 2007), “Business Combinations” (“FAS 141R”).
      FAS 141R replaces Statement of Financial Accounting Standards
      No. 141, “Business Combinations” (“FAS 141”). Although it
      retains the fundamental requirement in FAS 141 that the acquisition
      method of accounting be used for all business combinations, FAS 141R
      establishes principles and requirements for how the acquirer in a business
      combination (a) recognizes and measures the assets acquired,
      liabilities assumed and any noncontrolling (“minority”) interest in the
      acquiree, (b) recognizes and measures the goodwill acquired in a
      business combination or a gain from a bargain purchase and
      (c) determines what information to disclose regarding the business
      combination. FAS 141R applies prospectively to business combinations
      for which the acquisition date is on or after
  the


beginning
      of the Company’s 2009 fiscal year. The Company is currently assessing the
      potential effect of FAS 141R on its financial
    statements.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No. 160, “Noncontrolling (“minority”) Interests in Consolidated
      Financial Statements” (“FAS 160”). FAS 160 establishes
      accounting and reporting standards for the noncontrolling (“minority”)
      interest in a subsidiary, commonly referred to as minority interest. Among
      other matters, FAS 160 requires (a) the noncontrolling
      (“minority”) interest be reported within equity in the balance sheet and
      (b) the amount of consolidated net income attributable to the parent
      and to the noncontrolling (“minority”) interest to be clearly presented in
      the statement of income. FAS 160 is effective for the Company’s 2009
      fiscal year. FAS 160 is to be applied prospectively, except for the
      presentation and disclosure requirements, which shall be applied
      retrospectively for all periods presented. The Company is currently
      assessing the potential effect of FAS 160 on its financial
      statements.





In
      March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities – An Amendment of FASB Statement No.
      133” (“SFAS No. 161”), which changes the disclosure requirements for
      derivative instruments and hedging activities. Entities are required to
      provide enhanced disclosures about (a) how and why an entity uses
      derivative instruments, (b) how derivative instruments and related
      hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged
      items affect an entity’s financial position, financial performance, and
      cash flows. This statement will be effective for financial statements
      issued for fiscal years and interim periods beginning after November 15,
      2008 (that is, fiscal 2009 for the Company). The Company does not expect
      that this Statement will have an effect on the Company’s consolidated
      financial statements.





In
      May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
      Accepted Accounting Principles”. This Statement identifies the sources of
      accounting principles and the framework for selecting the principles to be
      used in the preparation of financial statements of nongovernmental
      entities that are presented in conformity with generally accepted
      accounting principles (GAAP) in the United States (the GAAP hierarchy).
      This Statement is effective 60 days following the SEC’s approval of the
      Public Company Accounting Oversight Board amendments to AU Section 411,
      The Meaning of Present Fairly in Conformity With Generally Accepted
      Accounting Principles. The Company does not expect that this Statement
      will have an effect on the Company’s consolidated financial
      statements.





In
      May 2008, the FASB issued SFAS No. 163, “Accounting for Financial
      Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60”.
      This Statement interprets Statement 60, “Accounting and Reporting by
      Insurance Enterprises” and amends existing accounting pronouncements to
      clarify their application to the financial guarantee insurance contracts
      included within the scope of this Statement. This Statement requires that
      an insurance enterprise recognize a claim liability prior to an event
      of default (insured event) when there is evidence that credit
      deterioration has occurred in an insured financial obligation. This
      Statement also clarifies how Statement 60 applies to financial guarantee
      insurance contracts, including the recognition and measurement to be used
      to account for premium revenue and claim liabilities.  This
      Statement is effective for financial statements issued for fiscal years
      beginning after December 15, 2008 (that is, fiscal 2009 for the Company),
      and all interim periods within those fiscal years. The Company does not
      expect that this Statement will have an effect on the Company’s
      consolidated financial statements.





-13-
 Table of Contents








3.
            ACQUISITION





On
      June 30, 2008, the Company and its wholly owned subsidiary, Hangson,
      entered into a Securities Purchase Agreement (the “Agreement”) with the
      minority shareholder of Suo’ang New Energy. Pursuant to the Agreement, the
      minority shareholder transferred his 20% ownership of Suo’ang New Energy
      to Hangson in exchange for 7,500,000 shares (the “Shares”) of the
      Company’s restricted common stock. Suo’ang Biological, the Company’s VIE,
      owns 80% of Suo’ang New Energy. Pursuant to the terms of the Agreement,
      the minority shareholder agreed to waive any and all rights that he may
      have to any distributions and or payments from Suo’ang New Energy
      beginning January 1, 2008. On June 30, 2008, the transaction
      contemplated under the Agreement was completed upon approval by the
      Chinese local government authorities. As a result, Suo’ang New Energy is
      now 100% controlled by the
Company.








The
      total purchase price was $1,148,851, by issuance of the Company’s
      restricted common stock based on the per share value on the acquisition
      date.





The
      acquisition was accounted for using the purchase method of accounting. The
      allocation of the purchase price for this acquisition, as of the date of
      acquisition, is as follows:





Cash
      acquired
                                
                                $
                                3,712,020Accounts
      receivable, net of allowance
                                
                                
                                3,459,196Property,
      plant and equipment
                                
                                
                                3,100,935Inventory
                                
                                
                                76,443Prepaid
      land use right
                                
                                
                                1,848,416Goodwill
                                
                                
                                410,869Other
      assets acquired
                                
                                
                                2,422,836Total
      assets acquired
                                
                                
                                15,030,715Liabilities
      assumed
                                
                                
                                (10,929,937
                                )4,100,778Less:
      Interest held by Suo'ang by way of initial contribution
                                
                                
                                (2,951,927
                                )$
                                1,148,851





At
      the date of acquisition of the minority interest of Suo’ang New Energy,
      management made its best estimate of the allocations of the fair value
      assigned to assets and has categorized the value of $410,869 attributed to
      goodwill for the acquisition. A final analysis and determination will be
      made during year ending December 31,
2008.





The
      following table sets forth the unaudited pro forma results of operations
      of the Company as if the additional acquisition of the 20% interest in
      Suo’ang New Energy had occurred at the beginning of the year. These pro
      forma amounts do not purport to be indicative of the results that would
      have actually been obtained if the acquisition occurred as of the
      beginning of the periods presented or that not be obtained in the
      future.





Unaudited
      Pro Forma ResultsNet
      income attributable to shareholders
              
              $
              1,686,538







-14-
 Table of Contents








4.
            CONCENTRATIONOF CREDIT
      RISK





a.
            Financial
      instruments that potentially expose the Company to concentrations of
      credit risk, consist of cash and cash equivalents and accounts receivable.
      The Company performs ongoing evaluations of their cash position and credit
      evaluations to ensure collections and minimize
  losses.





b.
            As
      of September 30, 2008 and 2007, the Company's bank deposits were all
      placed with banks in the PRC where there is currently no rule or
      regulation in place for obligatory insurance of bank
    accounts.





c.
            For
      the periods ended September 30, 2008 and 2007, all of the Company's sales
      arose in the PRC. All accounts receivable as of September 30, 2008 and
      2007 also arose in the PRC.





d.
            Details
      of the customers accounting for 10% or more of the Company’s total sales
      for the periods ended September 30, 2008 and 2007 are as
      follows:





Periods
      ended September 30,2008
                          
                          
                          2007Company
      A
                          
                          $
                          1,370,151
                          
                          
                          $
                          196,384Company
      B
                          
                          
                          -
                          
                          
                          
                          52,990Company
      C
                          
                          
                          1,197,573
                          
                          
                          
                          -Company
      D
                          
                          
                          1,144,546
                          
                          
                          
                          -





The
accounts receivable from the customers accounting for 10% or more of the
Company’s total sales represent 49.43% of the balance of the account at
September 30, 2008. Accounts receivable at September 30, 2008 originated from
the coal water mixture business. None of the accounts receivable originating
from the COPO resin business accounted for 10% or more of the Company total
sales.





5.
            CURRENT VULNERABILITY
      DUE TO CERTAIN
CONCENTRATIONS





The
      Company's operations are all carried out in the PRC. Accordingly, the
      Company's business, financial condition and results of operations may be
      influenced by the political, economic and legal environments in the PRC,
      and by the general state of the PRC's
economy.





The
      Company's operations in the PRC are subject to specific considerations and
      significant risks not typically associated with companies in the North
      America and Western Europe. These include risks associated with, among
      others, the political, economic and legal environments and foreign
      currency exchange. The Company's results may be adversely affected by
      changes in governmental policies with respect to laws and regulations,
      anti-inflationary measures, currency conversion and remittance abroad, and
      rates and methods of taxation, among other
  things.





6.
            DEPOSITS AND
      PREPAYMENTS





Deposits
      and prepayments consist of the
following:




September
      30,
                                      
                                      
                                      December
      31,2008
                                      
                                      
                                      2007Prepayment
      for construction in progress and machinery purchases
                                      
                                      $
                                      720,229
                                      
                                      
                                      $
                                      908,561Purchase
      security deposit
                                      
                                      
                                      4,400
                                      
                                      
                                      
                                      1,609,750Prepaid
      expenses
                                      
                                      
                                      5,632
                                      
                                      
                                      
                                      22,600Other
                                      
                                      
                                      2,159
                                      
                                      
                                      
                                      2,018$
                                      732,420
                                      
                                      
                                      $
                                      2,542,929







-15-
 Table of Contents








7.
            GOVERNMENT GRANT
      RECEIVABLE





The
      amount represents a subsidy from the Shaanxi Provincial Government. The
      subsidy is unconditional and was received in the first quarter of
      2008.





8.
            INVENTORIES





Inventories
      consist of the following,


September
      30,
                          
                          
                          December
      31,2008
                          
                          
                          2007Raw
      materials
                          
                          $
                          245,555
                          
                          
                          $
                          22,615Packing
      materials
                          
                          
                          987
                          
                          
                          
                          1,751Work
      in progress
                          
                          
                          2,213
                          
                          
                          
                          -Finished
      goods
                          
                          
                          44,346
                          
                          
                          
                          16,593$
                          293,101
                          
                          
                          $
                          40,959





9.
            PROPERTY, PLANT AND
      EQUIPMENT





Property,
      plant and equipment consists of the
following:


September
      30,
                            
                            
                            December
      31,2008
                            
                            
                            2007Construction in
progress
                            
                            
                            $
                            2,682,282
                            
                            
                            $
                            119,169Buildings
                            
                            
                            
                            1,692,118
                            
                            
                            
                            3,806,628Leasehold improvements
                            
                            
                            
                            -
                            
                            
                            
                            232,900Plant and machinery
                            
                            
                            
                            1,708,749
                            
                            
                            
                            1,596,161Office equipment
                            
                            
                            
                            70,028
                            
                            
                            
                            65,414Motor vehicles
                            
                            
                            
                            179,948
                            
                            
                            
                            127,9356,333,125
                            
                            
                            
                            5,948,207Less: Accumulated depreciation and
      amortization
                            
                            
                            
                            417,346
                            
                            
                            
                            512,403$
                            
                            5,915,779
                            
                            
                            $
                            5,435,804





Construction
      in progress included above was the construction of buildings, production
      lines and machinery for the coal-water mixture
  business.





The
      depreciation expenses on property, plant and equipment for the nine months
      ended September 30, 2008 and 2007 were $175,095 and $35,966,
      respectively.





10.
            PREPAID LAND USE
      RIGHT





The
      Company has recorded as prepaid land use rights the costs paid to acquire
      a long-term interest to utilize the land underlying the building and
      production facility for its coal-water mixture business. This type of
      arrangement is common for the use of land in the PRC. The prepaid land use
      rights are expenses on the straight-line method over the term of the land
      use rights of 50 years.





The
      amount expensed on prepaid land use right for the periods ended September
      30, 2008 and 2007 was $28,031 and $4,377, respectively. The amount to be
      expensed on prepaid land use rights over each of the next five years and
      thereafter is $193,070 per annum.





-16-
 Table of Contents








11.
            GOODWILL





Balance
      as of December 31, 2007
                            
                            $
                            -Arising
      from additional acquisition of Suo’ang New Energy on June 30, 2008 (Note
      3)
                            
                            
                            410,869Balance
      as of September 30, 2008
                            
                            $
                            410,869





12.
            INTANGIBLE
      ASSETS





Intangible
      assets consist of the following:





September
      30,
                      
                      
                      December
      31,2008
                      
                      
                      2007Accounting software
                      
                      $
                      2,097
                      
                      
                      $
                      1,959Less: Accumulated
      amortization
                      
                      
                      (829
                      )
                      
                      
                      (481
                      )$
                      1,268
                      
                      
                      $
                      1,478





The
      amortization expenses on intangible assets for the periods ended September
      30, 2008 and 2007 were $304 and $275,
  respectively.





13.
            ACCRUEDEXPENSES AND OTHER
      PAYABLES





Accrued
      expenses and other payables consist of the following as
  of:





September
      30,
                                  
                                  
                                  December
      31,2008
                                  
                                  
                                  2007Accrued operating
    expenses
                                  
                                  $
                                  374,450
                                  
                                  
                                  $
                                  471,988Prepaid land use right
      payable
                                  
                                  
                                  143,165
                                  
                                  
                                  
                                  133,731Accrued staff welfare
                                  
                                  
                                  142,104
                                  
                                  
                                  
                                  71,706Construction in progress
      payable
                                  
                                  
                                  12,831
                                  
                                  
                                  
                                  90,140Non-interest bearing
    loan
                                  
                                  
                                  -
                                  
                                  
                                  
                                  68,627Advance from customer
                                  
                                  
                                  58,665
                                  
                                  
                                  
                                  54,800Other payables
                                  
                                  
                                  3,864
                                  
                                  
                                  
                                  2,740$
                                  735,079
                                  
                                  
                                  $
                                  893,732





14.
            OBLIGATIONS UNDER
      CAPITAL LEASES





September
      30,
                            
                            
                            December
      31,2008
                            
                            
                            2007Total
      minimum lease payments
                            
                            $
                            17,715
                            
                            
                            $
                            -Less:
      Current portion of obligations under capital leases
                            
                            
                            (13,450
                            )
                            
                            
                            -$
                            4,265
                            
                            
                            $
                            -







-17-
 Table of Contents








15.
            CONVERTIBLE
      DEBENTURES





On
September 16, 2008 and September 19, 2008, the Company sold $1,335,650 in
aggregate principal amount of its 18% secured convertible debentures (the
“Debentures”) and issued warrants (the “Warrants”) to purchase up to 8,904,334
shares of common stock of the Company to institutional and other accredited
investors in a private placement (the “Transactions”). The Company also issued
warrants to Ancora Securities, Inc. as finder’s fee as follows: (1) for the
Debentures sold on September 16, 2008, warrants to purchase up to 267,100 shares
of common stock at an exercise price of $0.25 per share and expiring on
September 15, 2010, and (ii) for the Debentures sold on September 19, 2008,
warrants to purchase up to 90,000 shares of common stock at an exercise price of
$0.25 per share and expiring on September 18, 2010.





The
Debentures bear a fixed rate of interest at 18% per annum and mature one year
from their issuance dates, provided that the principals and interests are due
immediately upon an event of default, as such term is defined in the Debentures.
The holders of the Debentures have the right at any time to convert all or part
of the outstanding principal amount of the Debentures and any accrued and unpaid
interest into common shares of the Company at the then effective conversion
price, initially being $0.15 per share. However, if the Company completes a
Qualifying Financing Transaction (as defined in the Debentures) and the listing
of its common stock on a Subsequent Market (as defined in the Debentures) on or
before the Debentures mature, all interests due under the Debentures will be
waived and all of the outstanding principal amount of Debentures will
automatically convert into common shares. The Debentures are secured by a
personal guarantee from the Company’s Chairman.





The
Warrants entitle each investor to purchase up to a number of common shares (the
“Warrant Shares”) equal to 100% of the number of common shares that would be
issuable upon conversion of the Debentures purchased by such investor in the
Transaction. The Warrants have an initial exercise price of $0.15 per share. 25%
of the Warrant Shares vest and are immediately exercisable upon issuance of the
Warrants. Thereafter, up to 5% of the Warrant Shares will vest and become
exercisable at the end of every one-month period beginning on October 31, 2008,
until the sooner of the listing of the Company’s common stock on a Subsequent
Market, or the repayment in full of the Debentures, or until 100% of the Warrant
Shares are vested. Any portion of the Warrant Shares not vested prior to
the earlier of the Subsequent Market listing or repayment of the Debentures
shall be deemed void. The Warrants are exercisable for a period of three years
from their issuance date.





The
initial conversion price of the Debentures is subject to adjustments should the
Company issue more shares of common stock or securities convertible into common
stock, including rights, options or warrants to subscribe for common shares, for
less than the initial conversion price and without offering the same to the
investors in the Transaction. In the case of adjustments to the conversion
price, the conversion price shall be adjusted to the consideration received or
receivable by the Company for each share of common stock issued or issuable. The
initial conversion price of the Debentures and the initial exercises price of
the Warrants are also subject to adjustment for other customary adjustment
events such as any stock dividend, stock split, reverse stock split or other
similar transaction.





In
connection with the Transactions, the Company’s Chairman entered into an escrow
agreement (the “Escrow Agreement”) with the investors pursuant to which he has
agreed to place a certain number of the Company's common shares that he owns
into escrow (the “Escrow Shares”). Under the terms of the Escrow Agreement,
one-half of the Escrow Shares will be released back to the Chairman if the
Company meets certain financial milestones described in the Escrow Agreement at
the end of fiscal year ended December 31, 2008; otherwise, these Escrow Shares
will be distributed to the investors in proportion to each investor’s purchase
price in the Transaction. Likewise, the remaining half of the Escrow Shares will
be released back to the Chairman if the Company meets certain financial
milestones described in the Escrow Agreement at the end of fiscal year ended
December 31, 2009; otherwise, these Escrow Shares will be proportionately
distributed to the investors.











-18-
 Table of Contents








The fair
value of the embedded conversion feature of the Debentures of $986,921 was
calculated using the intrinsic value method in accordance with EITF 00-27,
“Application of Issue No. 98-5 to Certain Convertible Instruments”, limited to
the amount of the proceeds allocated to the convertible instrument, and recorded
in additional paid-in capital in the balance sheet. The discount resulting from
recording the conversion feature of the Debentures is amortized from their date
of issuance to their date of maturity.





The
Company has evaluated the Warrants under SFAS 133, “Accounting for Derivatives”,
and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company’s Own Stock”, and reported the fair value of
the Warrants as equity instruments. The Warrants were valued using the
Black-Scholes option pricing method with the following assumptions:




Issuance
      date:
                      
                      September
      16, 2008
                      
                      
                      September
      19, 2008Dividend
      Yield:
                      
                      
                      0.00
                      %
                      
                      
                      0.00
                      %Volatility:
                      
                      
                      86.82
                      %
                      
                      
                      91.68
                      %Risk-free
      interest rate:
                      
                      
                      1.62
                      %
                      
                      
                      2.00
                      %







Costs
directly associated with the issuance of the Debentures were capitalized and
amortized using the straight-line method over the term of the Debentures. As of
September 30, 2008, the balance of capitalized debt issuance costs was $209,519.
Amortization charged to interest expense was $8,399 for the nine-month period
ended September 30, 2008.





16.
            CAPITAL
      TRANSACTION





On
      June 30, 2008 the Company acquired 20% ownership interest of Suo’ang New
      Energy with the agreed value of $1,148,851 in exchange for the Company’s
      issuance of 7,500,000 shares of common stock, as fully described in Note
      3.





17.
            WARRANTS




The
following table summarizes the Warrants outstanding and related prices for the
shares of the Company’s common stock issuable upon exercise of
the Warrants at September 30, 2008:







Exercise
      price
                    
                    Number
      outstanding
                    
                    Weighted
      average remaining contractual life (years)
                    
                    Number
      exercisable
                    
                    Weighted
      average exercise price$0.15
                    
                    5,337,667
                    
                    2.96
                    
                    1,334,416
                    
                    $0.15$0.25
                    
                    267,100
                    
                    1.96
                    
                    267,100
                    
                    $0.25$0.15
                    
                    3,566,667
                    
                    2.97
                    
                    891,666
                    
                    $0.15$0.25
                    
                    90,000
                    
                    1.97
                    
                    90,000
                    
                    $0.25


No
      warrant was exercised during the nine-month period ended September 30,
      2008.








-19-
 Table of Contents








18.
            STATUTORY
      RESERVES





As
      stipulated by the PRC's Company Law, net income after taxation can only be
      distributed as dividends after appropriation has been made for the
      following:





a.           Making
up cumulative prior years' losses, if any;





b.
            Allocations
      to the “Statutory capital reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered capital. This is restricted to
      set off against losses, expansion of production and operation or increase
      in registered capital; and





c.
            Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company's “Statutory common welfare fund”. This is
      restricted to capital expenditure for the collective benefits of the
      Company's employees; and





d.           Allocations
to the discretionary surplus reserve, if approved in the shareholders' general
meeting.





Statutory
      reserves consist of the following as
of:





September
      30,
                          
                          
                          December
      31,2008
                          
                          
                          2007StStatutory
      capital reserve
                          
                          $
                          232,206
                          
                          
                          $
                          232,206StStatutory
      common welfare fund
                          
                          
                          116,103
                          
                          
                          
                          116,103$
                          348,309
                          
                          
                          $
                          348,309





19.
            INCOME
      TAXES





Companies
      in the PRC are generally subject to PRC Enterprise Income Taxes at a
      statutory rate of 33% (30% of national income tax plus 3% local income
      tax) on the net income. However, the Company’s VIE, Shaanxi Suo’ang, has
      been approved as a “high and new technology enterprise” and under PRC
      Income Tax Laws, it is entitled to a preferential tax rate of 15% upon
      expiry of a two years' tax holiday for 2004 and 2005, within which no
      income taxes were charged. Shaanxi Suoang is subject to income tax from
      2006.





The
      Company and its wholly owned subsidiary Hangson are not subject to any
      income taxes as these companies had no income for the periods ended
      September 30, 2008 and 2007.





-20-
 Table of Contents








The
      income tax expense consisted of the following as
  of:





September
      30,2008
                        
                        
                        2007Current – PRC
      Enterprise Income Tax
                        
                        $
                        24,779
                        
                        
                        $
                        -Deferred
                        
                        
                        -
                        
                        
                        
                        -Total income tax
    expenses
                        
                        $
                        24,779
                        
                        
                        $
                        -





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





September
      30,2008
                          
                          
                          2007U.S. statutory rate
                          
                          
                          34
                          %
                          
                          
                          34
                          %Foreign income not recognized in
      U.S.
                          
                          
                          (34
                          %)
                          
                          
                          (34
                          %)Non-deductible expenses and
      other
                          
                          
                          -
                          
                          
                          
                          -Tax holiday
                          
                          
                          (14
                          %)
                          
                          
                          -PRC preferential income tax
      rate
                          
                          
                          15
                          %
                          
                          
                          15
                          %Effective tax rate
                          
                          1
                          %
                          
                          15
                          %





No significant deferred tax liabilities or assets existed as of either
      September 30, 2008 or 2007.





20.
            INCOME (LOSS) PER
      COMMON SHARE





Basic
      income (loss) per common share for the periods ended September 30, 2008
      and 2007 were determined by dividing net income for the periods by the
      weighted average number of common shares
  outstanding.





The
      Company has retroactively adjusted the weighted average number of common
      shares outstanding by deeming that the three-for-one (3:1) forward stock
      split on August 20, 2007 had occurred as of the beginning of the earliest
      period presented.





The
      Company did not have dilutive securities outstanding as of and during the
      periods ended September 30, 2008 and
2007.





21.
            RELATED PARTY
      TRANSACTIONS





(a)           Related party
payables





Amount
      payable to a director as of September 30, 2008 and December 31 2007, is
      summarized as follows:





September
      30,
                      
                      
                      December
      31,2008
                      
                      
                      2007Amount
      due to a director:Mr.
      Peng Zhou
                      
                      $
                      1,178
                      
                      
                      $
                      8,527





This
      balance is interest free and unsecured and has no fixed repayment
      date.







-21-
 Table of Contents






(b)
              Disposal of
      patent







In 2006,
the Company disposed of the patent related to the discontinued COPO resin
product operations to a related company for a consideration of $256,200. A loss
on disposal of $291,266 was recorded. The


balance
remains outstanding as of December 31, 2007 was $141,795 and was repaid during
the first quarter of 2008.





(c)
            Transfer of
      property





On June
13, 2006, the Company signed a property transfer agreement with a related
company, HanZhong SiXiong KeChuang Commercial Company Ltd., which is controlled
by a shareholder of the Company, to dispose of the Company’s leasehold
properties together with the leasehold improvements for an aggregate cash
consideration of approximately $2,450,000. The agreed price is $120,000 lower
then the evaluated value according to an appraisal report issued by an
independent professional appraiser because the property title did not transfer
from the property developer to the Company. As of December 31, 2007,
$1,567,500 was received and recorded as deposit on sale of property in the
balance sheet.





On
      March 25, 2007 and June 21, 2007, the Company and the buyer entered into
      extension agreements whereby the Company extended the date for payment of
      the remaining balance and transfer of the title of properties to the buyer
      to on or before May 31, 2007 and October 31, 2007 respectively. On March
      6, 2008, the Company entered a supplementary agreement whereby the Company
      agreed to transfer the title of the properties before May 31, 2008 and the
      buyer will pay the Company on or one month after the transfer of property
      title. The transfer of property was completed accordingly. Gain on
      transfer of property of $33,095 was
recorded.





(d)
            Forfeiture of minority
      interest





On
      June 30, 2008, the Company entered into a Securities Purchase Agreement
      (the “Agreement”) to acquire from a minority shareholder his 20% equity
      ownership interest in Suo’ang New Energy as more fully described in Note
      3. Pursuant to the terms of the Agreement, the minority shareholder agreed
      to waive any and all right he may have to any distributions and/or
      payments from Suo’ang New Energy beginning January 1,
  2008.





22.
            COMMITMENTS AND
      CONTINGENCIES





a.           Capital expenditure
commitments





During
      the fiscal year 2007, the Company entered into various contracts for the
      construction of a new plant for its coal water mixture business, as well
      as several contracts to purchase
machinery.





The
      Company's commitments for capital expenditure as of September 30, 2008 are
      as follows:








Contracted but not accrued
for:
  Purchase
      of machinery
                          
                          $
                          340,329








-22-
 Table of Contents








b.           Operating lease
commitments





As
      of September 30, 2008, the Company’s total future minimum lease payments
      under non-cancelable operating leases to be paid in each of the five
      succeeding years are as follows:




Periods
      ending September 30,2009
                            
                            $
                            21,1202010
                            
                            
                            16,7202011
      and thereafter
                            
                            
                            -Total
      operating lease commitments
                            
                            $
                            37,840


-23-


c.           Social insurance of
Employees





According
      to the prevailing laws and regulations of the PRC, the Company is required
      to cover its employees with medical, retirement and unemployment insurance
      programs. Management believes that due to the transient nature of its
      employees, the Company does not need to provide all employees with such
      social insurance.





In
      the event that any current or former employee files a complaint with the
      PRC government, the Company may be subject to making up the social
      insurance as well as administrative fines. As the Company believes that
      these fines would not be material, no provision has been made in this
      regard.








































-24-
 Table of Contents








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





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-KSB filed with
the SEC on April 15, 2008.  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 Form 10-Q, references to “we”, “our”, "the", “us”, the "Company”, or the
“Registrant” refer to Sino Clean Energy Inc., a Nevada corporation, its
subsidiary and affiliated entities.





Overview





Sino
Clean Energy Inc. (the “Company”) is engaged in the research, development,
production and sale in the People’s Republic of China (“China”) of its
“coal-water mixture” product, a fuel substitute for oil, gas or coal. Our
primary business operations are conducted through our wholly-owned subsidiary
Hangson Limited (“Hangson”), a British Virgin Islands company, Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. (“Suo’ang Biological”), a Chinese
company which Hangson controls through a series of contractual arrangement, and
Shaanxi Suo’ang New Energy Enterprise Company Ltd. (“Suo’ang New Energy”), a
Chinese company and subsidiary of Suo’ang Biological.





Because
of its contractual arrangements with Hangson, Suo’ang Biological is deemed
Hangson’s variable interest entity (“VIE”).  Accordingly, we
consolidate Suo’ang Biological’s results, assets and liabilities in our
financial statements. The Company’s consolidated assets do not include any
collateral for Suo’ang Biological’s obligations. The creditors of Suo’ang
Biological do not have recourse to the general credit of the Company. For a
description of the contractual arrangements between Hangson and Suo’ang
Biological, see the section titled “Contractual Arrangements with Shaanxi Suoang
and its Shareholders” in the Company’s Annual Report on Form 10-KSB filed with
the SEC on April 15, 2008.





For the
majority of fiscal 2006, Suo’ang Biological was engaged in two lines of
businesses: the research, development, production, marketing and sales of
coal-polymer (“COPO”) resin products, and also the research, development,
production and sale of coal-water mixture fuel substitute product (“CWM
Fuel”).  However, the Company subsequently decided to focus on its CWM
Fuel business.  Thus, in December 2006, Suo’ang Biological ceased
operations of the COPO resin business and is now focused on its CWM Fuel
business, which is conducted through Suo’ang New
Energy.





The
Company entered into sales contracts for the sale of the CWM Fuel in early
2007.  Construction of the first phase of the Company’s CWM Fuel
production plant was completed in June 2007.  The Company’s CWM Fuel
production plant became operational and production of the CWM Fuel commenced in
August 2007.











-25-
 Table of Contents








On
September 16 and 19, 2008, we issued our 18% secured convertible
debentures (the “Debentures”) to certain institutional and accredited investors
for an aggregate amount of $1,335,650. The Debentures bear a fixed rate of
interest at 18% per annum and mature one year from their issuance dates,
provided that the principals and interests are due immediately upon an
event of default. The holders of the Debentures have the right at any time to
convert all or part of the outstanding principal amount of the Debentures and
any accrued and unpaid interest into common shares of the Company at the then
effective conversion price, initially being $0.15 per share.





Additionally, we issued to these investors warrants to purchase up to 100% of
the number of common shares that would be issuable upon conversion of the
Debentures purchased by the investors. The warrants have an initial
exercise price of $0.15 per share. 25% of the common shares underlying the
warrants (the “Warrant Shares”)  vest and are immediately exercisable
at the issuance of the warrants. Thereafter, up to 5% of the Warrant Shares
shall vest and become exercisable at the end of every one-month period beginning
on October 31, 2008, until the sooner of (i) the listing of the Company’s common
stock on the New York Stock Exchange, the American Stock Exchange, the NASDAQ
Global Select Market, the NASDAQ Global Market, or the NASDAQ Capital Market
(each a “Subsequent Market”),  (ii) the repayment in full of the
Debentures, or (iii) until 100% of the Warrant Shares are vested. Any portion of
the Warrant Shares not vested prior to the earlier of the Subsequent Market
listing or repayment of the Debentures shall be deemed void. The warrants are
exercisable for a period of three years from their issuance date.





Critical
Accounting Policies and Estimates





Property,
plant and equipment





Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Gains or losses on disposals are reflected as gain or loss in the
year of disposal. The cost of improvements that extend the life of plant,
property and equipment are capitalized. These capitalized costs may include
structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.





Depreciation
or amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives.





Goodwill





The
Company accounts for acquisitions of business in accordance with SFAS No. 141
“Business Combinations”, which may result in the recognition of goodwill.
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. Goodwill is not subject to amortization but will be subject to periodic
evaluation for impairment. Goodwill is stated in the consolidated balance sheet
at cost less accumulated impairment loss.





Impairment








(i)
              Long-lived
      Assets
 
 The
Company reviews and evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. Impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis are less than the carrying amount of the
assets, including goodwill, if any. An impairment loss is measured and recorded
based on discounted estimated future cash flows. In estimating future cash
flows, assets are grouped at the lowest level for which there are identifiable
cash flows that are largely independent of future cash flows from other asset
groups.














-26-
 Table of Contents





(ii)
              Goodwill
 
 Impairment
of goodwill is tested at least annually at the reporting unit. The test consists
of two steps. Firstly, the Company identifies potential impairment by comparing
the fair value of the reporting unit to its carrying amount, including goodwill.
If the fair value of the reporting unit is greater than its carrying amount,
goodwill is not considered impaired. Secondly, if there is impairment identified
in the first step, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit’s goodwill over the implied fair value of
goodwill. The implied fair value of goodwill is determined by allocating the
fair value of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No 141, “Business Combinations”. If the
carrying value of a reporting unit exceeds its estimated fair value, the Company
compares the implied fair value of the reporting unit’s goodwill to its carrying
amount, and any excess of the carrying value over the fair value is charged to
earnings. The Company’s fair value estimates are based on numerous assumptions
and it is possible that actual fair value will be significantly different than
the 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).  No return allowance is made
as products are normally not returnable upon acceptance by the
customers.





Foreign
currency translation




The
reporting currency of the Company is the United States Dollars. All assets and
liabilities accounts have been translated into United States Dollars using the
current exchange rate at the balance sheet date. Capital stock is recorded at
historical rates. Revenue and expenses are translated using the average exchange
rate in the year. The resulting gain and loss has been reported as other
comprehensive income (loss) within the shareholder’s equity.





Use
of estimates





The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles 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. Significant
estimates include estimates of accruals and determination of fair values for
assets disposal.




Results
of Operations





Three
month period ended September 30, 2008 as compared to three month period ended
September 30, 2007





Revenue. During the three
month period ended September 30, 2008, we had revenues from sale of our CWM Fuel
of $3,419,941, as compared to revenues of $234,639 during the three month period
ended September 30, 2007.  In general, this increase is mainly
attributable to sales revenue received after the Company commenced operations of
its CWM Fuel production facility during the third quarter of 2007.




General and Administrative Expenses.General and administrative expenses totaled $204,915 for the three-month
period ended September 30, 2008, as compared to $197,371 for the three-month
period ended September 30, 2007.  This increasewas primarily caused by
professional fee, salaries and traveling expenses in connection with the
commencement of our CMW Fuel operations.





Net Income. We had net
incomeof
$1,144,737 for the three-month period ended September 30, 2008, as compared to
net loss of$148,106 for the same
period in 2007.  The increase in net income is primarily attributable
to the commencement of our CWM Fuel operations and production during the third
quarter in 2007.







-27-
 Table of Contents




Nine
month period ended September 30, 2008 as compared to six month period ended
September 30, 2007





Revenue. During the
nine-month period ended September 30, 2008, we had revenues from sale of our CWM
Fuel of $9,156,293, as compared to revenues of $234,639 during the nine-month
period ended September 30, 2007.  In general, this increase is mainly
attributable to the commencement of our CWM Fuel operation in the third quarter
of 2007.




General and Administrative
Expenses. General and administrative expenses totaled $590,719 for the
nine-month period ended September 30, 2008, as compared to $330,282 for the
nine-month period ended September 30, 2007.  This increasewas primarily caused by
professional fee, salaries and traveling expenses in connection with the
commencement of our CMW Fuel operations.





Net Income. We had net
incomeof
$2,480,126 for the nine-month period ended September 30, 2008, as compared to
net loss of$124,445 for the same
period in 2007.  The increase in net income is primarily attributable
to the commencement of our CMW Fuel operations and production in third quarter
in 2007.





Liquidity
and Capital Resources





Net cash
flow provided fromoperating activities was
$154,407 for the nine months ended September 30, 2008, as compared to $1,980,902
used inoperating
activities for the nine months ended September 30, 2007.  The increase
in our net cash flow provided by operating activities for the nine months ended
September 30, 2008 was mainly due the commencement of our CWM Fuel operations in
third quarter in 2007.





Net cash
flow used in investing activities was $2,791,475 for the nine months ended
September 30, 2008, as compared to net cash of $1,053,865 used in investing
activities for the same period in 2007. Uses of cash flow for investing
activities were mainly related to the purchase of property, plant and
equipment.





Net cash
flow provided by financing activities was $2,183,606 for the nine months ended
September 30, 2008, as compared to net cash flow provided by financing
activities of $74,515 for the same period in 2007. The increase in net cash flow
provided by financing activities was mainly due to the issuance of our
secured convertible debentures in September 2008, as well as receipt from
government grant and sales proceeds from disposal of property.





We
believe that we have adequate capital resources to continue our operations in
the near future.  We believe that our current cash balance and the
revenues that will be generated will cover anticipated operating expenses for a
period of at least one year without supplementing our cash
reserves.  We may, however, raise additional capital to further
develop our products.





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.














-28-
 Table of Contents





Exchange
Rates





Suo’ang
Biological maintains its books and records in Renminbi (“RMB”), the lawful
currency of the PRC.  In general, for consolidation purposes, the
Company translates Suo’ang Biological’s assets and liabilities into U.S. Dollars
using the applicable exchange rates prevailing at the balance sheet date, and
the statement of income is translated at average exchange rates during the
reporting period.  Adjustments resulting from the translation of
Suo’ang Biological’s financial statements are recorded as accumulated other
comprehensive income.





Until
July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30:
US$1.00.  On July 21, 2005, the PRC government reformed the exchange
rate system into a managed floating exchange rate system based on market supply
and demand with reference to a basket of currencies. In addition, the exchange
rate of RMB to US$ was adjusted to RMB8.11: US$1.00 as of July 21,
2005.  The People’s Bank of China announces the closing price of a
foreign currency such as US$ traded against RMB in the inter-bank foreign
exchange market after the closing of the market on each working day, which will
become the unified exchange rate for the trading against RMB on the following
working day.  The daily trading price of US$ against RMB in the
inter-bank foreign exchange market is allowed to float within a band of ±0.3%
around the unified exchange rate published by the People’s Bank of
China.  This quotation of exchange rates does not imply free
convertibility of RMB to other foreign currencies.  All foreign
exchange transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the People’s Bank of China.  Approval of foreign currency
payments by the Bank of China or other institutions required submitting a
payment application form together with invoices, shipping documents and signed
contracts.





The
exchange rates used to translate amounts in RMB into US Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in this
MD&A were as follows:





September
      30, 2008
                December
      31, 2007
                September
      30, 2007Balance
      sheet items, except for the registered and paid-up capital, as of end of
      period/year
                
                USD0.1467:RMB1
                
                USD0.1370:RMB1
                
                USD0.1331:RMB1Amounts
      included in the statement of operations, statement of changes in
      stockholders' equity and statement of cash flows for the period/ year
      ended
                
                USD0.1416:RMB1
                
                USD0.1320:RMB1
                
                USD0.1307:RMB1




No
representation is made that RMB amounts have been, or would be, converted into
US$ at the above rates.




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
 
 (a)
              Evaluation of disclosure
      controls and procedures. As of the end of the period covered by
      this report, we carried out an evaluation, 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 defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended.  Based upon that evaluation, our Chief Executive
      Officer and Chief Financial Officer concluded that our disclosure controls
      and procedures were effective as of the end of the applicable period to
      ensure that the information required to be disclosed by the Company in
      reports that it files or submits under the Exchange Act (i) is recorded,
      processed, summarized and reported within the time periods specified in
      Securities and Exchange Commission rules and forms, and (ii) 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.(b)
              Changes in internal controls
      over financial reporting. There was no change in our internal
      control over financial reporting during our most recent fiscal quarter
      that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial
  reporting.
















-29-
 Table of Contents





PART II- OTHER INFORMATION





Item
1.                      Legal
Proceedings.





None





Item 1A. Risk Factors.





Not
applicable





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





Reference
is made to our Current Reports on Form 8-K filed with the SEC on September 17,
2008 and on September 22, 2008, respectively.





Item
3.                      Defaults
upon Senior Securities.





None





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





None





Item
5.                      Other
Information.





None




Item
6.                      Exhibits.


Exhibit
                Number
              Description2.1
              Share
      Exchange Agreement between Endo Networks, Inc., Endo Majority
      Shareholders, Hangson Ltd. and the Hangson Shareholders dated October 18,
      2006 (1)


3.1
              Articles
      of Incorporation of Endo Networks, Inc., a Nevada corporation, as
      amended. (3)3.2
              Bylaws
      of Endo Networks, Inc. (3)


3.3
              Text
      of Amendment to our Bylaws (4)3.4
              Articles
      of Merger filed with the Secretary of State of Nevada with an effective
      date of August 15, 2007 (6)


10.1
              Asset
      and Share Purchase Agreement between Registrant and Peter B. Day (for Endo
      Canada) (2)10.2
              Contract
      for Technology Transfer between Shaanxi Suo’ang Biological Science &
      Technology Co., Ltd. and HanZhongWeiDa Commercial Company Limited dated
      December 25, 2006 (5)


10.3
                Machineries
      Transfer Agreementbetween Shaanxi
      Suo’ang Biological Science & Technology Co., Ltd. and HanZhongWeiDa
      Commercial Company Limited dated January 10, 2007 (5)10.4
                Securities
      Purchase Agreement dated as of June 30, 2008, by and among Mr. Peng Zhou,
      Sino Clean Energy Inc., Hangson Limited and Shaanxi Suo’ang New Energy
      Enterprise Co., Ltd. (8)31.1
                Section
      302 Certification by the Corporation’s Chief Executive Officer
      *


31.2
              Section
      302 Certification by the Corporation’s Chief Financial Officer
      *32.1
              Section
      906 Certification by the Corporation’s Chief Executive Officer
      *


32.2
              Section
      906 Certification by the Corporation’s Chief Financial Officer
      *99.1
              Consulting
      Services Agreement by and between Hangson Limited and Shaanxi Suo’ang
      Biological Science & Technology Co., Ltd. dated August 18, 2006
      (3)






-30-
 Table of Contents





99.4
              Proxy Agreement by and between
      Hangson Limited and Shaanxi Suo’ang Biological Science & Technology
      Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s Majority Shareholders
      dated August 18, 2006 (3)99.5
              Option
      Agreement between Hangson Limited and Shaanxi Suo’ang Biological Science
      & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
      Majority Shareholders dated August 18, 2006 (3)99.6
              Agreement
      by and between ShaanxiSuo’ang Biological
      Science and Technology Co. Ltd. and Hanzhong Si Xiong Ke Chuang Business
      Co. Ltd. (3)99.7
              Supplementary
      Agreement by and between ShaanxiSuo'ang Biological
      Science and Technology Co. Ltd. and Hanzhong Si Xiong Ke Chuang Business
      Co. Ltd. dated March 25, 2007 (5)99.8
              Agreement
      to Defer Payment for Property Transfer by and between Shaanxi Suo'ang
      Biological Science and Technology Co. Ltd. and Hanzhong Si Xiong Ke Chuang
      Business Co. Ltd. dated June 21, 2007 (7)99.9
              Supplementary
      Agreement to the Property Transfer Agreement  by
      and between Shaanxi Suo'ang Biological Science and Technology Co.
      Ltd. and Hanzhong Si Xiong Ke Chuang Business Co. Ltd. dated March 6,
      2008 (7)





*  Filed
herewith




(1)
              Filed
      as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
      the SEC on October 18, 2006 and incorporated herein by
      reference.(2)
              Filed
      as Exhibit A of Registrant’s Schedule 14A filed with the SEC on August 8,
      2006 and incorporated herein by
reference.


(3)
              Filed
      as Exhibits to the Registrant’s Current Report on Form 8-K filed with the
      SEC on October 26, 2006 and incorporated herein by
    reference.(4)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on November 17, 2006 and incorporated herein by
      reference.(5)
              Filed as Exhibits to the
      Registrant’s Annual Report on Form 10-KSB filed with the SEC on May 3,
      2007 and incorporated herein by reference.(6)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on August 17, 2007 and incorporated herein by
      reference.(7)
              Filed
      as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with
      the SEC on May 19, 2008 and incorporated herein by
    reference.(8)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on July 7, 2008 and incorporated herein by
    reference.








-31-
 Table of Contents





SIGNATURES





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




SINO
      CLEAN ENERGY INC.
                    (Registrant)Date:
      November 13, 2008
                  By:
                  /s/
      Baowen RenBaowen
      Ren
                    Chief
      Executive Officer















































-33-