UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K/A




(Amendment
No. 2)




ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
fiscal year ended December 31, 2008





Commission
file number: 000-12536





China
Recycling Energy Corporation





(Name of
Registrant in its Charter)





Nevada





(State or
other jurisdiction of incorporation or organization)





90-0093373





(I.R.S.
Employer Identification No.)





Suite
909, Tower B


Chang
An International Building


No.
88 Nan Guan Zheng Jie


Xi
An City, Shan Xi Province


China
710068





(Address
of principal executive offices)





710068





(Zip
Code)





Issuer’s
telephone number: (011) 86-29-8769-1097




Securities
registered pursuant to Section 12(b) of the Act:




NONE




Securities
registered pursuant to Section 12(g) of the Act:




NONE




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈ No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈ No x





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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈




(Cover
continued from previous page)





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 “small
reporting company” in Rule 12b-2 of the Exchange Act (Check one):





Large accelerated filer  ̈
            
            Accelerated filer  ̈Non-accelerated filer  ̈
            
            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




The
aggregate market value of 8,986,405 shares of voting stock held by
non-affiliates of the registrant was approximately $11,143,142 based on the last
reported sale price of the registrant’s Common Stock as reported on the
NASD’s Over-the-Counter Bulletin Board on June 30, 2008. The
aggregate market value of 11,953,346 shares of voting stock held by
non-affiliates of the registrant was approximately $11,833,813 based on the last
reported sale price of the registrant’s Common Stock as reported on the
NASD’s Over-the-Counter Bulletin Board on June 30, 2009.




As of
September 21, 2009, the registrant had 38,778,035 shares of Common Stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





None.








CHINA
RECYCLING ENERGY CORPORATION




FORM
10-K




TABLE
OF CONTENTS




Explanatory
      Note
                          1PART
      IItem
      1.
                          Description
      of Business
                          2Item
      1A.
                          Risk
      Factors
                          6Item
      2.
                          Description
      of Property
                          10Item
      3.
                          Legal
      Proceedings
                          10Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          10PART
      IIItem
      5.
                          Market
      for Common Equity, Related Shareholder Matters and Small Business Issuer
      Purchases of Equity Securities.
                          10Item
      6.
                          Selected
      Financial Data.
                          13Item
      7.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                          13Item
      8.
                          Consolidated
      Financial Statements of China Recycling Energy
Corporation.
                          23Item
      9.
                          Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                          44Item
      9A.
                          Controls
      and Procedures.
                          44Item
      9B.
                          Other
      Information.
                          45PART
      IIIItem
      10.
                          Directors,
      Executive Officers and Corporate Governance.
                          45Item
      11.
                          Executive
      Compensation.
                          47Item
      12.
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters.
                          49Item
      13.
                          Certain
      Relationships and Related Transactions, Director
    Independence.
                          51Item
      14.
                          Principal
      Accountant Fees and Services.
                          51Item
      15.
                          Exhibits.
                          52





Explanatory Note





China
Recycling Energy Corporation (the “Company,” “we,” “us” or “our”) is filing this
Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for the
year ended December 31, 2008, originally filed with the Securities and Exchange
Commission (the “SEC”) on March 23, 2009 and amended on April 30, 2009 (the
“Original Form 10-K”), to restate our consolidated financial statements as of
and for the year ended December 31, 2008. In addition, we are concurrently
filing Forms 10-Q/A to restate our consolidated financial statements as of and
for the periods ended each of June 30, 2008, September 30, 2008 and March 31,
2009.




The
accounting issues that resulted in misstatements in our consolidated financial
statements as of and for the periods ended June 30, 2008, September 30, 2008,
December 31, 2008 and March 31, 2009 relate to (i) the reclassification of
current tax payable to deferred tax liability on the Company’s sales-type
leases, as the Company did not separately record the deferred tax liability;
(ii) the expensing of the unamortized amount of the beneficial conversion
feature in connection with the 2008 amendment of a convertible note that was
issued by the Company to certain investors in 2007; (iii) the reclassification
of interest expense from interest income for the three months ended June 30,
2008; and (iv) the reclassification of 3,000,000 stock options under the
Company’s 2007 Nonstatutory Stock Option Plan from the fair value of the options
as a liability to equity recorded as additional paid in capital. See Note 21 to
our consolidated financial statements contained in Item 8 of Part II
of this report for more information regarding the restatement and details of the
impact of the restatement on our consolidated financial statements as of and for
the year ended December 31, 2009.




In
addition, we have revised the data and information in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7 of
Part II of this report accordingly to reflect the effects of the
restatement on our consolidated financial statements.




In
connection with the restatement, our management has re-evaluated our disclosure
controls and procedures and internal control over financial reporting as of
December 31, 2008. See Item 9A of Part II of this report for further
discussions on these matters.




Item 15
of Part III of this report has been revised to contain the currently-dated
certifications from our principal executive officer and chief accounting
officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of
2002.




Because this Form 10-K/A sets forth the
Original Form 10-K in its entirety, it includes both items that have been
changed as a result of the restatement and items that are unchanged from the
Original Form 10-K. Other than the revision of the disclosures relating to the
impact of the restatement as discussed above, this Form 10-K/A speaks as of the
original filing date of the Original Form 10-K and has not been updated to
reflect other events occurring subsequent to the original filing date. This
includes forward-looking statements and all other sections of this Form 10-K/A
that were not directly impacted by the restatement, which should be read in
their historical context. The following items have been amended as a result of
the restatement:





Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations;


Part III, Item 8. Financial
Statements and Supplementary Data;


Part III, Item 9A. Controls
and Procedures;


Part III, Item 11. Executive
Compensation; and


Part IV, Item 15. Exhibits,
Financial Statement Schedules.


1


PART
I




When we
use the terms ”we,” ”us,” ”our” and “the Company,” we mean China Recycling
Energy Corporation., a Nevada corporation, and its wholly-owned subsidiary,
Sifang Holdings Co., Ltd., and Sifang Holdings Co., Ltd.’s wholly-owned
subsidiary, Shanghai TCH Energy Technology Co., Ltd. and Shanghai TCH Energy
Technology Co., Ltd’s wholly-owned subsidiary, Xi’an TCH Energy Technology Co.,
Ltd. Prior to March 8, 2007, China Recycling Energy Corporation’s name was China
Digital Wireless, Inc.




ITEM
1. DESCRIPTION OF BUSINESS




General




We
currently engage in the recycling energy business, providing energy savings and
recycling products and services.




Overview




Business
History.




We
originally began operations as a Colorado corporation known as Boulder Brewing
Company, or Boulder Brewing. We were incorporated in Colorado on May 8, 1980 and
operated as a microbrewery of various beers. Boulder Brewing was unable to
become profitable within any segment of its core business, became illiquid, and
was forced to divest itself of all of its assets. Boulder Brewing became dormant
without any operations or assets in the second quarter of 1990.




In
September 2001, Boulder Brewing changed its state of incorporation from Colorado
to Nevada and changed its name to Boulder Acquisitions, Inc., or Boulder
Acquisitions. From the date of reincorporation until June 23, 2004, Boulder
Acquisitions had no material operations or assets.




On June
23, 2004, we completed a stock exchange transaction with the shareholders of
Sifang Holdings Co., Ltd. (“Sifang Holdings”). The exchange was consummated
under Nevada and Cayman Islands law pursuant to the terms of a Securities
Exchange Agreement dated as of June 23, 2004 by and among Boulder Acquisitions,
Sifang Holdings and the shareholders of Sifang Holdings. Pursuant to the
Securities Exchange Agreement, we issued 13,782,636 shares of our common stock
to the shareholders of Sifang Holdings, representing approximately 89.7% of our
post-exchange issued and outstanding common stock, in exchange for 100% of the
outstanding capital stock of Sifang Holdings. We presently carry on the business
of Sifang Holdings’ wholly-owned subsidiary,  Shanghai TCH Energy
Technology Co., Ltd. or Shanghai TCH, a corporation organized under the laws of
the People’s Republic of China (“PRC” or “China”).




Effective
August 6, 2004, we changed  our name from Boulder Acquisitions, Inc. to
China Digital Wireless, Inc.




From
August 2004 to December 2006, we primarily engaged in the business of pager and
mobile phone distribution and provided value added information services to the
customers in the PRC.  We gradually phased out and substantially
scaled down most of the business of mobile phone distribution and provision of
pager and mobile phone value-added information services, and on May 10, 2007,
the Company approved and announced that it completely ceased and discontinued
these businesses.




In
December 2006, we began to engage in business activities in the energy saving
and recycling industry, including purchasing certain equipment, devices,
hardware and software for the construction and installation of top gas recovery
turbine systems (“TRT”) and other renewable energy products. TRT is an
electricity generating system that utilizes the exhaust pressure and heat
produced in the blast furnace of steel mills to generate electricity. It has
commercial value for the steel mills by using waste heat and steam to produce
electricity for the operation of the mills.


2




On March
8, 2007, we changed our name from China Digital Wireless, Inc. to China
Recycling Energy Corporation.




On April
8, 2007, our Board of Directors approved and made effective a TRT Project
Joint-Operation Agreement (“Joint-Operation Agreement”) which was conditionally
entered on February 1, 2007 between Shanghai TCH and Xi’an Yingfeng Science and
Technology Co., Ltd.(“Yingfeng”). Yingfeng is a Chinese company that is located
in Xi’an, Shaanxi Province, China, which is engaged in the business of
designing, selling, installing, and operating TRT systems and other renewable
energy products.




Under the
Joint-Operation Agreement, Shanghai TCH and Yingfeng jointly pursued a top gas
recovery turbine project (“Project”) to design, construct, install and operate a
TRT system in Xingtai Iron and Steel Company, Ltd. (“Xingtai”). This project was
originally initiated by a Contract to Design and Construct TRT System (“Project
Contract”) entered by Yingfeng and Xingtai on September 26, 2006. Due to
Yingfeng’s lack of capital in pursuing this Project alone, Yingfeng sought
Shanghai TCH’s cooperation. After intensive and substantial inquiry and
assessment, Shanghai TCH agreed to pursue this project with Yingfeng as a joint
venture. Under the terms of the Joint-Operation Agreement, Shanghai TCH provided
various forms of investments and properties into the Project including cash,
hardware, software, equipments, major components and devices. In return,
Shanghai TCH obtained all the rights, titles, benefits and interests that
Yingfeng originally had under the Project Contract, including but not limited to
the cash payment made by Xingtai on regular basis and other property rights and
interests.




On
October 31, 2007, Shanghai TCH entered an asset-transfer agreement with Yingfeng
on to transfer from Yingfeng to Shanghai TCH all electricity-generating related
assets owned by Yingfeng. As the result, the contractual relationships between
Shanghai TCH and Yingfeng under the TRT Project Joint-Operation Agreement
entered on April 8, 2007 were terminated.




Our
current business is primarily conducted through our wholly-owned subsidiary,
Sifang Holdings and its wholly-owned subsidiaries, Shanghai TCH and Shanghai
TCH’s wholly-subsidiaries, Xi’an TCH Energy Technology Company, Ltd (“Xi’an
TCH”) and Xingtai Huaxin Energy Tech Co., Ltd. (“Huaxin”).  Shanghai
TCH was established as a foreign investment enterprise in Shanghai under the
laws of the PRC on May 25, 2004, with registered capital of $7.2 million. Xi’an
TCH was established as a foreign investment enterprise in Xi’an, Shannxi
Province under the laws of the PRC on December 14, 2007. Huaxin was incorporated
in Xingtai, PRC in November, 2007.




Market




A.
            Description of the TRT
      (Blast Furnace Top-Gas Recovery Turbine Unit)
  Market




Energy is
a major strategic issue affecting the development of the Chinese economy. The
Chinese government has committed to adjusting the economic structure and
changing the mode of economic growth in order to encourage the use of more
advanced and more environment-friendly technologies. Also, the Chinese
government has been promoting the development of a recycling economy and the
circulated use of resources by encouraging enterprises to engage in the
energy-recycling industry. Various government issued documents indicate the
government’s plan to promote the use of energy saving and recycling equipment
and systems.




The 2007
Report of China’s Iron & Steel Associationpredicted that 200 TRT
systems or plants will be installed in China from 2008 to 2010. The total amount
of investment is expected to reach RMB5billion (averaging RMB2.5million each year), with an
electricity-generation up to 11.2 billion KWH per year.




TRT
projects are one of our core businesses and we have an excellent team
specialized in development, installation, production and operation of TRT
systems and equipment. Also, we have rich marketing experience in this field and
have become a leader in TRT market.




We
invested and built 3 TRT projects in 2007 (one for Shanxi Changzhi Steel Group,
and two for Hebei Xingtai Steel Group). In addition, we have one project
scheduled to be built in 2009 for Zhonggang Binhai.


3




B.
            Description of CHPG
      (Cement Low Temperature Heat Power Generation)
    Market




Cement
waste heat power generation, or CHPG, is power generation by recovering cement
residual heat without additional fuel, to be built on NSP (New Suspension
Pre-heater Dry Process) cement clinker production lines.




1.
            State
      of the market:




The cement industry experienced
substantial growth in China in 2008 according to a February 2009 article of
China’s Securities
News. China’s total investment in the cement industry reached RMB 105
billion ($15 billion), a 60% increase from 2007.  Of the RMB 105
billion ($15 billion) investment, 65 percent was spent on building up NSP cement
clinker production lines, a 10% increase from 2007. It is estimated that the
percentage of NSP production lines of the total will rise to 70% by the end of
2009. There are three main reasons for such strong demand of CHPG
systems.




First,
during the period of the Chinese government’s 10th Five-Year Plan, the output of
NSP production lines reached 40% of the total cement output. The 11th
Five-Year plan has continued to promote the NSP production line as a primary
goal for the cement industry. This government promotion provides a good
foundation for CHPG.




Second,
with the development of China’s national economy, demand on electricity and coal
has been increasing, and the price for such materials has been rising. This
exerts a negative effect on cement enterprises. As the price of power and coal
reached the majority of the production cost and substantially exceeded the cost
of raw materials, companies are motivated to utilize CHPG in order to reduce
production cost.




Third, at
the end of the 10th Five-Year Plan and the start of the 11th Five-Year Plan, the
Chinese government called for an energy saving campaign and issued aMedium and Long-Term Plan on
Special Energy-Savingwhich indicated that CHPG should be widely used,
and specified that 30 CHPG systems be established annually on cement producing
lines with an output of 2000 tons daily. The 11th Five-Year Plan provides policy
support for development of CHPG.




2.
            Market
      prospects




The rapid development of CHPG creates a
good opportunity for the development, marketing and sales of cement residual
heat boilers. In 2006, eight Chinese state ministries jointly issued Views on Adjustment of Structure of
Cement Industry that pointed out that by the year 2010, the percentage of
the NSP production lines equipped with CHPG should reach 40% and the total
output of cement will reach between 1.4 billion-1.5 billion tons up from 1.24
billion tons in 2006. According to regulations on Chinese saving-energy
industry, in the future, the NSP production will gradually replace shaft kiln
cement.  The 2007 Report of China’s Cement Associationestimated that there
will be a demand for 400 CHPG systems by 2010.




We started to invest and build two CHPG
systems (Shengwei) during 2008, one was completed at the end of the year and the
other is under construction to be in place in 2009.  In addition, we
have contracted to build an additional CHPG project (Shengwei) in
2009.




C.
            Suppliers




1.           Shanghai
TCH believes it maintains good relationships with TRT and CHPG equipment
suppliers, and these relationships help provide cost-effective equipment
purchasing for its intended projects and ensure the timely completion of these
projects.




2.           The
Company has established business relationships with its suppliers, including
Hangzhou Boiler Plant, Beijing Zhongdian Electric Machinery, Chengdu Engine
Group and Shanghai Electric Group. Therefore, we believe that we now have
strong support in equipment supply and installation, and in research and
development of technologies.


4




D.
            Main
      Customers




Our
customers are mainly large-size domestic enterprises involving high
energy-consuming businesses producing iron, steel or cement. As stated below,
due to the continued expansion of the Chinese markets and administrative support
for energy-recycling by the Chinese government, our market to provide TRT
projects and CHPG continues to expand.




E.
            Demand for Recycled
      Energy




The
following table is the funds invested, or expected to be invested, in
environmental protection industry by the Chinese government (in billion
RMB).








Eighth
      Five-
                    Year Plan
                    (1991-1995)
                
                
                Ninth
Five-
                    Year Plan
                    (1996-2000)
                
                
                Tenth
Five-
                    Year Plan
                    (2001-2005)
                
                
                Eleventh
      Five-
                    Year Plan
                    (2006-2010)Total
      Investment Amount
                  (in
      billion RMB)
                
                
                131
                
                
                
                450
                
                
                
                750
                
                
                1,350
      (proj.)Percentage
      of PRC’s GDP
                
                
                0.73
                %
                
                
                1.3
                %
                
                
                1.5
                %
                
                
                1.5
                %










Source:
11th
Five-Year Plan of the China National Environmental Protection
Plans.




Currently,
recycled energy accounts for less than 1% of China’s total energy consumption.
As a result, due to environmental protection pressure and improvement of
infrastructure in western China, recycled energy, as a special and stable energy
resource, can be expected to grow in China.




F.
            Intellectual Property
      Rights




The
company has applied for a service mark “TCH” in China, which will be used in all
of our business operations.




G.
            Research and
      Development




In 2008
and 2007, we invested about $120,000 and $100,000, respectively, in
research and development.




H.
            Government and
      Environmental Management
System




We own
all licenses that the Chinese governments require for all aspect of our
operations.




I.
            Competition




The
Company faces limited domestic competition. Currently, most TRT and CHPG
systems are purchased, constructed and operated by the steel and cement
companies, themselves, rather than outsourced to a third-party.  Our
main competitors as third-party providers are state owned research institutes or
their wholly owned construction companies. The reasons for low competition
are high entry barriers in technology, experience, investment capital, and
credibility, as well customer relationships. We believe that we offer advantages
over our competitors in several ways:




1.           Our
management team has over 20 years of industry experience and
expertise;




2.           We
have the capabilities to provide TRT and CHPG systems, while our competitors
usually concentrate on one type or another;


5




3.           We
have the capabilities and experience in undertaking large scale projects;
and




4.           We
provide BOT or capital lease services to the customers, while our
competitors usually use an EPC (engineering, procurement and construction) or
turnkey contract model.




J.
              Employees




As of
March 1, 2009, we have 182 employees:




Management:
                10   EmployeesAdministration:
                9     EmployeesMarketing:
                25   EmployeesResearch
      & Development:
                28   EmployeesAccounting
      & Finance:
                10   EmployeesProject
      Officer:
                100
      Employees, including 64
operators




All of
our personnel are employed full-time and none of them are represented under
collective bargaining agreements. We consider our relations with our employees
to be good.




K.
              Costs and effects of
      compliance with environmental
laws




There
were many new laws, regulations, rules and notices regarding the environment and
energy production adopted, promulgated and put into force during 2008.  The
Chinese government is putting more stringent requirements and urgency on
reducing pollution and emissions and improving energy efficiency nationwide. Our
products are designed and constructed to comply with the environmental laws and
regulations of China.  As our systems allow our customers to use waste
heat and gases to create energy, we help reduce the overall environmental impact
of our customers.  Since our business focuses on recycling energy, the
effect of the strengthening of environmental laws in China may be to increase
demand for the products and services we offer and others like them.




ITEM
1A. RISK FACTORS




Risks
Related to our Common Stock




The
market price for our common stock may be volatile.




The
market price for our common stock is highly volatile and subject to wide
fluctuations in response to factors including the following:




·
            actual
      or anticipated fluctuations in our quarterly operating
      results,


·
            announcements
      of new services by us or our
competitors,


·
            changes
      in financial estimates by securities
analysts,


·
            conditions
      in the energy recycling and saving services
  market,


·
            changes
      in the economic performance or market valuations of other companies
      involved in the same industry,


·
            announcements
      by our competitors of significant acquisitions, strategic partnerships,
      joint ventures or capital
commitments,


·
            additions
      or departures of key personnel,


6




·
            potential
      litigation, or


·
            conditions
      in the market.




In
addition, the securities markets from time to time experience significant price
and volume fluctuations that are not related to the operating performance of
particular companies.  These market fluctuations may also materially and
adversely affect the market price of our common stock.




Shareholders
could experience substantial dilution.




We may
issue additional shares of our capital stock to raise additional cash for
working capital. If we issue additional shares of our capital stock, our
shareholders will experience dilution in their respective percentage ownership
in the company.




We
have no present intention to pay dividends.




We have
not paid dividends or made other cash distributions on our common stock during
any 2006, 2007 and 2008, and we do not expect to declare or pay any dividends in
the foreseeable future. We intend to retain any future earnings for working
capital and to finance current operations and expansion of our
business.




A
large portion of our common stock is controlled by a small number of
shareholders.




A large
portion of our common stock is held by a small number of shareholders. As a
result, these shareholders are able to influence the outcome of shareholder
votes on various matters, including the election of directors and extraordinary
 corporate transactions including business combinations.  In addition,
the occurrence of sales of a large number of shares of our common stock, or the
perception that these sales could occur, may affect our stock price and could
impair our ability to obtain capital through an offering of equity securities.
Furthermore, the current ratios of ownership of our common stock reduce the
public float and liquidity of our common stock which can in turn affect the
market price of our common stock.




We
may be subject to “penny stock” regulations.




The
Securities and Exchange Commission, or SEC, has adopted rules that regulate
broker-dealer practices in connection with transactions in “penny stocks.” Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
SEC, which specifies information about penny stocks and the nature and
significance of risks of the penny stock market. A broker-dealer must also
provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer, and our sales person in the transaction, and
monthly account statements indicating the market value of each penny stock held
in the customer’s account. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from those rules,
the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for stock that becomes
subject to those penny stock rules. These additional sales practice and
disclosure requirements could impede the sale of our securities. Whenever any of
our securities become subject to the penny stock rules, holders of those
securities may have difficulty in selling those securities.




Risks
Related to Our Business Operations




We
depend on the waste energy of our customers to generate
electricity.




We
acquire waste heat and gases from steelworks or cement plants and use these to
generate power. Therefore, our power generating capacity depends on the
availability of an adequate supply of our “raw materials” from our customers. If
we do not have enough supply, power generated for those customers will be
impeded. Since our contracts are often structured so that we receive
compensation based on the amount of energy we supply, a reduction in production
may cause problems for our revenues and results of operations.


7




The
global financial crisis intensified in 2008 and will adversely affect our
revenues.




Although
the Chinese government has indicated it will focus on keeping its economy on
track, it is difficult to insulate any economy from the global financial crisis
and economic downturn that intensified worldwide during 2008. After five years
of growth in excess of 10 percent, the Chinese economy is beginning to weaken.
Growth in exports and investment is slowing, consumer confidence is waning and
stock and property markets are severely depressed. At a time when major
infrastructure projects are being put off around the world, there are obvious
slowdowns in China’s major industries, like iron and steel, construction and
energy.  Our customers in such industries may face more challenges and
hardships than before and tend to take more conservative positions in their
business and investment, including the purchase of TRT or CHPG
systems.




Our
insurance may not cover all liabilities and damages.




Our
industry can be dangerous and hazardous. The insurance we carry might not be
enough to cover all the liabilities and damages that may be caused by potential
accidents.




A
downturn in the Chinese economy may slow down our growth and
profitability.




The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business. Our profitability, will decrease if less energy is consumed due to a
downturn in the Chinese economy.




Our
heavy reliance on the experience and expertise of our management may cause
adverse impacts on us if management member departs.




We depend
on key personnel for the success of our business. Our business may be severely
disrupted if we lose the services of our key executives and employees or fail to
add new senior and middle managers to our management.




Our
future success is heavily dependent upon the continued service of our key
executives. We also rely on a number of key technology staff for the operation
of our company. Our future success is also dependent upon our ability to attract
and retain qualified senior and middle managers to our management team. If one
or more of our current or future key executives or employees are unable or
unwilling to continue in their present positions, we may not be able to easily
replace them, and our business may be severely disrupted. In addition, if any of
these key executives or employees joins a competitor or forms a competing
company, we could lose customers and suppliers and incur additional expenses to
recruit and train personnel. We do not maintain key-man life insurance for any
of our key executives.




We
may need more capital for the operation and failure to raise the capital we need
may delay the development plan and reduce the profits.




If we
don’t have adequate income or our capital can’t meet the requirement for
expansion of operations, we will need to seek financing to continue our business
development. If we fail to acquire adequate financial resources at acceptable
terms, we might have to postpone our proposed business development plans and
reduce projections of our future incomes.




Risks
Related to the People’s Republic of China




China’s
economic policy may affect our business.




All of
our assets are in China, and all of our revenue comes from business in China.
Therefore, our business and prospects are tied to China’s economic, political
and legal development.


8




China’s
economy has quickly developed over the past 20 years. The Chinese government has
taken many measures to balance the economic development and the allocation of
resources. Some measures may have adverse effect on our industry. For example,
government’s excessive investment control and changes in tax law may have
adverse impacts on us.




China’s
economy had been changed from planned economy into market economy. In recent
years, the government has taken many measures to strengthen market forces to
reduce state-owned assets and set up joint ventures. However, a great portion of
Chinese assets, still remains controlled by the government. In addition, the
government plays a great role in industrial development. The great level of
interference of government in the business and industrial development might have
an adverse impact on us because we are not part of the state-owned business, and
our relationship with the governmental authorities might not be as strong as
those state-owned enterprises.




China’s
regulation of foreign currency exchange and cash out-flow may prevent us from
remitting profits and dividends to the United States.




China has
adopted complicated rules that govern foreign currency exchange and cash
out-flow. Although we believe we meet the requirements of those rules, we may
not be able to remit all of our profits to the United States and distribute
dividends to our shareholders if those rules are substantially changed to
restrict the cash out-flow.  Foreign currency exchange rate changes
might also have negative impact on our financial performance.




We
may face the hindrance of China’s bureaucratic system.




Foreign
companies face the political, economic and legal risks when developing business
in China. China’s bureaucratic system might hinder investment from foreign
countries.




The
legal system in China has some uncertainties, which may affect the
implementation of laws.




The legal
system in China is a system of civil laws, based on provisions and written
codes, therefore precedents and cases are not binding on the future decisions of
the courts. Only after 1979 did the Chinese government begin to promulgate a
comprehensive system of laws that regulate economic affairs in general and
encourage foreign investment in China.  Although the influence of the
law has been increasing, in certain rural areas the legal system and its
enforcement are not well implemented.  In addition, there have been
constant changes and amendments of laws and regulations over the past 30 years
in order to keep up with the rapidly changing society and economy in China.
Because government agencies and courts provide interpretations of laws and
regulations and decide contractual disputes and issues, their inexperience on
new business and new polices or regulations in certain less developed areas
causes uncertainty and may affect our business.   In some
provincial areas, the government agencies and the courts are protectionist and
may not fully enforce contractual rights against local parties.  In
certain areas, the intellectual property and trade secret protections are not as
effective as those in the other areas in China or in the U.S. in
general.  Consequently, we cannot clearly foresee the future direction
of Chinese legislative activities on foreign invested business and effectiveness
on enforcement of laws and regulations in the less developed areas in China. The
uncertainties, including new laws and regulations and changes of existing laws,
as well judicial interpretation by inexperienced officials in the agencies and
courts in certain areas, may cause possible problems to foreign
investors.




Where
You Can Find More Information




We file
annual, quarterly and special reports, proxy statements and other information
with the SEC. Our SEC filings are available to the public over the Internet at
the SEC’s web site at http://www.sec.gov. You may also read and copy any
document we file at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, DC 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.




9




ITEM
2. DESCRIPTION OF PROPERTY


We
currently lease two office spaces, one in Xi’an and one in Shanghai. Our leased
office space in Xi’an is located at Room B-909, Chang’an Metropolis Center, No.
88, Nanguanzheng Street, Xi’an, PRC and we currently pay monthly rent of $2,940.
Our leased office space in Shanghai is located at Room 3163, Floor 31, Jinmao
Plaza, No.88 Century Avenue, Pudong New District, Shanghai, PRC, and we are
currently pay monthly rent of $2,966.




ITEM
3. LEGAL PROCEEDINGS




The
Company is not a party to any legal proceedings that it believes will have a
material adverse effect upon the conduct of its business or its financial
position.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




There
were no matters submitted to the Company’s stockholders during the fourth
quarter of fiscal 2008.




PART
II




ITEM
5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.




Our
common stock is traded on the NASD’s Over-the-Counter Bulletin Board under the
symbol “CREG.” (“CHDW” prior to March 8, 2007). On August 6, 2004 we changed our
name from Boulder Acquisitions, Inc. to China Digital Wireless, Inc. and changed
our symbol from “BAQI” to “CHDW.” On March 8, 2007, we changed our name from
China Digital Wireless, Inc. to China Recycling Energy Corporation, and changed
our symbol from “CHDW” to “CREG”.  On March 11, 2009, the last
reported sales price for our common stock was $0.51 per share. As of March
1, 2009, there were 36,425,094 shares of our common stock outstanding held by
approximately 3,142 shareholders of record.




The table
below provides information with respect to the Company’s quarterly stock prices
during 2008 and 2007:




2008
                          
                          
                          20074Q
                          
                          
                          3Q
                          
                          
                          2Q
                          
                          
                          1Q
                          
                          
                          4Q
                          
                          
                          3Q
                          
                          
                          2Q
                          
                          
                          1QHigh
                          
                          $
                          1.09
                          
                          
                          $
                          1.34
                          
                          
                          $
                          1.88
                          
                          
                          $
                          2.72
                          
                          
                          $
                          3.02
                          
                          
                          $
                          1.01
                          
                          
                          $
                          0.399
                          
                          
                          $
                          0.449Low
                          
                          
                          0.27
                          
                          
                          
                          0.80
                          
                          
                          
                          1.05
                          
                          
                          
                          1.25
                          
                          
                          
                          0.69
                          
                          
                          
                          0.22
                          
                          
                          
                          0.18
                          
                          
                          
                          0.19Close
                          
                          
                          0.51
                          
                          
                          
                          1.10
                          
                          
                          
                          1.24
                          
                          
                          
                          1.45
                          
                          
                          
                          2.15
                          
                          
                          
                          0.66
                          
                          
                          
                          0.25
                          
                          
                          
                          0.20





We did
not pay any cash dividends on our common stock in 2007 or 2008. We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to finance
operations and the expansion of our business.




On
January 24, 2007, a group of individual purchasers entered a share purchase
agreement with a group of shareholders of China Digital Wireless, Inc.
(“Company”) to purchase 12,911,835 shares of Company’s common stocks owned by
Sellers, $ 0.001 par value, for an aggregate purchase price of $ 490,000.
Purchasers were Guohua Ku, Hanqiao Zheng, Ping Sun, Qianping Huang, Xiaohong
Zhang and Lixia Zhang. Sellers are Caihua Tai, Ming Mao, Ying Shi, Sixing Fu,
Xiaodong Zhang, Tianqi Huang, Wei Huang, Jing Song, Ruijie Yu, and Weiping Jing,
all of whom are shareholders of Company. In accordance with the share purchase
agreement, Guohua Ku acquired 9,073,700 shares. Hanqiao Zheng acquired 2,406,365
shares. Ping Sun acquired 745,880 shares. Qianping Huang acquired 157,755
shares. Xiaohong Zhang acquired 72,018 shares. Lixia Zhang acquired 456,117
shares. This sale was a sale of restricted shares between the shareholders of
the Company and the individual purchasers under Rule 144A of the Securities Act
of 1933. Therefore, the Company did not issue any new shares to purchasers and
this sale did not change the total number of issued and outstanding shares of
the Company. The proceeds of the sale were directly paid by the purchasers to
the sellers and Company neither was entitled to nor received the proceeds of the
sale.


10




On June
21, 2007, two of Company’s major shareholders, Guohua Ku and Hanqiao Zheng
executed and consummated a share exchange agreement with a group of individual
purchasers all of whom are shareholders of Xi’an Yingfeng Science and Technology
Co. Ltd (“Yingfeng”). Guohua Ku and Hanqiao Zheng sold 289,427 and 2,406,365
shares of CREG’s common stocks (“CREG shares”) they owned, respectively, to the
purchasers for a total of 8,087,376 shares of Yingfeng’s common stocks
(“Yingfeng Shares”), at the exchange rate of one CREG share for three Yingfeng
shares. The share exchange agreement was initially negotiated and signed by
Guohua Ku, Hanqiao Zheng and the representative of the purchasers on February
22, 2007. On June 21, 2007, the agreement was executed and consummated when all
Purchasers and Sellers received the physical stock certificates of CREG shares
and Yingfeng Shares delivered by the other party, pursuant to the Execution and
Closing Clause of the share exchange agreement. As the result of this share
exchange transaction, the purchasers, who were 472 individual shareholders of
Yingfeng, acquired in total 2,695,792 shares of CREG’s common stocks. None of
the purchasers acquired more than 1% of the total issued and outstanding common
stocks of CREG in this transaction. Guohua Ku and Hanqiao Zheng own 8,784,273
and 0 shares of CREG’s common stocks, respectively, upon the consummation of
this transaction. None of the purchasers in this share exchange transaction is a
U.S. Person, as such term is defined in Rule 902(k) of Regulation S, or located
within the U.S. This transaction is between non-U.S. Persons and takes place
outside of the U.S. Therefore, this transaction is exempt from registration
under the Securities Act of 1933 in reliance upon the exemption from
registration pursuant to Regulation S of the rules and regulations promulgated
by the SEC under the Securities Act of 1933.




On August
22, 2007, Guohua Ku executed and consummated a share exchange agreement with
another group of individual shareholders of Yingfeng. Under the terms of this
Agreement, Guohua Ku sold 623,410 shares of CREG’s common stocks he owned to the
Purchasers for a total of 1,870,230 shares of Yingfeng’s common stocks, at the
exchange rate of one CREG share for three Yingfeng shares. As the result of this
share exchange transaction, this group of Yingfeng Shareholders acquired in
total 623,410 shares of CREG’s common stock. None of them acquired more than 1%
of the total issued and outstanding common stock of CREG in this transaction.
Guohua Ku, owns 8,160,863 shares of CREG’s common stock after the consummation
of this transaction.




On August
23, 2007, Guohua Ku executed and consummated a share purchase agreement with
Hanqiao Zheng to sell 8,160,863 shares of CREG’s common stock he owned to
Hanqiao Zheng for a total price of US $2,040,215. As the result of this share
purchase transaction, Hanqiao Zheng acquired in total 8,160,863 shares of CREG’s
common stock. Guohua Ku, owns 0 shares of CREG’s common stock after the
consummation of this transaction.




On
November 14, 2007, the Company entered into an Assets Transfer and Share
Issuance Agreement (the “Agreement A”) with Hanqiao Zheng Hanqiao, the President
and major shareholder of the Company and TCH. Under the Agreement A, Hanqiao
Zheng sold and transferred two TRT systems equipments (the “Assets”) amounting
to $9,677,420 (equivalent to RMB 72,000,000) to the Company in exchange for
7,867,821 shares of common stock of the Company at a 23-days weighted average
market price of $1.23 per share. Under the same Agreement A, the Company
subsequently sold and transferred to TCH the aforementioned Assets for a total
price of $9,677,420 (equivalent to RMB 72,000,000). Currently, the management of
TCH has no intention to engage the Assets to any new direct financing
projects.




Also on
November 14, 2007, the Company entered into a Share Purchase Agreement (the
“Agreement B”) with Hanqiao Zheng for a cash investment of $4,032,258 in
exchange for 3,278,259 shares of common stock of the Company issued at a 23-days
weighted average market price of $1.23 per share.




On
November 16, 2007, the Company entered into a Stock and Notes Purchase Agreement
(“Purchase Agreement”) with Carlyle Asia Growth Partners III, L.P. (“CAGP”) and
CAGP III Co. Investment, L.P. (together with CAGP, the “Investors”). Under the
terms of the Purchase Agreement, the Company sold to the Investors a 10% Secured
Convertible Promissory Note in the principal amount of $5,000,000 (the “First
Note”). Additionally, the Purchase Agreement provides for two subsequent
transactions to be effected by the Company and the Investors, which include (i)
the issuance by the Company and subscription by the Investors of a total of
4,066,706 shares of common stock of Company, at the price of $1.23 per share for
an aggregate purchase price of approximately $5,000,000, and (ii) the issuance
and sale by the Company to the Investors of a 5% Secured Convertible Promissory
Note in the principal amount of $15,000,000 (the foregoing transactions,
together with sale and purchase of the First Note, are hereinafter referred to
as the “Offering”). The subsequent transactions are contingent upon the
satisfaction of certain conditions specified in the Purchase Agreement,
including entry into specified energy and recycling project contracts and the
purchase of certain energy recycling systems.


11





The First
Note bore interest at 10% per annum and matured on November 16, 2009. The
principal face amount of the First Note, together with any interest thereon was
convertible at the option of the holders at any time on or prior to maturity,
into shares of the Company’s common stock at an initial conversion price of
$1.23 per share (subject to anti-dilution adjustments). The First Note was
subject to mandatory conversion upon the consummation of the aforementioned
issuance and subscription of shares of the Company’s common stock under the
Purchase Agreement. As more fully described in the First Note, the obligations
of the Company under the First Note ranked senior to all other debt of the
Company.




As
collateral for the First Note, the President and a major shareholder of the
Company pledged 9,653,471 shares of the Company’s common stock held by him to
secure the First Note.




The First
Note was considered to have an embedded beneficial conversion feature (“BCF”)
because the conversion price was less than the quoted market price at the time
of the issuance. Accordingly, the BCF of $5,000,000 was recorded separately as
unamortized beneficial conversion feature based on the intrinsic value method.
The First Note was recorded in the balance sheet at face value less the
unamortized BCF. The terms for the First Note were amended on April 29, 2008 and
the First Note was repaid in full on June 25, 2008, as described
below.




On April
29, 2008, the Company entered into an Amendment to the Purchase Agreement with
the Investors (the “Amendment”). Under the terms of the Amendment, (i) the
Company issued and the Investors subscribed for 4,066,706 shares of common stock
of the Company, at $1.23 per share for an aggregate purchase price of
$5,002,048, as originally contemplated under the Agreement; (ii) the Investors
converted the principal amount under the First Note (and waived any accrued
interest thereon) into 4,065,040 shares of common stock of the Company at the
conversion price per share of $1.23, pursuant to the terms and conditions of the
First Note issued under the Agreement; (iii) the Company issued and sold to the
Investors a new 5% Secured Convertible Promissory Note in the principal amount
of $5,000,000 to the Investors (the “Second Note” and collectively with the
First Note, the “Notes”); and (iv) the Company granted to the Investors an
option to purchase a 5% Secured Convertible Promissory Note in the principal
amount of $10,000,000, exercisable by the Investors at any time within nine (9)
months following the date of the closing of the transactions contemplated by the
Amendment (the “Option Note”).




The
Second Note bears interest at 5% per annum and matures on April 29, 2011. The
principal face amount of the Second Note, together with any interest thereon, is
convertible at the option of the holders at any time on or after March 30, 2010
(or such earlier date if the audited consolidated financial statements of the
Company for the fiscal year ending December 31, 2009 are available prior to
March 30, 2010) and prior to maturity, into shares of the Company's common stock
at an initial conversion price that is tied to the after-tax net profits of the
Company for the fiscal year ending December 31, 2009, as described in the Second
Note. The Second Note is subject to mandatory conversion upon the listing of the
Company's common stock on the National Association of Securities Dealers
Automated Quotations main-board, the New York Stock Exchange or the American
Stock Exchange. As more fully described in the Second Note, the obligations of
the Company under the Second Note shall rank senior to all other debt of the
Company.





The
Second Note and the Option Note are both secured by a security interest granted
to the Investors pursuant to the Share Pledge Agreement.




The
Second Note was not considered to have an embedded BCF because the conversion
price and convertible shares are contingent upon future net
profits.




On June
25, 2008, the Company and the Investors entered into a Rescission and
Subscription Agreement (the “Rescission”) to rescind the conversion of the First
Note and the issuance of conversion shares of Common Stock at the Second Closing
pursuant to the Amendment. The Company and the Investors rescinded the
conversion of the principal amount ($5,000,000) under the First Note into
4,065,040 shares of Common Stock, and the Investors waived accrued interest on
the First Note. Accordingly, the interest expense which had accrued on the note
has been recorded as a decrease in interest expense for the period. At the
Rescission closing, the Company repaid in full the First Note and issued to the
Investors 4,065,040 shares of Common Stock at the price of $1.23 per share for
an aggregate purchase price of $5,000,000.  This was done through a
cross receipt arrangement; the amortized portion of BCF was reversed to
additional paid in stock.  The Company has now concluded that in
substance the transaction resulted in the conversion of the first $5,000,000
note into common stock and that the remaining BCF of $3,472,603 at the date of
conversion should have been expensed.


12




On
November 13, 2007, the Company approved the 2007 Non-statutory Stock Option Plan
(the “2007 Plan”). Pursuant to the 2007 Plan, the Company may issue stock, or
grant options to acquire the Company’s common stock at par value $0.001 (the
“Stock”), with an aggregate amount of 3,000,000 shares of the Stock, from time
to time to employees and directors of the Company or other individuals,
including consultants or advisors, all on the terms and conditions set forth in
the 2007 Plan. The exercise price of the options are the closing price per share
of the Company’s common stock on the grant date. On August 4, 2008, the Company
approved the forms of Nonstatutory Stock Option Agreement – Manager Employee and
Nonstatutory Stock Option Agreement – Non-Manager Employee for grants under the
2007 Plan.  The vesting terms of option grants under the 2007 Plan are
subject to the agreements for managerial and non-managerial employees. For
managerial employees, no more than 15% of the total stock options shall vest and
become exercisable on the six month anniversary of the grant date. An additional
15% and 50% of the total stock options shall vest and become exercisable on the
first and second year anniversary of the grant date, respectively. The remaining
20% of the total stock options shall vest and become exercisable on the third
year anniversary of the grant date. For non-managerial employees, no more than
30% of the total stock options shall vest and become exercisable on the first
year anniversary of the grant date. An additional 50% of the total stock options
shall vest and become exercisable on the second year anniversary of the grant
date. The remaining 20% of the total stock options shall vest and become
exercisable on the third year anniversary of the grant date. Each stock option
shall become vested and exercisable over a period of no longer than five years
from the grant date.   Accelerated vesting of options may also
occur upon a change in control or termination of employment due to death or
disability.




Information about our equity
compensation plans at December 31, 2008 that were either approved or not
approved by our shareholders was as follows:





Plan Category
                              
                              Number
      of securities
                                to
      be issued upon
                                exercise
      of
                                outstanding options
                              
                              
                              Weighted-average
                                exercise
      price of
                                outstanding options
                              
                              
                              Number
      of securities
                                remaining
      available
                                for
      future issuance
                                under
      equity
                                compensation plansEquity
      compensation plans approved by security holders
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Equity
      compensation plans not approved by security holders
                              
                              
                              3,000,000
                              
                              
                              $
                              0.80
                              
                              
                              
                              0Total
                              
                              
                              3,000,000
                              
                              
                              $
                              0.80
                              
                              
                              
                              0




ITEM
6.  SELECTED FINANCIAL DATA.




Not
applicable.




ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.




Note
Regarding Forward-Looking Statements




This
annual report on Form 10-K and other reports filed by the Company from time to
time with the SEC (collectively the “Filings”) contain or may contain
forward-looking statements and information that are based upon beliefs of, and
information currently available to, Company’s management as well as estimates
and assumptions made by Company’s management. Readers are cautioned not to place
undue reliance on these forward-looking statements, which are only predictions
and speak only as of the date hereof. When used in the filings, the words
“anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or
the negative of these terms and similar expressions as they relate to Company or
Company’s management identify forward-looking statements. Such statements
reflect the current view of Company with respect to future events and are
subject to risks, uncertainties, assumptions, and other factors (including the
risks contained in Item 1A. “Risk Factors” and the section “results of
operations” below),  and any businesses that Company may acquire.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended, or
planned.


13





Although
the Company believes that the expectations reflected in the forward-looking
statements are based on reasonable assumptions, the Company cannot guarantee
future results, levels of activity, performance, or achievements. Except as
required by applicable law, including the securities laws of the United States,
the  Company does not intend to update any of the forward-looking
statements to conform these statements to actual results. Readers are urged to
carefully review and consider the various disclosures made throughout the
entirety of this annual report, which attempt to advise interested parties of
the risks and factors that may affect our business, financial condition, results
of operations, and prospects.




Our
financial statements are prepared in US Dollars and in accordance with
accounting principles generally accepted in the United States. See “Foreign
Currency Translation and Comprehensive Income (Loss)” below for information
concerning the exchange rates at which Renminbi (“RMB”) were translated into US
Dollars (“USD”) at various pertinent dates and for pertinent
periods.




OVERVIEW
OF BUSINESS BACKGROUND




China
Recycling Energy Corporation (the “Company” or “CREG”) (formerly China Digital
Wireless, Inc.) was incorporated on May 8, 1980, under the laws of the State of
Colorado. On September 6, 2001, the Company re-domiciled its state of
incorporation from Colorado to Nevada. The Company, through its subsidiary
Shanghai TCH Data Technology Co., Ltd. (“TCH”), is in the business of selling
and leasing energy saving equipment. The businesses of mobile phone distribution
and provision of pager and mobile phone value-added information services were
discontinued in 2007. On March 8, 2007, the Company changed its name to “China
Recycling Energy Corporation”.




On June
23, 2004, the Company entered into a stock exchange agreement with Sifang
Holdings Co. Ltd. (“Sifang Holdings”) and certain shareholders. Pursuant to the
stock exchange agreement, the Company issued 13,782,636 shares of its common
stock in exchange for a 100% equity interest in Sifang Holdings, making Sifang
Holdings a wholly owned subsidiary of the Company. Sifang Holdings was
established under the laws of the Cayman Islands on February 9, 2004 for the
purpose of holding a 100% equity interest in Shanghai TCH Data Technology Co.,
Ltd. (“TCH”). TCH was established as a foreign investment enterprise in Shanghai
under the laws of the People’s Republic of China (the “PRC”) on May 25, 2004.
Beginning January 2007, the Company gradually phased out and substantially
scaled down most of its business of mobile phone distribution and provision of
pager and mobile phone value-added information services. In the first and second
quarters of 2007, the Company did not engage in any substantial transactions or
activity in connection with these businesses. On May 10, 2007, the Company
discontinued the businesses related to mobile phones and pagers. These
businesses are reflected in continuing operations for all periods presented
based on the criteria for discontinued operations prescribed by Statement of
Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets”.




On
February 1, 2007, the Company’s subsidiary, TCH entered into two TRT Project
Joint-Operation Agreements (“Joint-Operation Agreement”) with Xi’an Yingfeng
Science and Technology Co., Ltd. (“Yingfeng”). Yingfeng is a joint stock company
registered in Xi’an, Shaanxi Province, the PRC, and engages in the business of
designing, installing, and operating TRT systems and sales of other renewable
energy products. TRT is an electricity generating system that utilizes the
exhaust pressure and heat produced in the blast furnace of a steel mill to
generate electricity. In October 2007, the Company terminated the
Joint-Operation Agreement with Yingfeng and became fully entitled to the rights,
titles, benefits and interests in the TRT Projects.




On
September 21, 2007, the Company’s subsidiary, TCH changed its name to “Shanghai
TCH Energy Technology Co., Ltd.”


14


In
November 2007, TCH signed a cooperative agreement with Shengwei Group for a
cement waste heat power generator project. TCH will build two sets of 12MW pure
low temp cement waste heat power generator systems for its two 2500 tons
per day cement manufacturing lines in Jin Yang and a 5,000 tons per day
cement manufacturing line in Tong Chuan.   Total investment will
be approximately $12,593,000 (93 million RMB).  At the end of 2008,
the Power Generator Project in Tong Chuan was completed at a total cost of
approximately $6,191,000 (RMB 43,000,000) and put into operation.  The
ownership of the power generator system belongs to Tong Chuan from the date the
system is put into service.  TCH is responsible for the daily
maintenance and repair of the system, and charges Tong Chuan the monthly
electricity fee based on the actual power generated by the system at 0.4116 RMB
per KWH for an operating period of five years with the assurance from Tong Chuan
of proper functioning of 5000t/d cement manufacturing line and not less than
7440 hrs/yr heat providing hours to the electricity generator
system.  Shengwei Group has collateralized the cement manufacturing
line in Tongchuan to guarantee its obligations to provide the minimum
electricity income from the power generator system under the agreement during
the operating period. At the end of the five years operating period, TCH will
have no further obligations under the cooperative agreement.




During
2008, the Company also leased two energy recycling power generation equipment
systems under one-year, non-cancellable leases with the rents paid in full,
which the Company was able to sublease for higher rental income under one-year,
non-cancellable leases.




Starting
in November 2008, the Chinese government announced a series of economic stimulus
plans aimed at bolstering its weakening economy, a sweeping move that could also
help fight the effects of the global slowdown. China will spend an estimated
$586 billion over the next two years – roughly seven percent of its gross
domestic product each year – to construct new railways, subways and airports and
to rebuild communities devastated by an earthquake in the southwest China in May
2008. The economic stimulus package is the largest effort ever undertaken by the
Chinese government. The government said that the stimulus would cover 10 areas,
including low-income housing, electricity, water, rural infrastructure and
projects aiming at environmental protection and technological innovation. The
spending would begin immediately, with $18 billion scheduled for the last
quarter of 2008.




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




Our
management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.




While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements, we believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating
this management discussion and analysis.




Basis
of presentation




These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the SEC for annual
financial statements.




Basis
of consolidation




The
consolidated financial statements include the accounts of CREG and, its
subsidiaries, Sifang Holdings, TCH, and TCH’s subsidiaries Xi’an TCH and Huaxin.
Xi’an TCH and Huaxin engage in the same business as TCH. Substantially all of
the Company's revenues are derived from the operations of TCH and its
subsidiaries, which represent substantially all of the Company’s consolidated
assets and liabilities. All significant inter-company accounts and transactions
have been eliminated in consolidation.





Use of estimates




In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the year reported. Actual
results may differ from these estimates.


15




Accounts
receivable and concentration of credit risk




Accounts
receivable are recorded at the invoiced amounts and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment.




Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its clients' financial condition and customer
payment practices to minimize collection risk on accounts
receivable.




The
operations of the Company are located 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, as well as by the
general state of the PRC economy.




Inventory




Inventory
is valued at the lower of cost or market. Cost of work in progress and finished
goods comprises direct material cost, direct production cost and an allocated
portion of production overheads.




Property
and Equipment




Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method over the estimated lives ranging from 5 to 20 years as
follows:




Building
            20
      yearsVehicle
            2 -
      5 yearsOffice
      and Other Equipment
            2 -
      5 yearsSoftware
            2 -
      3 years





Sales-type
leasing and related revenue recognition




The
Company leases TRT and CHPG systems to its customers. The Company transfers all
benefits, risks and ownership of the TRT and CHPG systems to its customers at
the end of each lease term, except for one system in which the Company
transferred the ownership of the power generated system at the time the system
was put into operation. The Company also leases power generating systems to its
customers.  The Company’s investment in these projects is recorded as
investment in sales-type leases in accordance with SFAS No. 13, “Accounting for
Leases” and its various amendments and interpretations. The Company manufactures
and constructs the TRT and CHPG systems and power generation systems, and
finances its customers for the selling price of the systems.  The
sales and cost of goods sold are recognized at the point of sale. The investment
in sales-type leases consists of the sum of the total minimum lease payments
receivable less unearned interest income and estimated executory costs. Unearned
interest income is amortized to income over the lease term as to produce a
constant periodic rate of return on the net investment in the
lease.




Foreign Currency Translation and
Comprehensive Income (Loss)




The
Company’s functional currency is the Renminbi (“RMB”).  For financial
reporting purposes, RMB has been translated into United States dollars (“USD”)
as the reporting currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Revenues and expenses are translated
at the average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the use of different exchange rates from
period to period are included as a component of stockholders' equity as
“Accumulated other comprehensive income”. Gains and losses resulting from
foreign currency transactions are included in income. There has been no
significant fluctuation in exchange rate for the conversion of RMB to USD after
the balance sheet date.


16




The
Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is
comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders.




NEW
ACCOUNTING PRONOUNCEMENTS




Accounting for Financial
Guarantee Insurance Contracts




In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.”  The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial statements.




The Hierarchy of Generally
Accepted Accounting Principles




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 GAAP.  This Statement will not have an impact
on the Company’s financial statements.




Disclosures about Derivative
Instruments and Hedging Activities




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133 (“SFAS
133”).  This Statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (i) how and why an entity uses derivative instruments, (ii)
how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and (iii) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows.  Based on current conditions, the Company does
not expect the adoption of SFAS 161 to have a significant impact on its results
of operations or financial position.




Noncontrolling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The Company expects SFAS 160 will have an impact on accounting for business
combinations once adopted but the effect is dependent upon acquisitions at that
time.


17





Business
Combinations




In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:





·
              Acquisition costs will be
      generally expensed as incurred;


·
              Noncontrolling interests
      (formerly known as “minority interests” - see SFAS 160 discussion above)
      will be valued at fair value at the acquisition
    date;


·
              Acquired contingent liabilities
      will be recorded at fair value at the acquisition date and subsequently
      measured at either the higher of such amount or the amount determined
      under existing guidance for non-acquired
    contingencies;


·
              In-process research and
      development will be recorded at fair value as an indefinite-lived
      intangible asset at the acquisition date;


·
              Restructuring costs associated
      with a business combination will be generally expensed subsequent to the
      acquisition date; and


·
            Changes in deferred tax asset
      valuation allowances and income tax uncertainties after the acquisition
      date generally will affect income tax
  expense.





SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. We expect SFAS 141R will have an impact on
accounting for business combinations once adopted but the effect is dependent
upon acquisitions at that time.




Accounting for Nonrefundable
Advance Payments for Goods or Services Received for use in Future Research and
Development Activities




In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed.  EITF 07-03 is effective for fiscal years beginning after
December 15, 2008. Management is currently evaluating the effect of this
pronouncement on financial statements.




Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R




In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106, and 132R” (“SFAS 158”), which requires companies to recognize
the underfunded or overfunded status of their defined benefit pension and other
post-retirement plans as an asset or liability and to recognize changes in that
funded status through comprehensive income in the year in which the changes
occur.  As required, we adopted the recognition provision of SFAS No.
158 on December 31, 2006.




SFAS No. 158
also requires companies to measure the funded status of defined benefit pension
and other post-retirement plans as of their year-end reporting date. The
measurement date provisions of SFAS No. 158 were effective for us as
of December 31, 2008. We applied the measurement provisions by measuring
our benefit obligations as of September 30, 2007, our prior measurement
date, and recognizing a pro-rata share of net benefit costs for the transition
period from October 1, 2007 to December 31, 2008 as a cumulative
effect of change in accounting principle in retained earnings as of
December 31, 2008.  The adoption of the measurement date
provisions of SFAS No. 158 did not have a material impact on our
financial position or results of operations for the periods
presented.


18




RESULTS
OF OPERATIONS




Comparison
of Years Ended December 31, 2008 and December 31, 2007




The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:




2008 (Restated)
                      
                      
                      2007Years Ended December 31
                      
                      $
                      
                      
                      % of Sales
                      
                      
                      $
                      
                      
                      % of SalesSales
                      
                      
                      19,217,663
                      
                      
                      
                      100
                      %
                      
                      
                      9,302,347
                      
                      
                      
                      100
                      %Sales
      of products
                      
                      
                      8,048,956
                      
                      
                      
                      42
                      %
                      
                      
                      9,302,347
                      
                      
                      
                      100
                      %Rental
      income
                      
                      
                      11,168,707
                      
                      
                      
                      58
                      %
                      
                      
                      -
                      
                      
                      
                      -Cost
      of sales
                      
                      
                      (14,001,736
                      )
                      
                      
                      73
                      %
                      
                      
                      (7,033,400
                      )
                      
                      
                      76
                      %Cost
      of products
                      
                      
                      (6,191,505
                      )
                      
                      
                      32
                      %
                      
                      
                      (7,033,400
                      )
                      
                      
                      76
                      %Rental
      expense
                      
                      
                      (7,810,231
                      )
                      
                      
                      41
                      %
                      
                      
                      -
                      
                      
                      
                      -Gross
      profit
                      
                      
                      5,215,927
                      
                      
                      
                      27
                      %
                      
                      
                      2,268,947
                      
                      
                      
                      24
                      %Interest
      income on sales-type lease
                      
                      
                      2,285,582
                      
                      
                      
                      12
                      %
                      
                      
                      1,015,712
                      
                      
                      
                      11
                      %Total
      operating income
                      
                      
                      7,501,509
                      
                      
                      
                      39
                      %
                      
                      
                      3,284,659
                      
                      
                      
                      35
                      %Total
      operating expenses
                      
                      
                      (3,354,028
                      )
                      
                      
                      17
                      %
                      
                      
                      (542,434
                      )
                      
                      
                      6
                      %Income
      from operation
                      
                      
                      4,147,481
                      
                      
                      
                      22
                      %
                      
                      
                      2,742,225
                      
                      
                      
                      29.5
                      %Total
      non-operating expenses
                      
                      
                      (4,734,308
                      )
                      
                      
                      (25
                      )%
                      
                      
                      (425,964
                      )
                      
                      
                      (4.6
                      )%Income
      (loss) before income tax
                      
                      
                      (586,827
                      )
                      
                      
                      (3
                      )%
                      
                      
                      2,316,261
                      
                      
                      
                      25
                      %Income
      tax expense
                      
                      
                      (1,632,754
                      )
                      
                      
                      9
                      %
                      
                      
                      (466,647
                      )
                      
                      
                      5
                      %Minority
      interest
                      
                      
                      (83
                      )
                      
                      
                      -
                      
                      
                      
                      -Income
      from operations of discontinued component
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      28,699
                      
                      
                      
                      0.3
                      %Net
      income (loss)
                      
                      
                      (2,219,664
                      )
                      
                      
                      (12
                      )
      %
                      
                      
                      1,878,313
                      
                      
                      
                      20
                      %





SALES. Net sales for 2008
were approximately $19.22 million while our net sales for 2007 were
approximately $9.30 million, an increase in revenues of approximately $9.92
million. The increase was due to the change in our business during 2007. We
discontinued our mobile phone business and commenced selling, manufacturing and
constructing energy saving systems during 2007. We sell our energy saving
systems through sales-type leases. Sales and cost of sales are recorded at the
time of leases; the interest income from the sales-type leases are our major
revenue source in addition to sales revenue. We sold two TRT systems through
sales-type leasing during 2007 with sales recorded for approximately $9.30
million and interest income of approximately $1.02 million, while in 2008, we
sold one CHPG system through sales-type leasing with sales of approximately
$8.05 million in addition to total interest income of approximately $2.29
million from sales-type leases.  We also recorded rental income of
approximately $11.17 million from leasing our two power generating systems in
2008.





COST OF SALES.Cost of sales
for 2008 was approximately $14 million while our cost of sales for 2007 was
approximately $7.03 million, an increase of approximately $6.97 million. The
increase in cost of sales is attributed to changing our business type from a
mobile phone business to manufacturing, selling, constructing and leasing the
energy saving systems in 2007. Our cost of sales consisted of the cost of the
energy saving systems for sales-type leases, and cost of the operating lease as
we leased two power generating systems under one-year, non-cancellable leases
with options to renew at a favorable price during 2008, which we subleased for
higher monthly rental income under one-year, non-cancellable lease.




GROSS PROFIT. Gross profit
was approximately $5.22 million for 2008 as compared to approximately $2.27
million for 2007, representing gross margins of approximately 27% and 24% for
2008 and 2007, respectively. The increase in our gross profit was mainly due to
changes of our business from a mobile phone business to manufacturing, selling,
constructing and leasing energy saving systems. We sold two TRT systems through
sales-type leasing with gross margin of approximately 24% during 2007, while
during 2008, we sold one CHPG system through sales type leasing with gross
profit margin of approximately 74%, and commenced operating lease business for
leasing out two energy recycling power generation equipment systems at a profit
margin of approximately 30%.


19




OPERATING INCOME. Operating
income was approximately $7.50 million for 2008 while our operating income for
2007 was approximately $3.28 million, an increase of approximately $4.22
million. The growth in operating income was mainly due to (i) changing our
business type, (ii) selling and leasing our energy saving systems through
sales-type leasing and (iii) commencing operating lease business in 2008. A new
sales-type lease for power generated system was commenced in 2008 in addition to
our two TRT systems which were sold under sales-type leases in 2007. The
sales-type lease brings us additional interest income. Interest income on
sales-type lease for 2008 was approximately $2.29 million, an approximately
$1.27 million increase from approximately $1.02 million for 2007.




OPERATING EXPENSES.Operating
expenses consisted of selling, general and administrative expenses totaling
approximately $3.35 million for 2008 as compared to approximately $0.54 million
for 2007, an increase of approximately $2.81 million or 518%. This increase was
mainly due to the compensation expense of approximately $1.44 million related to
the fair value of the stock options to employees, and increased payroll,
marketing and traveling expense due to the expansion of our
business.




NET INCOME. Our net loss for
2008 was approximately $2.22 million as compared to approximately $1.88 million
net income for 2007, a decrease of $4.1 million. This decrease in net income was
mainly due to interest expense on our amortized beneficial conversion feature
for the convertible note of approximately $4.68 million and compensation expense
of the fair value of stock options of approximately $1.44 million for 2008. The
convertible note that was issued on November 16, 2007 was repaid on June 25,
2008.  The vested and non-vested employee stock options that were
granted on November 13, 2007, were forfeited and cancelled on June 25,
2008.  We subsequently reissued the same number of stock options on
August 4, 2008; this reissuance was accounted for as a modification of the
original options.




LIQUIDITY
AND CAPITAL RESOURCES




Comparison
of Years Ended December 31, 2008 and December 31, 2007




As of
December 31, 2008, the Company had cash and cash equivalents of $7,267,344. At
December 31, 2008, other current assets were approximately $16.54 million and
current liabilities were approximately $11.69 million, working capital amounted
to $12.12 million at December 31, 2008. The ratio of current assets to current
liabilities was 2.04:1 at the year ended December 31, 2008.




The
following is a summary of cash provided by or used in each of the indicated
types of activities during 2008 and 2007:




2008 (Restated)
                
                
                2007Cash
      provided by (used in):Operating
      Activities
                
                $
                1,958,334
                
                
                $
                4,997,455Investing
      Activities
                
                
                (10,896,198
                )
                
                
                (8,640,969
                )Financing
      Activities
                
                
                13,957,150
                
                
                
                5,068,583




Net cash
flow provided in operating activities was approximately $1.96 million
during 2008, as compared to approximately $5 million provided in same period of
2007. The decrease in net cash provided in operating activities was mainly due
to the prepaid equipment rents of approximately $3.79 million as well as
decrease in our accounts payable.




Net cash
flow used in investing activities was approximately $10.90 million for 2008, as
compared to approximately $8.64 million net cash used in investing activities
for 2007. The increase of net cash flow used in investing activities was mainly
due to the acquisition of equipment of $115,000 and payment for construction in
progress of approximately $3.72 million for constructing a power generating
system. We will use the BOT (build, operate, transfer) model to build and
operate a system and charge the user of this system monthly electricity fees
based on the actual power generated by the systems.




Net cash
flow provided by financing activities was approximately $13.96 million for 2008
as compared to net cash provided by financing activities of $5.07 million for
2007. The increase of net cash flow provided by financing activities was mainly
due to the issuance of common stock to an accredited investor for $5 million,
issuance of a convertible note to the same investor for $5 million, and issuance
of common stock to one of our major shareholders for
$4,032,258.


20




We
believe we have sufficient cash to continue our current business through
December, 2009 due to increased sales, interest revenue and rental income from
operating activity as well as more than $11 million in working capital at the
end of 2008. As of Dec 31, 2008, we have 3 sale-type leases, 2 TRT and 1 CHPG,
and 2 operational leases, currently generating net cash flow. We believe we have
sufficient cash resources to cover our capital expenditures we anticipate in
2009.




We do not
believe that inflation had a significant negative impact on our results of
operations during 2008.




Off-Balance
Sheet Arrangements




We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.




Contractual
Obligations




Convertible Notes
Payable




As
mentioned in Item 5, on November 16, 2007, the Company entered into a Stock and
Notes Purchase Agreement (“Purchase Agreement”) with Carlyle Asia Growth
Partners III, L.P. (“CAGP”) and CAGP III Co. Investment, L.P. (together with
CAGP, the “Investors”). Under the terms of the Purchase Agreement, the Company
sold to the Investors a 10% Secured Convertible Promissory Note in the principal
amount of $5,000,000 (the “First Note”). Additionally, the Purchase Agreement
provides for two subsequent transactions to be effected by the Company and the
Investors, which include (i) the issuance by the Company and subscription by the
Investors of a total of 4,066,706 shares of common stock of Company, at the
price of $1.23 per share for an aggregate purchase price of approximately
$5,000,000, and (ii) the issuance and sale by the Company to the Investors of a
5% Secured Convertible Promissory Note in the principal amount of $15,000,000
(the foregoing transactions, together with sale and purchase of the First Note,
are hereinafter referred to as the “Offering”). The subsequent transactions are
contingent upon the satisfaction of certain conditions specified in the Purchase
Agreement, including entry into specified energy and recycling project contracts
and the purchase of certain energy recycling systems.




The First
Note bore interest at 10% per annum and matured on November 16, 2009. The
principal face amount of the First Note, together with any interest thereon was
convertible at the option of the holders at any time on or prior to maturity,
into shares of the Company’s common stock at an initial conversion price of
$1.23 per share (subject to anti-dilution adjustments). The First Note was
subject to mandatory conversion upon the consummation of the aforementioned
issuance and subscription of shares of the Company’s common stock under the
Purchase Agreement. As more fully described in the First Note, the obligations
of the Company under the First Note ranked senior to all other debt of the
Company.




As
collateral for the First Note, the President and a major shareholder of the
Company pledged 9,653,471 shares of the Company’s common stock held by him to
secure the First Note.




The First
Note was considered to have an embedded beneficial conversion feature (“BCF”)
because the conversion price was less than the quoted market price at the time
of the issuance. Accordingly, the BCF of $5,000,000 was recorded separately as
unamortized beneficial conversion feature based on the intrinsic value method.
The First Note was recorded in the balance sheet at face value less the
unamortized BCF. The terms for the First Note were amended on April 29, 2008 and
the First Note was repaid in full on June 25, 2008, as described
below.


21





On April
29, 2008, the Company entered into an Amendment to the Purchase Agreement with
the Investors (the “Amendment”). Under the terms of the Amendment, (i) the
Company issued and the Investors subscribed for 4,066,706 shares of common stock
of the Company, at $1.23 per share for an aggregate purchase price of
$5,002,048, as originally contemplated under the Agreement; (ii) the Investors
converted the principal amount under the First Note (and waived any accrued
interest thereon) into 4,065,040 shares of common stock of the Company at the
conversion price per share of $1.23, pursuant to the terms and conditions of the
First Note issued under the Agreement; (iii) the Company issued and sold to the
Investors a new 5% Secured Convertible Promissory Note in the principal amount
of $5,000,000 to the Investors (the “Second Note” and collectively with the
First Note, the “Notes”); and (iv) the Company granted to the Investors an
option to purchase a 5% Secured Convertible Promissory Note in the principal
amount of $10,000,000, exercisable by the Investors at any time within nine (9)
months following the date of the closing of the transactions contemplated by the
Amendment (the “Option Note”).




The
Second Note bears interest at 5% per annum and matures on April 29, 2011. The
principal face amount of the Second Note, together with any interest thereon, is
convertible at the option of the holders at any time on or after March 30, 2010
(or such earlier date if the audited consolidated financial statements of the
Company for the fiscal year ending December 31, 2009 are available prior to
March 30, 2010) and prior to maturity, into shares of the Company's common stock
at an initial conversion price that is tied to the after-tax net profits of the
Company for the fiscal year ending December 31, 2009, as described in the Second
Note. The Second Note is subject to mandatory conversion upon the listing of the
Company's common stock on the National Association of Securities Dealers
Automated Quotations main-board, the New York Stock Exchange or the American
Stock Exchange. As more fully described in the Second Note, the obligations of
the Company under the Second Note shall rank senior to all other debt of the
Company.





The
Second Note and the Option Note are both secured by a security interest granted
to the Investors pursuant to the Share Pledge Agreement.




The
Second Note was not considered to have an embedded BCF because the conversion
price and convertible shares are contingent upon future net
profits.




On June
25, 2008, the Company and the Investors entered into a Rescission and
Subscription Agreement (the “Rescission”) to rescind the conversion of the First
Note and the issuance of conversion shares of Common Stock at the Second Closing
pursuant to the Amendment. The Company and the Investors rescinded the
conversion of the principal amount ($5,000,000) under the First Note into
4,065,040 shares of Common Stock, and the Investors waived accrued interest on
the First Note. Accordingly, the interest expense which had accrued on the note
has been recorded as a decrease in interest expense for the period. At the
Rescission closing, the Company repaid in full the First Note and issued to the
Investors 4,065,040 shares of Common Stock at the price of $1.23 per share for
an aggregate purchase price of $5,000,000.  This was done through a
cross receipt arrangement; the amortized portion of BCF was reversed to
additional paid in stock.  The Company has now concluded that in
substance the transaction resulted in the conversion of the first $5,000,000
note into common stock and that the remaining BCF of $3,472,603 at the date of
conversion should have been expensed.


22


ITEM
8. FINANCIAL STATEMENTS.




Report
of Independent Registered Public Accounting Firm




Board of
Directors and Shareholders of China Recycling Energy Corporation:




We have
audited the accompanying consolidated balance sheets of China Recycling Energy
Corporation (the “Company” or “CREG”) and subsidiaries as of December 31, 2008
and 2007 and the related consolidated statements of income and other
comprehensive income, shareholders’ equity, and cash flows for the years ended
December 31, 2008 and 2007. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements as restated referred to above
present fairly, in all material respects, the consolidated financial position of
China Recycling Energy Corporation and Subsidiaries as of December 31, 2008 and
2007 and the consolidated results of their operations and their consolidated
cash flows for the years ended December 31, 2008 and 2007, in conformity with
U.S. generally accepted accounting principles.




As
discussed in Note 21 to the consolidated financial statements, certain errors
resulting in the classification of current and deferred income tax liability and
understatement of previously reported expenses for the year ended December 31,
2008 were discovered by the Company's management on August 25, 2009.
Accordingly, the 2008 financial statements have been restated.




Goldman
Park Kurland Mohidin


Encino,
California


March 8,
2009, except for note 21, for which the date is August 25,
2009.


23


CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





AS OF
                  DECEMBER 31, 2008
                
                
                AS OF
                  DECEMBER 31, 2007(RESTATED)ASSETSCURRENT
      ASSETSCash
      & cash equivalents
                
                $
                7,267,344
                
                
                $
                1,634,340Investment
      in sales type leases, net
                
                
                1,970,591
                
                
                
                1,081,981Interest
      receivable on sales type leases
                
                
                82,406
                
                
                
                144,262Prepaid
      expenses
                
                
                3,849,087
                
                
                
                -Advances
      to suppliers
                
                
                -
                
                
                
                2,467,579Other
      receivables
                
                
                102,850
                
                
                
                32,902Inventory
                
                
                10,534,633
                
                
                
                9,870,315Total
      current assets
                
                
                23,806,911
                
                
                
                15,231,379NON-CURRENT
      ASSETSInvestment
      in sales type leases, net
                
                
                14,837,879
                
                
                
                7,933,780Advance
      for equipment
                
                
                2,642,889
                
                
                
                -Property
      and equipment, net
                
                
                95,359
                
                
                
                -Construction
      in progress
                
                
                3,731,016
                
                
                
                -Intangible
      assets, net
                
                
                3,482
                
                
                
                6,169Total
      non-current assets
                
                
                21,310,625
                
                
                
                7,939,949TOTAL
      ASSETS
                
                $
                45,117,536
                
                
                $
                23,171,328LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                1,186,902
                
                
                
                2,298,201Unearned
      revenues
                
                
                658,415
                
                
                
                -Taxes
      payable
                
                
                1,313,949
                
                
                
                191,982Accrued
      liabilities and other payables
                
                
                3,528,527
                
                
                
                2,565,726Advance
      from management
                
                
                -
                
                
                
                71,508Convertible
      notes, net of discount due tobeneficial
      conversion feature
                
                
                5,000,000
                
                
                
                378,082Total
      current liabilities
                
                
                11,687,793
                
                
                
                5,505,499DEFERRED
      TAX LIABILITY
                
                
                823,407
                
                
                
                342,540ACCRUED
      INTEREST ON CONVERTIBLE NOTES
                
                
                168,494
                
                
                
                -CONTINGENCIES
      AND COMMITMENTSMINORITY
      INTEREST
                
                
                16,179
                
                
                
                15,080STOCKHOLDERS'
      EQUITYCommon
      stock, $0.001 par value; 100,000,000shares
      authorized, 36,425,094 and 25,015,089shares
      issued and outstanding as of December 31,2008
      and December 31, 2007, respectively
                
                
                36,425
                
                
                
                25,015Additional
      paid in capital
                
                
                34,528,289
                
                
                
                19,070,908Statutory
      reserve
                
                
                1,319,286
                
                
                
                832,467Accumulated
      other comprehensive income
                
                
                3,582,587
                
                
                
                1,718,260Accumulated
      deficit
                
                
                (7,044,924
                )
                
                
                (4,338,441
                )Total
      Company stockholders' equity
                
                
                32,421,663
                
                
                
                17,308,209TOTAL
      LIABILITIES AND EQUITY
                
                $
                45,117,536
                
                
                $
                23,171,328





The
accompanying notes are an integral part of these consolidated financial
statements.


24


CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS





FOR
      THE YEARS ENDED
                  DECEMBER
      31,2008
                
                
                2007RESTATEDRevenueSales
      of products
                
                $
                8,048,956
                
                
                $
                9,302,347Rental
      income
                
                
                11,168,707
                
                
                
                -Total
      revenue
                
                
                19,217,663
                
                
                
                9,302,347Cost
      of salesCost
      of products
                
                
                6,191,505
                
                
                
                7,033,400Rental
      expense
                
                
                7,810,231
                
                
                
                -Total
      cost of sales
                
                
                14,001,736
                
                
                
                7,033,400Gross
      profit
                
                
                5,215,927
                
                
                
                2,268,947Interest
      income on sales-type leases
                
                
                2,285,582
                
                
                
                1,015,712Total
      operating income
                
                
                7,501,509
                
                
                
                3,284,659Operating
      expensesSelling
      expenses
                
                
                -
                
                
                
                125,039General
      and administrative expenses
                
                
                3,354,028
                
                
                
                417,395Total
      operating expenses
                
                
                3,354,028
                
                
                
                542,434Income
      from operations
                
                
                4,147,481
                
                
                
                2,742,225Non-operating
      income (expenses)Interest
      income
                
                
                27,033
                
                
                
                -Interest
      expense
                
                
                (4,787,292
                )
                
                
                (377,402
                )Other
      income
                
                
                108,999
                
                
                
                -Other
      expense
                
                
                (811
                )
                
                
                (397
                )Exchange
      loss
                
                
                (82,237
                )
                
                
                (48,165
                )Total
      non-operating expenses
                
                
                (4,734,308
                )
                
                
                (425,964
                )Income
      before income tax
                
                
                (586,827
                )
                
                
                2,316,261Income
      tax expense
                
                
                1,632,754
                
                
                
                466,647Net
      (loss) income from continuing operations
                
                
                (2,219,581
                )
                
                
                1,849,614Income
      from operations of discontinued component
                
                
                -
                
                
                
                28,699Less:
      minority interest
                
                
                83
                
                
                
                -Net
      income (loss)
                
                
                (2,219,664
                )
                
                
                1,878,313Other
      comprehensive itemForeign
      currency translation gain
                
                
                1,864,327
                
                
                
                680,586Comprehensive
      income (loss)
                
                $
                (355,337
                )
                
                $
                2,558,899Basic
      weighted average shares outstanding
                
                
                32,095,814
                
                
                
                18,160,385Diluted
      weighted average shares outstanding *
                
                
                49,702,199
                
                
                
                18,855,897Basic
      net earnings per share **
                
                $
                (0.07
                )
                
                $
                0.10Diluted
      net earnings per share ***
                
                $
                (0.07
                )
                
                $
                0.10





* Diluted
weighted average shares outstanding includes estimated shares will be converted
from the Second Note issued on Apr 29, 2008 with conversion price contingent
upon future net profits.


** Basic
and diluted loss per share are the same because common stock equivalents are
anti-dilutive.


***
Interest expense on convertible notes are added back to net income for the
computation of diluted EPS.




The
accompanying notes are an integral part of these consolidated financial
statements.


25


CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





Common StockShares
                      
                      
                      Amount
                      
                      
                      Paid in Capital
                      
                      
                      Statutory
                        Reserves
                      
                      
                      Other
                        Comprehensive
                        Income
                      
                      
                      Accumulated
                        Deficit
                      
                      
                      TotalBalance
      at December 31, 2006
                      
                      
                      17,147,268
                      
                      
                      $
                      17,148
                      
                      
                      $
                      4,229,845
                      
                      
                      $
                      574,666
                      
                      
                      $
                      1,037,674
                      
                      
                      $
                      (5,958,953
                      )
                      
                      $
                      (99,620
                      )Shares
      issued for capital contribution
                      
                      
                      7,867,821
                      
                      
                      
                      7,867
                      
                      
                      
                      9,669,553
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,677,420Stock
      compensation expense related to stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      171,510
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      171,510Value
      of beneficial conversion feature in connection with convertible
      note
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,000,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,000,000Net
      income for the year
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,878,313
                      
                      
                      
                      1,878,313Transfer
      to statutory reserves
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      257,801
                      
                      
                      
                      -
                      
                      
                      
                      (257,801
                      )
                      
                      
                      -Foreign
      currency translation gain
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      680,586
                      
                      
                      
                      -
                      
                      
                      
                      680,586Balance
      at December 31, 2007
                      
                      
                      25,015,089
                      
                      
                      
                      25,015
                      
                      
                      
                      19,070,908
                      
                      
                      
                      832,467
                      
                      
                      
                      1,718,260
                      
                      
                      
                      (4,338,441
                      )
                      
                      
                      17,308,209Shares
      issued for capital contribution
                      
                      
                      11,410,005
                      
                      
                      
                      11,410
                      
                      
                      
                      14,020,848
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,032,258Stock
      compensation expense related to stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,436,533
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,436,533Net
      loss for the year
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,219,664
                      )
                      
                      
                      (2,219,664
                      )Transfer
      to statutory reserves
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      486,819
                      
                      
                      
                      -
                      
                      
                      
                      (486,819
                      )
                      
                      
                      -Foreign
      currency translation gain
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,864,327
                      
                      
                      
                      -
                      
                      
                      
                      1,864,327Balance
      at December 31, 2008(RESTATED)
                      
                      
                      36,425,094
                      
                      
                      $
                      36,425
                      
                      
                      $
                      34,528,289
                      
                      
                      $
                      1,319,286
                      
                      
                      $
                      3,582,587
                      
                      
                      $
                      (7,044,924
                      )
                      
                      $
                      32,421,663





The
accompanying notes are an integral part of these consolidated financial
statements.


26


CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





FOR
      THE YEARS ENDED DECEMBER 31,2008
                  
                  
                  2007RESTATEDCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                  
                  $
                  (2,219,664
                  )
                  
                  $
                  1,878,313Adjustments
      to reconcile net income (loss) to net cashprovided
      by operating activities:Depreciation
      and amortization
                  
                  
                  18,079
                  
                  
                  
                  -Amortization
      of discount related to conversion feature of convertible
    note
                  
                  
                  4,684,932
                  
                  
                  
                  315,068Stock
      option compensation expense
                  
                  
                  1,436,533
                  
                  
                  
                  171,510Accrued
      interest on convertible notes
                  
                  
                  105,480
                  
                  
                  
                  63,014Minority
      interest
                  
                  
                  83
                  
                  
                  
                  14,463Change
      in deferred tax
                  
                  
                  823,407
                  
                  
                  
                  -(Increase)
      decrease in current assets:Interest
      receivable on sales type lease
                  
                  
                  61,856
                  
                  
                  
                  (144,262
                  )Advances
      to suppliers
                  
                  
                  -
                  
                  
                  
                  (1,590,891
                  )Prepaid
      equipment rent
                  
                  
                  (3,796,985
                  )
                  
                  
                  -Other
      receivables
                  
                  
                  (66,659
                  )
                  
                  
                  212,288Increase
      (decrease) in current liabilities:Accounts
      payable
                  
                  
                  (1,245,854
                  )
                  
                  
                  2,204,167Unearned
      revenue
                  
                  
                  647,948
                  
                  
                  
                  -Advance
      from customers
                  
                  
                  -
                  
                  
                  
                  (179,787
                  )Tax
      payable
                  
                  
                  707,013
                  
                  
                  
                  523,190Accrued
      liabilities and other payables
                  
                  
                  802,165
                  
                  
                  
                  1,530,382Net
      cash provided by operating activities
                  
                  
                  1,958,334
                  
                  
                  
                  4,997,455CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in sales type leases
                  
                  
                  (7,063,105
                  )
                  
                  
                  (8,640,969
                  )Acquisition
      of property & equipment
                  
                  
                  (115,350
                  )
                  
                  
                  -Construction
      in progress
                  
                  
                  (3,717,743
                  )
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  (10,896,198
                  )
                  
                  
                  (8,640,969
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Issuance
      of common stock
                  
                  
                  9,032,258
                  
                  
                  
                  -Convertible
      notes
                  
                  
                  5,000,000
                  
                  
                  
                  5,000,000Repayment
      to management
                  
                  
                  (75,108
                  )
                  
                  
                  68,583Advance
      from shareholder
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  13,957,150
                  
                  
                  
                  5,068,583EFFECT
      OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
                  
                  
                  613,718
                  
                  
                  
                  (42,729
                  )NET
      INCREASE IN CASH & CASH EQUIVALENTS
                  
                  
                  5,633,004
                  
                  
                  
                  1,382,340CASH
      & CASH EQUIVALENTS, BEGINNING OF YEAR
                  
                  
                  1,634,340
                  
                  
                  
                  252,000CASH
      & CASH EQUIVALENTS, END OF YEAR
                  
                  $
                  7,267,344
                  
                  
                  $
                  1,634,340Supplemental
      Cash flow data:Income
      tax paid
                  
                  $
                  152,881
                  
                  
                  $
                  35,281Interest
      paid
                  
                  $
                  -
                  
                  
                  $
                  -





The
accompanying notes are an integral part of these consolidated financial
statements.


27


CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007





1.
ORGANIZATION AND DESCRIPTION OF BUSINESS





China
Recycling Energy Corporation (the “Company” or “CREG”) (formerly China Digital
Wireless, Inc.) was incorporated on May 8, 1980, under the laws of the State of
Colorado. On September 6, 2001, the Company re-domiciled its state of
incorporation from Colorado to Nevada. The Company, through its subsidiary,
Shanghai TCH Data Technology Co., Ltd (“TCH”), sells and leases energy saving
equipment. The businesses of mobile phone distribution and provision of pager
and mobile phone value-added information services were discontinued in 2007. On
March 8, 2007, the Company changed its name to “China Recycling Energy
Corporation”.





Since
January 2007, the Company has gradually phased out and substantially scaled down
most of its business of mobile phone distribution and provision of pager and
mobile phone value-added information services. In the first and second quarters
of 2007, the Company did not engage in any substantial transactions or activity
in connection with these businesses. On May 10, 2007, the Company discontinued
the businesses related to mobile phones and pagers. These businesses are
reflected in continuing operations for all periods presented based on the
criteria for discontinued operations prescribed by Statement of Financial
Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS 144”).





On
February 1, 2007, the Company’s subsidiary, TCH, entered into two TRT Project
Joint-Operation Agreements (“Joint-Operation Agreement”) with Xi’an Yingfeng
Science and Technology Co., Ltd. (“Yingfeng”). TRT is an electricity generating
system that utilizes the exhaust pressure and heat produced in the blast furnace
of a steel mill to generate electricity. Yingfeng is a joint stock company
registered in Xi’an, Shaanxi Province, Peoples Republic of China (the “PRC”),
and engages in the business of designing, installing, and operating TRT systems
and sales of other renewable energy products. In October 2007, the Company
terminated the joint operation agreement with Yingfeng and became fully entitled
to the rights, titles, benefits and interests in the TRT Projects.





Under the
Joint-Operation Agreement, TCH and Yingfeng jointly operated a top gas recovery
turbine project (“TRT Project”) which designed, constructed, installed and
operated a TRT system and leased it to Zhangzhi Iron and Steel Holdings Ltd.
(“Zhangzhi”). The total costs contributed by TCH were approximately $1,426,000
(equivalent to Renminbi (“RMB”) 10,690,000). TCH provided various forms of
investments and properties into the TRT Project including cash, hardware,
software, equipment, major components and devices. The construction of the TRT
Project was completed and put into operation in August 2007. In October 2007,
the Company terminated the Joint-Operation Agreement with Yingfeng. TCH became
entitled to the rights, titles, benefits and interests in the TRT Project and
receives monthly rental payments of approximately $147,000 (equivalent to RMB
1,100,000) from Zhangzhi for a lease term of thirteen years. At the end of the
lease term, TCH will transfer the rights and titles of the TRT Project to
Zhangzhi without cost.





Under
another Joint-Operation Agreement, TCH and Yingfeng jointly operated a TRT
Project which designed, constructed, installed and operated a TRT system and
lease to Xingtai Iron and Steel Company Ltd. (“Xingtai”). TCH provided various
forms of investments and properties into the TRT Project including cash,
hardware, software, equipment, major components and devices. The total estimated
costs of this TRT Project were approximately $3,900,000 (equivalent to RMB
30,000,000). The construction of the TRT Project was completed and put into
operation in February 2007. In October 2007, the Company terminated the
Joint-Operation Agreement with Yingfeng. TCH became fully entitled to all the
rights, titles, benefits and interests of the TRT Project and receives monthly
rental payments of approximately $117,000 (equivalent to RMB 900,000) from
Xingtai for a lease term of five years. At the end of the lease term, TCH will
transfer all the rights and titles of the TRT Project to Xingtai without
cost.





On
September 21, 2007, the Company’s subsidiary, TCH changed its name to “Shanghai
TCH Energy Technology Co., Ltd.”


28


In
November 2007, TCH signed a cooperative agreement with Shengwei Group for a
Cement Waste Heat Power Generator Project. TCH will build two sets of 12MW pure
low temp cement waste heat power generator systems for its two 2500 tons
per day cement manufacturing lines in Jin Yang and a 5,000 tons per day
cement manufacturing line in Tong Chuan.   Total investment will
be approximately $12,593,000 (93 million RMB).  At the end of 2008,
construction of the Power Generator Project in Tong Chuan was completed at a
total cost of approximately $6,191,000 (RMB 43,000,000) and put into
operation.  The ownership of the power generator system belongs to
Tong Chuan from the date the system is put into service.  TCH is
responsible for the daily maintenance and repair of the system, and charges Tong
Chuan the monthly electricity fee based on the actual power generated by the
system at 0.4116 RMB per KWH for an operating period of five years with the
assurance from Tong Chuan of proper functioning of 5000t/d cement manufacturing
line and not less than 7440 hrs/yr heat providing hours to the electricity
generator system.  Shengwei Group has collateralized the cement
manufacturing line in Tongchuan to guarantee its obligations to provide the
minimum electricity income from the power generator system under the agreement
during the operating period. At the end of the five years operating period, TCH
will have no further obligations under the cooperative agreement.




2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Basis
of presentation




These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”) and pursuant to the rules and regulations of the SEC for annual
financial statements.




Basis
of consolidation




The
consolidated financial statements include the accounts of CREG and, its
subsidiaries, Sifang Holdings, TCH, and TCH’s subsidiaries Xi'an TCH Energy Tech
Co., Ltd. (“Xi’an TCH”) and Xingtai Huaxin Energy Tech Co., Ltd. (“Huaxin”).
Xi’an TCH and Huaxin engage in the same business as TCH. Substantially all of
the Company's revenues are derived from the operations of TCH and its
subsidiaries, which represent substantially all of the Company’s consolidated
assets and liabilities as of December 31, 2008 and 2007, respectively. All
significant inter-company accounts and transactions have been eliminated in
consolidation.




Use
of estimates




In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the period reported. Actual
results may differ from these estimates.




Cash
and cash equivalents




Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.




Accounts
receivable and concentration of credit risk




Accounts
receivable are recorded at the invoiced amounts and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. The Company does not require collateral or
other security to support these receivables. The Company conducts periodic
reviews of its clients' financial condition and customer payment practices to
minimize collection risk on accounts receivable.




An
allowance for doubtful accounts is established and determined based on
managements’ assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic environment.
As of each of December 31, 2008 and December 31, 2007, the Company had an
accounts receivable allowance of $0.


29





Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable, leases, accounts payable, convertible notes
and other receivables. The carrying amounts reported in the balance sheets for
these financial instruments are a reasonable estimate of fair value because of
the short period of their maturity, The convertible notes rate
of  interest is equal to the  current market rate of
interest.




The
operations of the Company are located 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, as well as by the
general state of the PRC economy.




Inventory




Inventory
is valued at the lower of cost or market. Cost of work in progress and finished
goods comprises direct material cost, direct production cost and an allocated
portion of production overheads (See Note 5).




Property
and equipment




Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method over the estimated lives ranging from 5 to 20 years as
follows:




Building
              20
      yearsVehicle
              2
      - 5 yearsOffice
      and Other Equipment
              2
      - 5 yearsSoftware
              2
      - 3 years





Impairment
of long-life assets




In
accordance with SFAS 144,the Company reviews its
long-lived assets, including property, plant and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of the assets may not be fully recoverable. If the total of the expected
undiscounted future net cash flows is less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value and
carrying amount of the asset. There has been no impairment as of December 31,
2008 and 2007.




Sales-type
leasing and related revenue recognition




The
Company leases TRT and CHPG systems to its customers. The Company usually will
transfer all benefits, risks and ownership of the TRT and CHPG systems to its
customers at the end of each lease term.  In one system, the Company
transferred the ownership of the power generated system at the time of the
system put into operation.  The Company’s investment in these projects
is recorded as investment in sales-type leases in accordance with SFAS No. 13,
“Accounting for Leases” and its various amendments and interpretations. The
Company manufactures and constructs the TRT and CHPG systems and power generated
system, and finances its customers for the selling price of the
systems.  The sales and cost of goods sold are recognized at the point
of sale. The investment in sales-type leases consists of the sum of the total
minimum lease payments receivable less unearned interest income and estimated
executory cost. Unearned interest income is amortized to income over the lease
term as to produce a constant periodic rate of return on the net investment in
the lease.




Cost
of sales




Cost of
sales consists primarily of the direct material of the power generating system
and expenses incurred directly for project construction for sales-type leasing;
and rental expenses for two pieces of power generation equipment for the
operating lease.


30





Income
taxes




The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




The
Company does not have any significant deferred tax asset or liability that
related to tax jurisdictions not covered by the tax holiday provided by Tax
Bureau of the PRC.




The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
(“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the
Company made a comprehensive review of its portfolio of tax positions in
accordance with recognition standards established by FIN 48. As a result of the
implementation of FIN 48, the Company recognized no material adjustments to
liabilities or stockholders equity. When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.  Interest associated with unrecognized
tax benefits are classified as interest expense and penalties are classified in
selling, general and administrative expenses in the statements of income. The
adoption of FIN 48 did not have a material impact on the Company’s financial
statements.




Statement
of cash flows




In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company's operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows may not necessarily agree with changes in the corresponding balances
on the balance sheet.




Fair
Value of Financial Instruments




SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires the
Company disclose estimated fair values of financial
instruments.   The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.




Fair
Value Measurements




On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures.  The three levels are defined as follow:




·
            Level 1 inputs to the valuation
      methodology are quoted prices (unadjusted) for identical assets or
      liabilities in active
markets.





·
            Level 2 inputs to the valuation
      methodology include quoted prices for similar assets and liabilities in
      active markets, and inputs that are observable for the asset or liability,
      either directly or indirectly, for substantially the full term of the
      financial instrument.




31





·
            Level 3 inputs to the valuation
      methodology are unobservable and significant to the fair value
      measurement.




As of
December 31, 2008, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.




Stock
Based Compensation




The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.”  The
Company recognizes in the statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to employees and
non-employees.




Basic
earnings per share (“EPS”) is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed similar to basic net income per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Diluted net earnings
per share is based on the assumption that all dilutive convertible shares and
stock options were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the
average market price during the period. The following table presents a
reconciliation of basic and diluted earnings per share:




For
      the Year
                          Ended
                          December 31,
                          2008
      (Restated)
                        
                        
                        For
      the Year
                          Ended
                          December
                          31, 2007Net
      income (loss) for basic weighted average shares
                        
                        $
                        (2,219,664)
                        
                        
                        $
                        1,878,313Net
      income (loss) for diluted weighted average shares *
                        
                        
                        (2,051,088)
                        
                        
                        
                        1,941,327Weighted
      average shares outstanding - basic
                        
                        
                        32,095,814
                        
                        
                        
                        18,160,385Effect
      of dilutive securities:Convertible
      notes
                        
                        
                        16,583,080
                        **
                        
                        
                        507,485Options
      granted
                        
                        
                        1,023,304
                        
                        
                        
                        188,027Weighted
      average shares outstanding - diluted
                        
                        
                        49,702,199
                        
                        
                        
                        18,855,897(Loss)
      Earnings per share – basic ***
                        
                        $
                        (0.07
                        )
                        
                        $
                        0.10(Loss)
      Earnings per share – diluted ***
                        
                        $
                        (0.07
                        )
                        
                        $
                        0.10





*
Interest expense on convertible note has been added back to net income for the
computation of diluted earnings per share.




**
Diluted weighted average shares outstanding includes estimated shares will
be converted from the Second Note issued on April 29, 2008 with conversion price
contingent upon future net profits.


*** These
securities are anti-dilutive, therefore, basic and diluted loss per share are
the same.





Foreign
Currency Translation and Comprehensive Income (Loss)




The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as “Accumulated other
comprehensive income”. Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in the exchange rate for the conversion of RMB to USD after the balance sheet
date.


32




The
Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is
comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders.




Segment
Reporting




SFAS No.
131, “Disclosures about Segments of an Enterprise and Related Information”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company's management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. SFAS 131 has no effect on the Company's financial
statements as substantially all of the Company's operations are conducted in one
industry segment. All of the Company's assets are located in the
PRC.





Reclassifications





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





New
Accounting Pronouncements




Accounting for Financial
Guarantee Insurance Contracts




In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.”  The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial statements.




The Hierarchy of Generally
Accepted Accounting Principles




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.  This Statement will not have an impact on the
Company’s financial statements.




Disclosures about Derivative
Instruments and Hedging Activities




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133 (“SFAS
133”).  This Statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (i) how and why an entity uses derivative instruments, (ii)
how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and (iii) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows.  Based on current conditions, the Company does
not expect the adoption of SFAS 161 to have a significant impact on its results
of operations or financial position.


33





Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No.
51




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The Company expects SFAS 160 will have an impact on accounting for business
combinations once adopted but the effect is dependent upon acquisitions at that
time.




Business
Combinations




In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:




·
            Acquisition costs will be
      generally expensed as
incurred;


·
            Noncontrolling interests
      (formerly known as “minority interests” - see SFAS 160 discussion above)
      will be valued at fair value at the acquisition
    date;


·
            Acquired contingent liabilities
      will be recorded at fair value at the acquisition date and subsequently
      measured at either the higher of such amount or the amount determined
      under existing guidance for non-acquired
    contingencies;


·
            In-process research and
      development will be recorded at fair value as an indefinite-lived
      intangible asset at the acquisition
date;


·
            Restructuring costs associated
      with a business combination will be generally expensed subsequent to the
      acquisition date; and


·
            Changes in deferred tax asset
      valuation allowances and income tax uncertainties after the acquisition
      date generally will affect income tax
  expense.




SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company, we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.




Accounting for Nonrefundable
Advance Payments for Goods or Services Received for use in Future Research and
Development Activities




In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed.  EITF 07-03 is effective for fiscal years beginning after
December 15, 2008. Management is currently evaluating the effect of this
pronouncement on financial statements.


34




Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R




In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106, and 132R” (“SFAS 158”), which requires companies to recognize
the underfunded or overfunded status of their defined benefit pension and other
post-retirement plans as an asset or liability and to recognize changes in that
funded status through comprehensive income in the year in which the changes
occur.  As required, we adopted the recognition provision of SFAS No.
158 on December 31, 2006.




SFAS No. 158
also requires companies to measure the funded status of defined benefit pension
and other post-retirement plans as of their year-end reporting date. The
measurement date provisions of SFAS No. 158 were effective for us as
of December 31, 2008. We applied the measurement provisions by measuring
our benefit obligations as of September 30, 2007, our prior measurement
date, and recognizing a pro-rata share of net benefit costs for the transition
period from October 1, 2007 to December 31, 2008 as a cumulative
effect of change in accounting principle in retained earnings as of
December 31, 2008.  The adoption of the measurement date
provisions of SFAS No. 158 did not have a material impact on our
financial position or results of operations for the periods
presented.




3.
NET INVESTMENT IN SALES-TYPE LEASES




Under
sales-type leases, TCH leased TRT systems to Xingtai and Zhangzhi, and CHPG
systems to Tongchuan Shengwei with terms of five years, thirteen years and five
years, respectively. The components of the net investment in sales-type leases
as of December 31, 2008 and December 31, 2007 are as follows:




2008
                    
                    
                    2007Total
      future minimum lease payments receivables
                    
                    $
                    41,431,868
                    
                    
                    $
                    27,162,928Less:
      unearned interest income
                    
                    
                    (24,623,398
                    )
                    
                    
                    (18,147,167
                    )Net
      investment in sales - type leases
                    
                    $
                    16,808,470
                    
                    
                    $
                    9,015,761Current
      portion
                    
                    $
                    1,970,591
                    
                    
                    $
                    1,081,981Noncurrent
      portion
                    
                    $
                    14,837,879
                    
                    
                    $
                    7,933,780





As of
December 31, 2008, the future minimum rentals to be received on non-cancelable
sales type leases are as follows:




Years
      ending December 31,2009
                    
                    $
                    6,387,8132010
                    
                    
                    6,446,9162011
                    
                    
                    6,446,9162012
                    
                    
                    5,103,3812013
                    
                    
                    4,981,241Thereafter
                    
                    
                    12,065,601$
                    41,431,868





4.
PREPAID EXPENSES




Prepaid equipment rent for
operating leases




On April
10, 2008, the Company leased energy recycling power generation equipment for
operating under a one-year, non-cancellable lease for approximately $4,455,000
(RMB 31,000,000). At the end of this lease, the Company has the right to renew
the lease for another four-year term at an aggregate price of approximately
$10,940,000 (RMB 75,000,000). The lease payment of approximately $4,455,000 has
been paid in full.


35




On the
same day, the Company entered into a lease with a lessee to sublease the above
power generation equipment under a one-year, non-cancellable lease for
approximately $583,000 (RMB 4,000,000) per month with an option to renew. The
lessee will pay a lower monthly lease payment of approximately $486,000 (RMB
3,333,000) if the Company renews the lease of the equipment from the ultimate
lessor after one year.




On May
21, 2008, the Company leased energy recycling power generation equipment from
the same lessor for operating under a one-year, non-cancellable lease for the
amount of approximately $6,560,000 (RMB 45,000,000). At the end of the one-year
lease term, the Company has the right to renew the lease for another four-year
term at an aggregate price of approximately $17,500,000 (RMB 120,000,000) with a
separate agreement. The lease payment of approximately $6,560,000 has been paid
in full.




On the
same day, the Company entered into a lease with the same lessee to sublease the
above power generation equipment under a one-year, non-cancellable lease for
approximately $887,000 (RMB 5,850,000) per month with an option to renew. The
lessee will pay a lower monthly lease payment of approximately $729,000 (RMB
5,000,000) if the Company renews the lease of the equipment from the ultimate
lessor after one year.




Prepaid expenses –
other




Other
prepaid expenses mainly consisted of prepayment for office rental, parking
space, insurance and legal fees.  Other prepaid expenses were
approximately $28,000 and $0 at December 31, 2008 and 2007,
respectively.




5.
INVENTORY




Inventory
consisted of two equipment systems that will be used for TRT or CHPG projects in
the amount of $10,534,633 and $9,870,315 at December 31, 2008 and December 31,
2007, respectively.




6.
ADVANCE FOR EQUIPMENT




“Advance
for equipment” represented advance payment of approximately $2,640,000 (RMB
18,000,000) to an independent contractor for constructing a power generation
system and purchase of the equipment that will be used for the construction. At
December 31, 2008, this project has been terminated; the advance for the
equipment will be recorded as the Company’s inventory when the title of the
equipment officially transfers to the Company.




7.
CONSTRUCTION IN PROGRESS




“Construction
in progress” represented the amount paid to an independent contractor for
constructing two power generation systems for the total amount of approximately
$10,046,935 (RMB 68,500,000). The construction project commenced in March 2008,
and will take about 11 months to complete. Upon completion, the Company will
sell the power that is generated from this system to predetermined customers
(See Note 20).  At December 31, 2008, the construction in progress
amounted $3,731,016, one system has completed construction and was put into
operation, the other system is expected to be completed in March
2009.




8.
TAX PAYABLE




“Tax
payable” consisted of the following at December 31, 2008 and 2007,
respectively:




2008
      (Restated)
                    
                    
                    2007Income
      tax payable
                    
                    $
                    1,217,026
                    
                    
                    $
                    149,295Business
      tax payable
                    
                    
                    86,692
                    
                    
                    
                    41,126Other
      taxes payable
                    
                    
                    10,231
                    
                    
                    
                    1,561$
                    1,313,949
                    
                    
                    $
                    191,982




36





9.
ACCRUED LIABILITIES AND OTHER PAYABLES




“Accrued
liabilities and other payables” consisted of the following at December 31,
2008 and 2007, respectively:




2008
                        
                        
                        2007Other
      payables
                        
                        $
                        
                        
                        
                        $Cash
      advance from third parties
                        
                        
                        -
                        
                        
                        
                        138,201Employee
      training and social insurance payable
                        
                        
                        125,323
                        
                        
                        
                        17,646Consulting
      and legal expenses
                        
                        
                        371,125
                        
                        
                        
                        371,000Payable
      to Yingfeng
                        
                        
                        1,676,878
                        
                        
                        
                        1,747,958Deposit
      from lessee
                        
                        
                        1,024,252
                        
                        
                        
                        -Total
      other payables
                        
                        
                        3,197,578
                        
                        
                        
                        2,274,805Employee
      welfare payable
                        
                        
                        258,443
                        
                        
                        
                        228,923Accrued
      maintenance expense
                        
                        
                        72,506
                        
                        
                        
                        61,998Total
                        
                        $
                        3,528,527
                        
                        
                        $
                        2,565,726





“Consulting
and legal expenses” was the expenses paid by a third party on behalf of the
Company, which will be repaid by the Company.  “Payable to Yingfeng”
represented the cost of obtaining the ownership of two TRT projects that were
previously owned by Yingfeng. “Deposit from lessee” represented deposit received
for leasing out the power generation equipments.




10.
ADVANCE FROM MANAGEMENT




“Advance
from management” represented the balances due to a director for unsecured
advances in 2007, which are interest free and repayable in the next twelve
months. This advance was repaid as of December 31, 2008.





11.
MINORITY INTEREST




“Minority
interest” represented a 20% equity interest in Huaxin. Huaxin was incorporated
in November 2, 2007, and engages in a similar business to TCH.




12. DEFERRED
TAX




Deferred
tax asset arose from accrued maintenance cost on two TRT machines and one CHPG
machine that can be deducted for tax purposes in the future.




Deferred
tax liability represented differences between the tax bases and book bases of
sales-type leases.




As of
December 31, 2008 and 2007, deferred tax asset (liability) consisted of the
following:





2008 (Restated)
                      
                      
                      2007Deferred
      tax asset - noncurrent
                      
                      $
                      27,878
                      
                      
                      $
                      -Deferred
      tax liability - noncurrent
                      
                      
                      (851,285
                      )
                      
                      
                      (342,540
                      )Deferred
      tax liability, Net
                      
                      $
                      (823,407
                      )
                      
                      $
                      (342,540
                      )





13.
DISCONTINUED OPERATIONS




Since
January 2007, the Company has phased out and scaled down most of its business of
mobile phone distribution and provision of pager and mobile phone value-added
information services. In the first and second quarters of 2007, the Company did
not engage in any substantial transactions or activity in connection with these
businesses. On May 10, 2007, the Company discontinued these businesses.
Accordingly, the results of the discontinued operations have been segregated
from continuing operations. The discontinued operations had an income of $28,457
for the year ended December 31, 2007. The income represented the write down of
deferred revenue generated from the provision of pager value-added information
services.


37




14.
INCOME TAX




Effective
January 1, 2008, the PRC government implemented a new corporate income tax law
with a new maximum corporate income tax rate of 25%. The Company is governed by
the Income Tax Law of the PRC concerning privately-run enterprises, which are
generally subject to tax at a statutory rate of 25% (33% prior to 2008) on
income reported in the statutory financial statements after appropriate tax
adjustments.




The
Company’s subsidiaries generated substantially all of its net income from its
PRC operations. Shanghai TCH’s effective income tax rates for 2008 and 2007 are
18% and 15%, respectively. Xi’an TCH’s effective income tax rate for 2008 is
25%. Shanghai TCH and its subsidiaries Xi’an TCH and Xingtai Huaxin filed
separate income tax returns.  Net income for 2008 would have been
lower by approximately $0 as Shanghai TCH incurred net loss for the year and
approximately $531,000 or $0.03 basic earnings per share for 2007, if the
Company did not benefit the from the income tax exemption.




There is
no income tax for companies domiciled in the Cayman Islands. Accordingly, the
Company's consolidated financial statements do not present any income tax
provisions related to Cayman Islands tax jurisdiction where Sifang Holding is
domiciled.  At December 31, 2008 and 2007, Sifang Holing has net
operating losses of approximately $23,000 and $246,000 incurred in nontaxable
jurisdictions, respectively.




The
parent company, China Recycling Energy Co., Ltd., is taxed in the U.S. and has
net operating loss of approximately $1,633,000 at December 31, 2008. The pre-tax
loss per book of the parent company was approximately $6.68 million, of which,
$1.7 million was the tax effect of non-deductible expense of the beneficial
conversion feature of the $5,000,000 note payable.  Net operating loss
can be used to offset future taxable income and can be carried-forward for 20
years from the year in which the loss occurred.  A 100% valuation
allowance has been established due to the uncertainty of its
realization.





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2008 and 2007,
respectively:




2008
                      
                      
                      2007US
      statutory rates
                      
                      
                      (34)
                      %
                      
                      
                      34
                      %Tax
      rate difference
                      
                      
                      (93.8)
                      %
                      
                      
                      (1
                      )%Effect
      of tax holiday
                      
                      
                      4.5
                      %
                      
                      
                      (18
                      )%Effect
      of tax on loss in nontaxable jurisdiction
                      
                      
                      1.4
                      %
                      
                      
                      1
                      %Non-tax
      deductible expense - beneficial conversion feature
                      
                      
                      291.4
                      %
                      
                      
                      -
                      %Valuation
      allowance
                      
                      
                      108.8
                      %
                      
                      
                      4
                      %Tax
      per financial statements
                      
                      
                      278.3
                      %
                      
                      
                      20.0
                      %




15.
CONVERTIBLE NOTES PAYABLE




On
November 16, 2007, the Company entered into a Stock and Notes Purchase Agreement
(“Purchase Agreement”) with Carlyle Asia Growth Partners III, L.P. (“CAGP”) and
CAGP III Co. Investment, L.P. (together with CAGP, the “Investors”). Under the
terms of the Purchase Agreement, the Company sold to the Investors a 10% Secured
Convertible Promissory Note in the principal amount of $5,000,000 (the “First
Note”). Additionally, the Purchase Agreement provides for two subsequent
transactions to be effected by the Company and the Investors, which include (i)
the issuance by the Company and subscription by the Investors of a total of
4,066,706 shares of common stock of Company, at the price of $1.23 per share for
an aggregate purchase price of approximately $5,000,000, and (ii) the issuance
and sale by the Company to the Investors of a 5% Secured Convertible Promissory
Note in the principal amount of $15,000,000 (the foregoing transactions,
together with sale and purchase of the First Note, are hereinafter referred to
as the “Offering”). The subsequent transactions are contingent upon the
satisfaction of certain conditions specified in the Purchase Agreement,
including entry into specified energy and recycling project contracts and the
purchase of certain energy recycling systems.


38




The First
Note bore interest at 10% per annum and matured on November 16, 2009. The
principal face amount of the First Note, together with any interest thereon was
convertible at the option of the holders at any time on or prior to maturity,
into shares of the Company’s common stock at an initial conversion price of
$1.23 per share (subject to anti-dilution adjustments). The First Note was
subject to mandatory conversion upon the consummation of the aforementioned
issuance and subscription of shares of the Company’s common stock under the
Purchase Agreement. As more fully described in the First Note, the obligations
of the Company under the First Note ranked senior to all other debt of the
Company.




As
collateral for the First Note, the President and a major shareholder of the
Company pledged 9,653,471 shares of the Company’s common stock held by him to
secure the First Note.




The First
Note was considered to have an embedded beneficial conversion feature (“BCF”)
because the conversion price was less than the quoted market price at the time
of the issuance. Accordingly, the BCF of $5,000,000 was recorded separately as
unamortized beneficial conversion feature based on the intrinsic value method.
The First Note was recorded in the balance sheet at face value less the
unamortized BCF. The terms for the First Note were amended on April 29, 2008 and
the First Note was repaid in full on June 25, 2008, as described
below.




On April
29, 2008, the Company entered into an Amendment to the Purchase Agreement with
the Investors (the “Amendment”). Under the terms of the Amendment, (i) the
Company issued and the Investors subscribed for 4,066,706 shares of common stock
of the Company, at $1.23 per share for an aggregate purchase price of
$5,002,048, as originally contemplated under the Agreement; (ii) the Investors
converted the principal amount under the First Note (and waived any accrued
interest thereon) into 4,065,040 shares of common stock of the Company at the
conversion price per share of $1.23, pursuant to the terms and conditions of the
First Note issued under the Agreement; (iii) the Company issued and sold to the
Investors a new 5% Secured Convertible Promissory Note in the principal amount
of $5,000,000 to the Investors (the “Second Note” and collectively with the
First Note, the “Notes”); and (iv) the Company granted to the Investors an
option to purchase a 5% Secured Convertible Promissory Note in the principal
amount of $10,000,000, exercisable by the Investors at any time within nine (9)
months following the date of the closing of the transactions contemplated by the
Amendment (the “Option Note”).




The
Second Note bears interest at 5% per annum and matures on April 29, 2011. The
principal face amount of the Second Note, together with any interest thereon, is
convertible at the option of the holders at any time on or after March 30, 2010
(or such earlier date if the audited consolidated financial statements of the
Company for the fiscal year ending December 31, 2009 are available prior to
March 30, 2010) and prior to maturity, into shares of the Company's common stock
at an initial conversion price that is tied to the after-tax net profits of the
Company for the fiscal year ending December 31, 2009, as described in the Second
Note. The Second Note is subject to mandatory conversion upon the listing of the
Company's common stock on the National Association of Securities Dealers
Automated Quotations main-board, the New York Stock Exchange or the American
Stock Exchange. As more fully described in the Second Note, the obligations of
the Company under the Second Note shall rank senior to all other debt of the
Company.





The
Second Note and the Option Note are both secured by a security interest granted
to the Investors pursuant to the Share Pledge Agreement.




The
Second Note was not considered to have an embedded BCF because the conversion
price and convertible shares are contingent upon future net
profits.




On June
25, 2008, the Company and the Investors entered into a Rescission and
Subscription Agreement (the “Rescission”) to rescind the conversion of the First
Note and the issuance of conversion shares of Common Stock at the Second Closing
pursuant to the Amendment. The Company and the Investors rescinded the
conversion of the principal amount ($5,000,000) under the First Note into
4,065,040 shares of Common Stock, and the Investors waived accrued interest on
the First Note. Accordingly, the interest expense which had accrued on the note
has been recorded as a decrease in interest expense for the period. At the
Rescission closing, the Company repaid in full the First Note and issued to the
Investors 4,065,040 shares of Common Stock at the price of $1.23 per share for
an aggregate purchase price of $5,000,000.  This was done through a
cross receipt arrangement; the amortized portion of BCF was reversed to
additional paid in stock.  The Company has now concluded that in
substance the transaction resulted in the conversion of the first $5,000,000
note into common stock and that the remaining BCF of $3,472,603 at the date of
conversion should have been expensed (see Note 21).


39




16.
STOCK-BASED COMPENSATION PLAN




On
November 13, 2007, the Company approved the 2007 Non-statutory Stock Option
Plan, which was later amended and restated in August 2008 (the “2007
Plan”), and granted stock options with an aggregate amount of 3,000,000 shares
of the stock at $1.23 per share to acquire the Company's common stock at par
value $0.001 to twenty (20) managerial and non-managerial employees under the
2007 Plan.




The
vesting terms of options granted under the 2007 Plan is subject to the
Non-Statutory Stock Option Agreements for managerial and non-managerial
employees. For managerial employees, no more than 15% of the total stock options
shall vest and become exercisable on the six month anniversary of the grant
date. An additional 15% and 50% of the total stock options shall vest and become
exercisable on the first and second year anniversary of the grant date,
respectively. The remaining 20% of the total stock options shall vest and become
exercisable on the third year anniversary of the grant date. For non-managerial
employees, no more than 30% of the total stock options shall vest and become
exercisable in the first year anniversary of the grant date. An additional 50%
of the total stock options shall vest and become exercisable in the second year
anniversary of the grant date. The remaining 20% of the total stock options
shall vest and become exercisable on the third year anniversary of the grant
date. Each stock option shall become vested and exercisable over a period of no
longer than five years from the grant date.




Based on
the fair value method under SFAS No. 123 (Revised) “Share Based Payment” (“SFAS
123(R)”), the fair value of each stock option granted is estimated on the date
of the grant using the Black-Scholes option pricing model. The Black-Scholes
option pricing model has assumptions for risk free interest rates, dividends,
stock volatility and expected life of an option grant. The risk free interest
rate is based upon market yields for United States Treasury debt securities at a
maturity near the term remaining on the option. Dividend rates are based on the
Company’s dividend history. The stock volatility factor is based on the
historical volatility of the Company’s stock price. The expected life of an
option grant is based on management’s estimate as no options have been exercised
in the Plan to date. The fair value of each option grant to employees is
calculated by the Black-Scholes method and is recognized as compensation expense
over the vesting period of each stock option award. For stock options issued,
the fair value was estimated at the date of grant using the following range of
assumptions:




The
options vest over a period of three years and have a life of 5 years. The fair
value of the options was calculated using the following assumptions: estimated
life of five years, volatility of 100%, risk free interest rate of 3.76%, and
dividend yield of 0%. No estimate of forfeitures was made as the Company has a
short history of granting options.




Effective
June 25, 2008, the Company cancelled all vested shares and accepted optionees’
forfeiture of any unvested shares underlying the currently outstanding
options.




On August
4, 2008, the Company granted stock options to acquire an aggregate amount
of 3,000,000 shares of the Company’s common stock, par value $0.001, at
$0.80 per share to 17 employees under the 2007 Plan. The new awards were
considered as replacement awards and were recorded in accordance with SFAS
123(R).The options vest over a period of three years and have a life of 5 years.
The fair value of the options was calculated using the following assumptions:
estimated life of five years, volatility of 100%, risk free interest rate of
2.76%, and dividend yield of 0%. No estimate of forfeitures was made as the
Company has a short history of granting options. The options have been accounted
for as a modification to the options which were cancelled on June 25,
2008.





The
following table summarizes activity for employees in the Company’s Plan for 2008
and 2007:


40





Number of
                          Shares
                        
                        Average
                          Exercise
                          Price per Share
                        
                        Weighed
                          Average
                          Remaining
                          Contractual
                          Term in YearsOutstanding
      at December 31, 2006
                        
                        -Granted
                        
                        3,000,000
                        
                        $
                        1.23
                        
                        5.00Exercised
                        
                        -Forfeited
                        
                        -Outstanding
      at December 31, 2007
                        
                        3,000,000
                        
                        $
                        1.23
                        
                        4.87Granted
                        
                        -Exercised
                        
                        -Cancelled
      vested shares
                        
                        450,000
                        
                        
                        1.23
                        
                        -Forfeited
      unvested shares
                        
                        2,550,000
                        
                        
                        1.23
                        
                        -Granted
                        
                        3,000,000
                        
                        $
                        0.80
                        
                        5.00Exercised
                        
                        -Forfeited
                        
                        -Outstanding
      at December 31, 2008
                        
                        3,000,000
                        
                        $
                        0.80
                        
                        4.48





During
2008, the Company recorded $1,436,533 compensation expense including amortized
portion of incremental cost arising from the modification to the employee stock
options. The weighted-average modification date fair value of stock options
granted to employees for the year ended December 31, 2008 was $0.88 per share.
There were no options exercised during 2008.




17.
SHAREHOLDERS’ EQUITY




On April
29, 2008, the Company issued and the Investors subscribed for a total of
4,066,706 shares of common stock of the Company, at the price of $1.23 per share
for an aggregate purchase price of $5,002,048 under the Purchase
Agreement.




On June
25, 2008, the Company and the Investors entered into a Rescission and
Subscription Agreement to rescind the conversion of the First Note and the
issuance of conversion shares of Common Stock pursuant to Amendment to Stock and
Notes Purchase Agreement dated on April 29, 2008. The Company and the Investors
rescinded the conversion of the principal amount ($5,000,000) under the First
Note into 4,065,040 shares of Common Stock and repaid the First Note in full. At
the Rescission and Subscription Closing, the Company issued to the Investors,
4,065,040 shares of Common Stock at the price of $1.23 per share for an
aggregate purchase price of $5,000,000.




The
Company issued 3,278,259 shares of its Common Stock to one of the Company’s
shareholders who paid $4,032,258 cash to the Company during 2008. This purchase
was part of an investment agreement by the shareholder entered into in November
2007 to purchase the shares at $1.23 per share.




18.
STATUTORY RESERVES




Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company is
now only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.




Surplus Reserve
Fund




The
Company is required to transfer 10% of its net income, as determined under PRC
accounting rules and regulations, to a statutory surplus reserve fund until such
reserve balance reaches 50% of the Company’s registered
capital.


41




The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholdings or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issuance is not less than 25% of the registered
capital.




Common Welfare
Fund




The
common welfare fund is a voluntary fund that the Company can elect to transfer
5% to 10% of its net income to this fund. This fund can only be utilized on
capital items for the collective benefit of the Company’s employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon
liquidation.




19.
CONTINGENCIES




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.




The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.




20.
COMMITMENTS




Shengwei Cement Pure Low
Temperature Waste Heat Power Generator Project




In
November 2007, the Company signed a cooperative agreement with Shengwei Group
for building two sets of 12MW pure low temp cement waste heat power generator
systems for its two 2,500 tons per day cement manufacturing lines in
Jin Yang and a 5,000 tons per day cement manufacturing line in Tong Chuan. At
the end of 2008, the power generator system in Tong Chuan has completed
construction and was put into operation; the other system in Jin Yang is
expected to be complete in April 2009 with approximately $7,246,000 (RMB
53millon) in total investment.




Zhonggang Binhai 7-Megawatt
Capacity Electricity Generation Project




In
September, 2008, the Company signed a contract to recycle waste gas and waste
heat for China Zhonggang Binhai Enterprise Ltd. (“Zhonggang Binhai”) in Cangzhou
City, Hebei Province, a world-class nickel-iron manufacturing joint venture
between China Zhonggang Group and Shanghai Baoshan Steel
Group.  According to the contract, CREG will install a 7-Megawatt
capacity electricity-generation system. It will be an integral part of the
facilities designed to produce 80,000 tons of nickel-iron per year. The project
will generate 7-megawatt capacity electricity and help reduce in excess of
20,000 tons of carbon dioxide emissions every year. The project is expected to
start in March 2009 and be completed within 11 months with approximately $ 7.8
million (RMB 55 million) in total investment.  At December 31, 2008,
this project had not commenced.





21. RESTATEMENT OF
FINANCIAL STATEMENTS




The
financial statements for the balance sheet date at December 31, 2008 and for the
year ended December 31, 2008 were restated to reflect the
following:




1.
            Reclassification
      of current tax payable to deferred tax liability of $823,407 on sales-type
      leases as the Company did not separately record the deferred tax
      liability.


42




2.
            The
      Company initially recorded the rescission of the first $5,000,000
      convertible note and cross receipt transactions as the settlement of the
      note and the reacquisition of the BCF (See Note 15).  The
      Company’s management has now concluded that in substance the transaction
      resulted in the conversion of the first $5,000,000 note into common stock
      and should have been accounted for as such.  Accordingly, in
      accordance with EITF 00-27, the remaining BCF of $3,472,603 at the date of
      conversion has been expensed.





3.
            The
      Company originally recorded the employee stock options expense for those
      options that had vested up to the cancellation date.  The Company’s
      management has now concluded that the options subsequently issued on
      August 4, 2008 should be accounted for as a modification of the options
      cancelled and forfeited on June 25, 2008.  Accordingly, the Company
      recorded the difference between the fair values of the options before and
      after the modification date as incremental cost and amortized such cost
      including the unamortized grant date fair value over the new vesting
      period.





These restatement adjustments did not
have an impact to the statement of cash flows except the reclassification within
the operating activities.





The
following table presents the effects of the restatement adjustment on the
accompanying consolidated statement of operations for the year ended December
31, 2008:




As
                  Previously
                
                
                
                
                
                NetReported
                
                
                Restated
                
                
                AdjustmentCon Consolidated
      Statement of Operations and Comprehensive lossGeneral
      and administrative expenses
                
                $
                2,773,702
                
                
                $
                3,354,028
                
                
                $
                580,326Total
      operating expenses
                
                $
                2,773,702
                
                
                $
                3,354,028
                
                
                $
                580,326Interest
      expense
                
                $
                (1,314,689)
                
                
                $
                (4,787,292)
                
                
                $
                (3,472,603)Total
      non-operating expenses
                
                $
                (1,261,705)
                
                
                $
                (4,734,308)
                
                
                $
                (3,472,603)(Loss)
      income before income taxes
                
                $
                3,466,102
                
                
                $
                (586,827)
                
                
                $
                (4,052,929)Net
      (Loss) income
                
                $
                1,833,265
                
                
                $
                (2,219,664)
                
                
                $
                (4,052,929)Comprehensive
      (loss) income
                
                $
                3,697,592
                
                
                $
                (355,337)
                
                
                $
                (4,052,929)Net
      (Loss) income per common share — basic
                
                $
                0.06
                
                
                $
                (0.07)
                
                
                $
                (0.13)Net
      (Loss) income per common share — diluted
                
                $
                0.03
                
                
                $
                (0.07)
                
                
                $
                (0.10)




The following table presents the
effects of the restatement adjustment on the accompanying consolidated balance
sheet for the date at December 31, 2008:




Consolidate
      Balance Sheet at December 31, 2008
                
                As
                  Previously
                  Reported
                
                
                Restated
                
                
                Net
                  AdjustmentTax
      payable
                
                $
                2,137,356
                
                
                $
                1,313,949
                
                
                $
                (823,407
                )Deferred
      tax liability, net
                
                $
                -
                
                
                $
                823,407
                
                
                $
                823,407Total
      liabilities
                
                $
                12,679,694
                
                
                $
                12,679,694
                
                
                $
                -Additional
      paid in capital
                
                $
                30,475,360
                
                
                $
                34,528,289
                
                
                $
                4,052,929R      Accumulated
      deficit
                
                $
                (2,991,995
                )
                
                $
                (7,044,924
                )
                
                $
                (4,052,929
                )Total
      stockholders’ equity
                
                $
                32,421,663
                
                
                $
                32,421,663
                
                
                $
                -




43


ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.




None.




ITEM
9A. CONTROLS AND PROCEDURES.




Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. The Company’s internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.





Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.





On August
25, 2009, the Company announced that it had identified accounting issues and
therefore that the Company’s previously issued audited consolidated financial
statements as of and for the fiscal year ended December 31, 2008, and
unaudited interim consolidated financial statements as of and for the quarterly
periods ended March 31, 2009, September 30, 2008, and June 30, 2008
should no longer be relied upon.   The Company undertook a review
to resolve these issues.  Management also carried out a new
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 internal control over financial
reporting as of December 31, 2008 (the “Evaluation Date”), pursuant to Exchange
Act Rule 13(a). We carried out this evaluation using criteria similar to that
proscribed by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control — Integrated Framework. Upon review, the
Company concluded that it had not properly recorded the unamortized portion of
the beneficial conversion feature of a convertible note that was issued by the
Company to certain investors in 2007 and amended in 2008 and that it had not
properly recorded a modification in to the Company’s stock option which occurred
in 2008 (See Note 21).





Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to management, including
our principal executive and principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.  In connection with the restatement of our financial
statements in this Annual Report on Form 10-K/A described in the introductory
Explanatory Note, management reevaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the Evaluation Date.
Based on that reevaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of the Evaluation Date.





To address our concerns regarding these
matters, the Company has retained a consultant to evaluate our internal control
over financial reporting and to assist us in making improvements to the quality
of our controls, policies and procedures. The Company also intends to form an
Audit Committee of independent directors during the 2009 fiscal year to oversee
the audit and internal audit process.  In addition, we are improving
supervision, education, and training of our accounting staff and continue to
search for more qualified financial personnel with experience with U.S. GAAP and
U.S. public company reporting and compliance obligations.


44




This annual report on Form 10-K does
not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to the temporary rules of
the Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report on Form 10-K.





Changes
in internal control over financial reporting




We
believe the many changes we adopted in 2008 to alleviate the material weaknesses
we discovered in our internal controls over financial reporting as of December
31, 2007 have been effective, but further progress is needed.  In
order to correct previously identified material weaknesses, we implemented
several steps during 2008 that materially improved our internal control over
financial reporting:




1.           Reorganized
the accounting and finance department and hired additional accounting and
operations personnel with adequate experience, skills and knowledge relating to
complex, non-routine transactions;




2.           Engaged
a new accounting firm and a new legal firm that have experience working with
U.S. public companies;




3.           Hired
a certified public accountant with expertise in U.S. accounting principles to
prepare the Company’s annual report and quarterly reports;




4.           Established
a complete management system based upon the Company’s internal accounting
process to ensure that internal control over financial reporting is
effective;




5.           Established
an internal audit system with a senior accountant serving as the Company's
internal auditor;




6.           Made
amendments to the Company’s accounting system and working process (including
internal audit and material transaction review and verification process) to
strengthen the timeliness and efficiency of the Company’s internal controls;
and




7.           Engaged
an outside consultant to provide the company with independent internal control
risk consulting services related to the company’s compliance
efforts.




ITEM
9B. OTHER INFORMATION.




Not
applicable.




PART
III




ITEM
10.    DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE.




Executive
Officers and Directors




The
following table sets forth our executive officers and directors, their ages and
the positions held by them:





Name
                    
                    Age
                    
                    PositionGuohua
      Ku
                    
                    47
                    
                    Chief
      Executive Officer and Chairman of the BoardLanwei
      Li
                    
                    27
                    
                    Vice
      President and Director of Business and DirectorXinyu
      Peng
                    
                    40
                    
                    Chief
      Financial Officer and SecretaryZhigang
      Wu
                    
                    37
                    
                    Vice
      President, FinanceNicholas
      Shao
                    
                    37
                    
                    Director




45





Guohua Ku was appointed as
a director and Chief Executive Officer as of December 10, 2008.  He
was elected Chairman of the Board as of April 1, 2009.  Prior to
joining the Company, Mr. Ku served as a Senior Engineer for Yingfeng Technology
from 2003 to 2007.  From 1979 to 2003, Mr. Ku served in multiple
capacities for Shan Xi Blast Air Blower (Group) Co., Ltd., with his last
position serving as a Senior Engineer.





Lanwei Li
was appointed as a director on April 1, 2009.  He has been working for
the Company and its predecessors since March 2005 and currently works as Vice
President and Director of Business, supervising the departments of Business
Development, Investment Management and Strategy Development.  He has
a higher education background in investment economy
management.





Xinyu
Peng was appointed as Chief Financial Officer of the Company on August 4,
2008.  On December 10, 2008, the board of directors also appointed Mr.
Peng as Secretary of the Company.  Prior to joining the Company, Mr.
Peng served as Vice President of Tavistock Group Asia from January 2008 to July
2008. From November 2006 to July 2008, Mr. Peng served as Chief Financial
Officer and Director of MOD3 Cabinets & Home LLC.  From July 2003
to July 2008, he served as Chief Financial Officer of Creative Hospitality
Concepts LLC.





Zhigang
Wu  was appointed as Vice President, Finance starting in October 2007
and is responsible for the securities and financing activities of the
Company.  Before joining the Company, Mr. Wu worked for over a decade
in the securities and investment industries with Guotai-Junan Securities and
Zhongzheng Investment.  Mr. Wu received a bachelor degree from
Inner-Mongolia Finance & Economy University in 1998, with a major in
international finance.





Nicholas
Shao was appointed as a director of the Company on June 3, 2008, in accordance
with the terms of the Shareholders Agreement between the Company and, among
other parties, certain Carlyle Asia Growth investors.  Mr. Shao is
currently a Vice President of Carlyle Asia Growth and has worked in several
international investment banks, including Credit Suisse First Boston and
Morgan Stanley as a senior manager and analyst.





Board
of Directors and Board Committees




Our board
of directors currently consists of three directors. All directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified. There are no membership qualifications for
directors. Further, there are no share ownership qualifications for directors
unless so fixed by us.  Currently, we have not established any
committees of our board of directors. The entire board of directors oversees and
acts on all matters relevant to the Company.  No directors receive any
compensation for their services on our board of directors.





Pursuant
to the Shareholders Agreement, dated as of November 16, 2007, between the
Company and, amongst other parties, Carlyle Asia Growth Partners III, L.P. and
CAGP III Co-Investment, L.P.  CAGP III Co-Investment, L.P. has the
right to appoint up to two members of the board of directors for so long as they
remain investors in the Company.  There are no other arrangements or
understandings pursuant to which our directors are selected or
nominated.





Code
of Ethics




We have
adopted a written Code of Business Conduct that applies to all of our employees,
including our principal executive officer and principal financial
officer.  A printed copy of our code of ethics is available without
charge by sending a written request to: China Recycling Energy Corporation,
ATTN: Corporate Secretary, Suite 909, Tower B, Chang An International Building,
No. 88 Nan Guan Zheng Jie, Xi An City, Shan Xi Province, China
710068.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act, and regulations of the SEC thereunder, require our
directors, officers and persons who own more than 10% of our common stock, as
well as certain affiliates of those persons, to file with the SEC initial
reports of their ownership of our common stock and subsequent reports of changes
in that ownership. Directors, officers and persons owning more than 10% of our
common stock are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file. Based solely on our review of the copies of
these reports received by us and on information provided by the reporting
persons, we believe that during the fiscal year ended December 31, 2008, our
directors, officers and owners of more than 10% of our common stock complied
with all applicable filing requirements, except that: (i) Zhigang Wu reported
one cancellation of stock options and one stock option grant late on Form 4;
(ii) Nicholas Shao filed late an initial statement of beneficial ownership on
Form 3 upon his appointment to the board of directors; and (iii) Xinyu Peng
filed late an initial statement of beneficial ownership on Form 3 upon his
appointment as Chief Financial Officer.  Additionally, individuals who
ceased to be reporting persons under Section 16(a) during the fiscal year ended
December 31, 2008 complied with all applicable filing requirements, except that:
Xiaogang Zhu and Guanyu Wu each reported one cancellation of stock options and
one stock option grant late on Form 4.


46





ITEM 11.
            EXECUTIVE
      COMPENSATION.




Summary
Compensation Table




The
following table summarizes the compensation earned during the years ended
December 31, 2008 and 2007, by those individuals who served as our Chief
Executive Officer during any part of 2008.  None of our other
executive officers had total compensation in excess of $100,000 during
2008.  The individuals listed in the table below are referred to as
the “named executive officers.”





Name and Principal Position
                                                            
                                                            Year
                                                            
                                                            Salary
                                                              ($)
                                                            
                                                            Bonus
                                                              ($)
                                                            
                                                            
                                                            Stock
                                                              Awards
                                                              ($)
                                                            
                                                            
                                                            Option
                                                              Awards
                                                              ($) (3)
                                                            
                                                            
                                                            Non-Equity
                                                              Incentive
                                                              Plan
                                                              Compensation
                                                              ($)
                                                            
                                                            
                                                            Nonqualified
                                                              Deferred
                                                              Compensation
                                                              Earnings
                                                              ($)
                                                            
                                                            
                                                            All
                                                              Other
                                                              Compensation
                                                              ($)
                                                            
                                                            
                                                            Total
                                                              ($)Guohua
      Ku (1)
                                                            
                                                            2008
                                                            
                                                            $
                                                            1,498
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            $
                                                            1,498Chief
      Executive Officer
                                                              and
      Chairman of the Board
                                                            
                                                            2007Guangyu
      Wu (2)
                                                            
                                                            2008
                                                            
                                                            $
                                                            66,
      676
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            $
                                                            81,644
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            $
                                                            148,320Former
      Chief Executive
                                                              Officer
                                                            
                                                            2007
                                                            
                                                            $
                                                            33,399
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            $
                                                            11,440
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            $
                                                            44,839





(1)
            Guohua Ku was appointed as Chief
      Executive Officer of the Company on December 10,
    2008.


(2)
            Guangyu Wu resigned as Chief
      Executive Officer of the Company on December 10,
    2008.


(3)
            The amounts in this column
      reflect the dollar amounts recognized for financial statement reporting
      purposes for the fiscal years ended December 31, 2008 and 2007, in
      accordance with Statement of Financial Accounting Standards No. 123(R),
      “Share-Based Payments” (“SFAS 123(R)”), for awards made under our 2007
      Nonstatutory Stock Option Plan, which include amounts from awards granted
      in and prior to 2008.  Assumptions used in the calculation of
      these amounts are included in Note 16 to our audited financial statements
      included in our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2008.





Employment
Contracts




Mr.
Guohua Ku entered into an employment agreement with the Company to serve as its
CEO on December 10, 2008.  The agreement has a two year term starting
December 10, 2008 that includes a one-month probationary period.  Mr.
Ku receives a salary of RMB 15,850 per month (approximately $27,880 annuallly)
for his service as CEO.  The Company may terminate the employment agreement
at any time without any prior notice to the employee if Mr. Ku engages in
certain conduct, including, but not limited to (i) the violation of the rules
and procedures of the Company or breaches the terms of the employment agreement;
(ii) neglecting his duties or engages in malpractice for personal gain that
damages the Company; (iii) entering into an employment relationship with any
other employer during his employment with the Company; or (iv) the commission of
a crime. The Company also may terminate the employment agreement upon 30 days
written notice to Mr. Ku under certain other conditions, including but not
limited to (i) inability to continue position due to non-work-related sickness
or injury; (ii) incompetence; and (iii) the need for mass layoffs or other
restructuring.   Mr. Ku has the right to resign at any time upon
a 30 days written notice to the Company.


47





Mr.
Guangyu Wu entered into an employment agreement with the Company to serve as its
CEO on October 26, 2007.  Mr. Wu subsequently resigned his position as
CEO of the Company as of December 10, 2008.  The agreement had a two
year term starting October 26, 2007 and included a one-month probationary
period. Mr. Wu was receiving a salary of RMB 40,200 per month (approximately
$70,700 annuallly) at the time of his resignation, but his employment agreement
otherwise had identical terms as Mr. Ku’s agreement described
above.




Nonstatutory
Stock Option Plan




The board
of directors of the Company approved the China Recycling Energy Corporation 2007
Nonstatutory Stock Option Plan (the “2007 Plan”) on November 13, 2007, which
permits grants of nonstatutory stock options to all employees, officers,
directors and consultants of the Company or its affiliates.  The 2007
Plan authorizes the issuance of up to 3,000,000 shares of common stock of the
Company and by its terms will expire on November 12, 2012.  On
November 13, 2007, the Board authorized the issuance of options on all 3,000,000
shares to eligible recipients under the 2007 Plan.  These stock
options had a five year term and an exercise price of $1.23 per
share.





The
recipients of the outstanding stock options forfeited all of the outstanding
options as of  June 25, 2008 and new grants of stock options equaling
3,000,000 shares were made on August 4, 2008.  These new stock options
were granted with an exercise price of $0.80 per share, the fair market value of
the Company's common stock on the date of grant.  The options vested
as to 15% on the six-month anniversary of the date of grant; vest 15% on the
first anniversary of the date of grant; vest 50% on the second anniversary of
the date of grant; and vest the remaining 20% on the third anniversary of the
date of grant. The stock options also become fully vested upon termination
without cause, termination for good reason, termination due to death or
disability or in the event of a change in control of the Company.  The
stock options expire on the fifth anniversary of the date of grant.




Outstanding
Equity Awards at 2008 Fiscal Year-End





The
following table sets forth information regarding all outstanding equity awards
held by the named executive officers at December 31, 2008.




Option Awards
                      
                      
                      Stock AwardsName
                      
                      Number of
                        Securities
                        Underlying
                        Unexercised
                        Options
                        (#)
                        Exercisable
                      
                      
                      Number of
                        Securities
                        Underlying
                        Unexercised
                        Options
                        (#)
                        Unexercisable
                      
                      
                      Equity
                        Incentive Plan
                        Awards:
                        Number of
                        Securities
                        Underlying
                        Unexercised
                        Unearned
                        Options (#)
                      
                      Option
                        Exercise
                        Price
                        ($)
                      
                      
                      Option
                        Expiration
                        Date
                      
                      
                      Number
                        of Shares or
                        Units of
                        Stock That
                        Have Not
                        Vested (#)
                      
                      
                      Market
                        Value of
                        Shares or
                        Units of
                        Stock
                        That
                        Have Not
                        Vested
                        ($ )
                      
                      
                      Equity
                        Incentive
                        Plan
                        Awards:
                        Number of
                        Unearned
                        Shares,
                        Units or
                        Other
                        Rights That
                        Have Not
                        Vested (#)
                      
                      
                      Equity Incentive
                        Plan Awards:
                        Market or Payout
                        Value of
                        Unearned
                        Shares, Units or
                        Other Rights That
                        Have Not Vested
                        ($)Guohua
      Ku
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –Guangyu
      Wu
                      
                      
                      30,000
                      
                      
                      
                      170,000
                      (1)
                      
                      
                      –
                      
                      
                      $
                      0.80
                      
                      
                      8/4/2013
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –




(1)
            The stock options, granted on
      August 4, 2008, vest as to 15% on February 2, 2009; 15% on August 4, 2009;
      50% on August 4, 2010; and the remaining 20% on August 4,
      2011.





Potential
Payments Upon Termination or Change of Control




Employment
Agreements




Certain of our executive officers,
including our CEO, have an employment agreement with the
Company.  Under Chinese law, we may only terminate employment
agreements without cause and without penalty by providing notice of non-renewal
one month prior to the date on which the employment agreement is scheduled to
expire. If we fail to provide this notice or if we wish to terminate an
employment agreement in the absence of cause, as defined in the agreement, then
we are obligated to pay the employee one month’s salary for each year we have
employed the employee. We are, however, permitted to terminate an employee for
cause without penalty pursuant to the employment
agreement.


48




2007
Plan




To date,
the only awards outstanding under the 2007 Plan are stock
options.  Under the terms of the 2007 Plan, recipients have the
right to exercise any vested options, in whole or in part, at any time after
termination during the remaining term of the option; provided, however, that the
Board may specify a shorter period for exercise following termination as it
deems reasonable and appropriate.   In the event of the
recipient’s termination of employment by the Company without “cause” (as may be
defined in an employment agreement), by the recipient for “good reason” (as may
be defined in an employment agreement), or by reason of the recipient's death or
“disability” (as may be defined in an employment agreement), any portion of the
option that has not become vested and exercisable as of the date of the
termination of employment shall immediately vest and become
exercisable.  The 2007 Plan is more fully described above in the
narrative following the Summary Compensation Table.




Director
Summary Compensation Table





The
following table sets forth certain information regarding the compensation earned
by or awarded during the 2008 fiscal year to each director that is not a named
executive officer and who served on our board of directors in the 2008 fiscal
year.





Name
                    
                    Fees Earned
                      or
      Paid in
                      Cash
      ($)
                    
                    
                    Stock
                      Awards
                      ($)
                    
                    
                    Option
                      Awards
                      ($)
      (1)
                    
                    
                    Non-Equity
                      Incentive
      Plan
                      Compensation
                      ($)
                    
                    
                    Nonqualified
                      Deferred
                      Compensation
                      Earnings
                    
                    
                    All
      Other
                      Compensation
                      ($)
                    
                    
                    Total
                      ($)Nicholas
      Shao
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    0Hanqiao
      Zheng
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    0







(1)
            The aggregate number of option
      awards outstanding at December 31, 2008 for each of the directors was
      as follows:





Name
                      
                      OptionsNicholas
      Shao
                      
                      
                      0Hanqiao
      Zheng
                      
                      
                      0





Non-employee
directors are eligible to participate in the 2007 Plan at the discretion of the
full board of directors.  If grants are made to the directors, the
options are granted at fair market value, as defined in the 2007 Plan, and are
subject to the normal terms and conditions of the 2007 Plan.  No
grants of stock options were made to non-employee directors in
2008.




ITEM 12.
            SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED SHAREHOLDER
      MATTERS.




The
following table sets forth certain information by each of the following as of
March 31, 2009 (unless otherwise indicated) regarding their beneficial ownership
of our common stock: (i) each person who is known by us to beneficially own more
than 5% of our common stock; (ii) our Chief Executive Officer and the other
individual named in the Summary Compensation Table in this Amended Report; (iii)
each of our directors; and (iv) all of our directors and executive officers as
of March 31, 2009 as a group.




Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting and investment power with respect to the securities.  Except as
indicated by footnote, and subject to applicable community property laws, the
persons and entities named in the table below have sole voting and sole
investment power with respect to the shares set forth opposite each person’s or
entity’s name.




49





Shares of
common stock subject to options currently exercisable or exercisable within
60 days after March 31, 2009 are deemed outstanding for purposes of
computing the percentage ownership of the person holding such options, but are
not deemed outstanding for purposes of computing the percentage ownership of any
other person.




Common
      Stock
                        Beneficially
      OwnedBeneficial
      Owner
                      
                      Number of
                        Shares
                      
                      
                      Percent
      of
                        ClassCarlyle
      Asia Growth Partners III, L.P.
                        c/o
      The Carlyle Group
                        1001
      Pennsylvania Avenue, NW, Suite 220
                        Washington,
      DC 20004
                      
                      
                      8,131,746
                      (1)
                      
                      
                      22.32
                      %Guohua
      Ku
                      
                      
                      18,706,843
                      
                      
                      
                      51.36
                      %Lanwei
      Li
                      
                      
                      45,000
                      (2)
                      
                      
                      *Zhigang
      Wu
                      
                      
                      18,000
                      (3)
                      
                      
                      *Nicholas
      Shao
                      
                      
                      —
                      
                      
                      
                      *All
      executive officers and directors as a group
    (5 persons)
                      
                      
                      18,769,843
                      (4)
                      
                      
                      51.53
                      %







*
            Less than one percent
      (1%) of outstanding
shares.


(1)
            The amount shown and the
      following information is derived from Amendment No. 1 to the Schedule 13D
      filed jointly by (i) Carlyle Asia Growth Partners III, L.P., a Cayman
      Islands exempt limited partnership (“Asia Growth”), (ii) CAGP III
      Co-Investment, L.P., a Cayman Islands exempt limited partnership
      (“Co-Investment”), (iii) CAGP General Partner, L.P., a Cayman Islands
      exempt limited partnership, (iv) CAGP Ltd., a Cayman Islands exempt
      company, (v) TC Group Cayman, L.P., a Cayman Islands exempt limited
      partnership (vi) TCG Holdings Cayman, L.P., a Cayman Islands exempt
      limited partnership, and (vii) Carlyle Offshore Partners II, Ltd. A Cayman
      Islands exempt company, reporting beneficial ownership as of April 29,
      2008. According to the amended Schedule 13D, Asia Growth and Co-Investment
      are the record owners of 7,785,415 and 346,331 shares of Common Stock,
      respectively. CAGP General Partner, L.P. is the general partner of both
      Asia Growth and Co-Investment. CAGP General Partner, L.P. may, by virtue
      of it being the general partner of Asia Growth and Co-Investment, be
      deemed to have voting control and investment discretion over the
      securities held by Asia Growth and Co-Investment. The sole general partner
      of CAGP General Partner, L.P. is CAGP Ltd., a limited company that is
      wholly owned by TC Group Cayman, L.P. The sole general partner of TC Group
      Cayman, L.P. is TCG Holdings Cayman, L.P. Carlyle Offshore Partners II,
      Ltd. Is the sole general partner of TCG Holdings Cayman, L.P. Each of CAGP
      Ltd., TC Group Cayman, L.P., TCG Holdings Cayman, L.P., and Carlyle
      Offshore Partners II, Ltd. May, by virtue of being the owner or general
      partner, as the case may be, of CAGP General Partner, L.P., CAGP Ltd., TC
      Group Cayman, L.P., and TCG Holdings Cayman, respectively, be deemed to
      have voting control and investment discretion over the securities held by
      Asia Growth and
Co-Investment.


(2)
            Includes 18,000 shares issuable
      upon the exercise of
options.


(3)
            Includes 45,000 shares issuable
      upon the exercise of
options.


(4)
            Includes 18,706,843 shares held
      directly and 63,000 shares issuable upon the exercise of
      options.




50





EQUITY
COMPENSATION PLAN INFORMATION




The
following table sets forth certain information as of December 31, 2008 with
respect to securities authorized for issuance under the 2007 Plan, which was not
approved by our shareholders.




Plan
      Category
                      
                      Number of securities to be
                        issued
      upon exercise of
                        outstanding
      options,
                        warrants
      and rights
                        (a)
                      
                      
                      Weighted-
                        average exercise
                        price
      of
                        outstanding
                        options,
                        warrants
      and
                        rights
      (b)
                      
                      
                      Number of securities
                        remaining available for
                        future
      issuance under
                        equity compensation plans
                        (excluding
      securities
                        reflected
      in column (a))
                        (c)Equity
      compensation plans approved by shareholders
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Equity
      compensation plans not approved by shareholders
                      
                      
                      3,000,000
                      
                      
                      $
                      0.80
                      
                      
                      
                      0Total
                      
                      
                      3,000,000
                      
                      
                      $
                      0.80
                      
                      
                      
                      0




ITEM 13.
            CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.




The board
of directors must approve all related party transactions. All material related
party transactions will be made or entered into on terms that are no less
favorable to us than can be obtained from unaffiliated third
parties.




Director
Independence





Nicholas Shao is our only non-employee
director, and our board of directors has determined he is independent pursuant
to the listing rules of NASDAQ.





ITEM 14.
            PRINCIPAL ACCOUNTANT FEES AND
      SERVICES.




The
following table shows the fees earned by Goldman Park Kurland Mohidin, for the
audit and other services provided that related to the fiscal years ended
December 31, 2008 and 2007.  We have not yet selected our auditor
for the 2009 fiscal year.




2008
                      
                      
                      2007Audit
      Fees
                      
                      $
                      155,000
                      
                      
                      $
                      137,500Audit-Related
      Fees
                      
                      
                      18,170
                      
                      
                      
                      16,000Tax
      Fees
                      
                      
                      —
                      
                      
                      
                      —All
      Other Fees
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      $
                      173,170
                      
                      
                      $
                      153,500





Audit Fees.Audit
fees for the fiscal years ended December 31, 2008 and 2007 were for
professional services rendered for audits of our annual financial statements and
review of our quarterly financial statements included in our Quarterly Reports
on Form 10-Q.




Audit-Related
Fees.Audit-related fees for the fiscal years ended December
31, 2008  and 2007 were for assurance and related services related to
the audit and review of our annual financial statements and our quarterly
financial statements included in our Quarterly Reports on Form
10-Q.




The board
of directors has determined that the provision of these services is compatible
with the maintenance of the independence of Goldman Park Kurland
Mohidin.


51





The board
of directors has adopted a policy to pre-approve all audit and permissible
non-audit services provided by the independent registered public accounting
firm.  The pre-approval policy is detailed as to the particular
service or category of services and is subject to a specific
budget.  The services include the engagement of the independent
registered public accounting firm for audit services and audit-related
services.





If
we need to engage the independent registered public accounting firm for other
services, which are not considered subject to the general pre-approval as
described above, then the board of directors must approve such specific
engagement as well as the projected fees.  If the timing of the
project requires an expedited decision, then the Board has delegated to the
Chairman the authority to pre-approve such engagement, subject to fee
limitations.  The Chairman must report all such pre-approvals to the
entire board of directors for ratification at the next meeting.





ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





(a)
            Financial
      Statements and Schedules





(1)
            The
      following Financial Statements are filed as a part of this
      report:


(i)
            Report
      of Independent Registered Public Accounting
  Firm.


(ii)
            Consolidated
      Balance Sheets as of December 31, 2008 (Restated)  and December
      31, 2007.


(iii)
            Consolidated
      Statements of Operations  for the years ended December 31, 2008
      (Restated) and December 31, 2007.


(iv)
            Consolidated
      Statements of Shareholders’ Equity for the years ended December 31, 2008
      (Restated) and December 31, 2007.


(v)
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 (Restated)
      and December 31, 2007.


(vi)
            Notes
      to Consolidated Financial
Statements.





(2)
            All
      schedules for which provision is made in the applicable accounting
      regulations of the Securities and Exchange Commission are not required
      under the related instructions or are inapplicable and, therefore, have
      been omitted.





(3)
            Exhibits.
      Please see the list of exhibits set forth on our Exhibit Index, which is
      incorporated herein by reference.




52


SIGNATURES




In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.




China
      Recycling Energy CorporationDate:
      September 28, 2009
                By:
                /s/  Guohua KuGuohua
      KuChairman
      of the Board of Directors and Chief Executive OfficerDate:
      September 28, 2009
                By:
                /s/  Xinyu
PengXinyu
      PengChief
      Financial Officer and
Secretary





In
accordance with the requirements of the Exchange Act, this report has been
signed below on behalf of the registrant and in the capacities indicated on
September 25, 2009.




Each
person whose signature appears below constitutes and appoints Guohua Ku and
Xinyu Peng as his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K/A and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the U.S. Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.




Signature
                      
                      Title/s/  Guohua Ku
                      
                      Chairman
      of the Board of Directors and ChiefGuohua
      Ku
                      
                      Executive
      Officer/s/ Nicholas Shao
                      
                      DirectorNicholas
      Shao/s/ Lanwei Li
                      
                      DirectorLanwei
      Li




53


EXHIBIT
INDEX





The
following documents listed below that have been previously filed with the SEC
(1934 Act File No. 000-12536 unless otherwise stated) are incorporated herein by
reference:




Exhibit
                                                                                                                                                      No.
                                                                                                                                                    
                                                                                                                                                    Description3.1
                                                                                                                                                    
                                                                                                                                                    Articles
      of Incorporation (filed as Exhibit 3.05 to the Company’s Form 10-KSB for
      the fiscal year ended December 31, 2001).3.2
                                                                                                                                                    
                                                                                                                                                    Second
      Amended and Restated Bylaws (filed as Exhibit 3.1 to the Company’s Current
      Report on Form 8-K dated July 8, 2004).4.1
                                                                                                                                                    
                                                                                                                                                    Common
      Stock Specimen (filed as Exhibit 4.1 to the Company’s Form SB-2 dated
      November 12, 2004; 1934 Act File No. 333-120431).10.1
                                                                                                                                                    
                                                                                                                                                    Securities
      Exchange Agreement by and among Boulder Acquisitions, Inc., Sifang
      Holdings Co., Ltd. and the shareholders of Sifang Holdings Co., Ltd.,
      dated effective as of June 23, 2004 (filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K dated July 8,
  2004).10.2
                                                                                                                                                    
                                                                                                                                                    Share
      Purchase Agreement, dated January 24, 2007, between individual purchasers
      and shareholders of China Digital Wireless, Inc. (filed as Exhibit 11.1 to
      the Company’s Current Report on Form 8-K dated January 26,
      2007).10.3
                                                                                                                                                    
                                                                                                                                                    TRT
      Joint Operation Agreement between Shanghai TCH Energy Technology Co. Ltd.
      and Xi’an Yingfeng Science and Technology Co.Ltd. dated February 1, 2007
      (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
      April 9, 2007)10.4
                                                                                                                                                    
                                                                                                                                                    Share
      exchange agreement between Hanqiao Zheng and Guohua Ku and a group of
      individual purchasers all of whom are shareholders of Xi’an Yingfeng
      Science and Technology Co. Ltd (“Yingfeng”) signed on February 22, 2007
      and consummated on June 21, 2007 (filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K dated June 22, 2007)10.5
                                                                                                                                                    
                                                                                                                                                    Share
      exchange agreement between Guohua Ku and a group of individual purchasers
      all of whom are shareholders of Xi’an Yingfeng Science and Technology Co.
      Ltd (“Yingfeng”) dated on August 22, 2007 (filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K dated August 23,
    2007).10.6
                                                                                                                                                    
                                                                                                                                                    Share
      purchase agreement between Guohua Ku and Hanqiao Zheng dated on August 23,
      2007 2007 (filed as Exhibit 10.1 to the Company’s Current Report on Form
      8-K dated August 24, 2007).10.7
                                                                                                                                                    
                                                                                                                                                    Assets
      Transfer and Share Issuance Agreement between Company and Hanqiao Zheng on
      November 14, 2007 (filed as Exhibit 10.1 to the Company’s Current Report
      on Form 8-K dated November 16, 2007).10.8
                                                                                                                                                    
                                                                                                                                                    Share
      Purchase Agreement between Company and Hanqiao Zheng on November 16, 2007
      (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
      November 16, 2007).10.9
                                                                                                                                                    
                                                                                                                                                    Stock
      and Notes Purchase Agreement, between Company, Sifang Holdings Co., Ltd.,
      Shanghai TCH Energy Technology Co., Ltd.  and Carlyle Asia
      Growth Partners III, L.P. and CAGP III Co-Investment, L.P. dated November
      16, 2007 (filed as Exhibit 10.1 to the Company’s Current Report on Form
      8-K dated November 16, 2007).10.10
                                                                                                                                                    
                                                                                                                                                    Amendment
      to Stock and Notes Purchase Agreement, between Company, Sifang Holdings
      Co., Ltd., Shanghai TCH Energy Technology Co., Ltd. and Carlyle Asia
      Growth Partners III, L.P. and CAGP III Co-Investment, L.P. dated April 29,
      2008 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
      dated April 30,
2008).









Exhibit
                  No.
                
                Description10.11
                
                Form
      of 10% Secured Convertible Promissory Note issued by the Company to
      Carlyle Asia Growth Partners III, L.P. and CAGP III Co-Investment, L.P.
      (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
      November 16, 2007).10.12
                
                Form
      of 5% Secured Convertible Promissory Note issued by the Company to Carlyle
      Asia Growth Partners III, L.P. and CAGP III Co-Investment, L.P (filed as
      Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November
      16, 2007).10.13
                
                5%
      Secured Convertible Promissory Note in the aggregate principal amount of
      $5,000,000 issued by the Company to Carlyle Asia Growth Partners III, L.P.
      and CAGP III Co-Investment, L.P 2008 (filed as Exhibit 10.2 to the
      Company’s Current Report on Form 8-K dated April 30,
  2008).10.14
                
                Form
      of 5% Secured Convertible Promissory Note in the aggregate principal
      amount of $10,000,000 issued by the Company to Carlyle Asia Growth
      Partners III, L.P. and CAGP III Co-Investment, L.P 2008 (filed as Exhibit
      10.3 to the Company’s Current Report on Form 8-K dated April 30,
      2008).10.15
                
                Registration
      Rights Agreement between Company and Carlyle Asia Growth Partners III,
      L.P. and CAGP III Co-Investment, L.P. dated November 16, 2007 (filed as
      Exhibit 10.6 to the Company’s Current Report on Form 8-K dated November
      16, 2007).10.16
                
                Shareholders
      Agreement between Company and Carlyle Asia Growth Partners III, L.P., CAGP
      III Co-Investment, L.P., Hanqiao Zheng and Ping Sun dated November 16,
      2007 (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K
      dated November 16, 2007).10.17
                
                Form
      of Nonstatutory Stock Option Agreement - Manager Employee (filed as
      Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 8,
      2008).*10.18
                
                2007
      Nonstatutory Stock Option Plan (filed as Exhibit 10.1 to the Company’s
      Registration Statement on Form S-8 dated November 13,
    2007).*10.19
                
                Form
      of Nonstatutory Stock Option Agreement - Non-Manager Employee (filed as
      Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 8,
      2008).14.1
                
                Code
      of Ethics (filed  as  an  Exhibit  14 to the Company’s
      Annual Report on Form 10-KSB for the period ending December 31,
      2004).21.1
                
                Subsidiaries
      (filed as Exhibit 21.1 on the Company’s Current Report on Form 8-K dated
      November 16, 2007).23.1
                
                Consent
      of Independent Registered Public Accounting Firm (filed as Exhibit 23.1 to
      the Company’s Annual Report on Form 10-K filed March 23,
      2009).31.1
                
                Rule
      13a-14(a)/15d-14(a) certification of the Chief Executive Officer.
      †31.2
                
                Rule
      13a-14(a)/15d-14(a) certification of the Chief Financial Officer.
      †32.1
                
                Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
      †32.2
                
                Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
      †




*
Management contract, compensatory plan or arrangement.




†
Exhibits filed herewith.