UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        DC 20549
  **FORM
        10-Q**
  x QUARTERLY
        REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        quarterly period ended June 30, 2008
 
 or
  o TRANSITION
        REPORT PURSUANT TO
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For
        the
        transition period from ________ to ____________
  Commission
        file number 333-126900
  
 **China
                  Clean Energy Inc.**(Exact
                  Name of Registrant as Specified in Its Charter)Delaware
              
              87-0700927(State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              
              (I.R.S.
                  Employer
                Identification
                  No.)c/o
                  Fujian Zhongde Technology Co., Ltd.
                Fulong
                  Industry Zone
                Longtian
                  Town Fuqing City
                Fujian,
                  China
              35013(Address
                  of Principal Executive Offices)
              (Zip
                  Code)86-591-85773387(Registrant’s
                  Telephone Number, Including Area Code)(Former
                  Name, Former Address and Former Fiscal Year, if Changed Since Last
                  Report)
 
 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
o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer”, “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
  Large
                  accelerated filer o
              Accelerated
                  filer oNon-accelerated
                  filer o
              Smaller
                  reporting company x
 (Do
        not
        check if a smaller reporting company)
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o No x
  As
        of
        August 12, 2008, 31,512,269 shares of the issuer’s common stock, $0.001 par
        value per share, were outstanding.
  
  **CHINA
        CLEAN ENERGY INC.**
  **Table
        of Contents**
  PagePART
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements
              1Consolidated
                  Balance Sheets as of June 30, 2008 (Unaudited)and
                  December 31, 2007
              1Consolidated
                  Statements of Income and Other Comprehensive Income (Unaudited)
                  for the
                  Three months and the Six months ended June 30, 2008 and
                  2007
              2Consolidated
                  Statements of Shareholders’ Equity (Unaudited)
              3Consolidated
                  Statements of Cash Flows for the six months ended June 30, 2008
                  and 2007(Unaudited)
              4Notes
                  to Consolidated Financial Statements (Unaudited)
              5Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results ofOperations
              22Item
                  4T.
              Controls
                  and Procedures
              27PART
                  II
              OTHER
                  INFORMATIONItem
                  6.
              Exhibits
              27
 
 
 PART
        I-
        FINANCIAL INFORMATION
  **Item
        1.**  **Financial
        Statements.**
 CHINA
                    CLEAN ENERGY INC. AND SUBSIDIARIESCONSOLIDATED
                    BALANCE SHEETSAS
                    OF JUNE 30, 2008 AND DECEMBER 31,
                    2007
  ASSETSJune
                    30,
                
                December
                    31,2008
                
                2007(Unaudited)CURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                7,387,647
                
                $
                1,133,555Accounts
                    receivable, net of allowance for doubtful accounts of$238,759and
                    $407,593,as
                    of June 30, 2008 and December 31, 2007, respectively
                
                
                1,629,377
                
                
                2,795,363Inventories
                
                
                1,278,681
                
                
                1,361,478Advances
                    for inventory purchase
                
                
                2,985,454
                
                
                -Prepaid
                    expenses and other receivables
                
                
                1,142
                
                
                179,815Total
                    current assets
                
                
                13,282,301
                
                
                5,470,211PROPERTY,
                    PLANT AND EQUIPMENT, NET
                
                
                10,453,655
                
                
                5,820,045INTANGIBLE
                    ASSETS, NET
                
                
                5,163,158
                
                
                4,879,635ADVANCES
                    ON EQUIPMENT PURCHASES
                
                
                3,406,694
                
                
                872,974TOTAL
                    ASSETS
                
                $
                32,305,808
                
                $
                17,042,865LIABILITIES
                    AND SHARE HOLDERS' EQUITYCURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                188,133
                
                $
                150,557Customer
                    deposits
                
                
                150
                
                
                181,825Accrued
                    liabilities
                
                
                129,860
                
                
                83,824Salaries
                    payable
                
                
                35,740
                
                
                31,425Value
                    added tax payables
                
                
                22,638
                
                
                320,397Other
                    taxes payable
                
                
                17,307
                
                
                13,652Short-term
                    bank loans
                
                
                -
                
                
                1,028,228Long-term
                    bank loans - current portion
                
                
                225,413
                
                
                202,792Total
                    current liabilities
                
                
                619,241
                
                
                2,012,700NONCURRENT
                    LIABILITIESLong-term
                    bank loans
                
                
                141,572
                
                
                241,097TOTAL
                    LIABILITIES
                
                
                760,813
                
                
                2,253,797SHAREHOLDERS'
                    EQUITYPreferred
                    stock, par value $0.001 per share, authorized 10,000,000
                    shares,no
                    shares issued and outstanding as of June 30, 2008 and December
                    31,
                    2007
                
                
                -
                
                
                -Common
                    stock, par value $0.001 per share, authorized 90,000,000
                    shares,31,512,269
                    and 21,512,269 shares issued and outstanding as ofJune
                    30, 2008 and December 31, 2007, respectively
                
                
                31,512
                
                
                21,512Additional
                    paid-in capital
                
                
                21,159,114
                
                
                7,034,473Statutory
                    reserves
                
                
                1,195,746
                
                
                785,536Retained
                    earnings
                
                
                6,075,123
                
                
                5,736,105Accumulated
                    other comprehensive income
                
                
                3,083,500
                
                
                1,211,44231,544,995
                
                
                14,789,068Total
                    liabilities and shareholders' equity
                
                $
                32,305,808
                
                $
                17,042,865
 The
          accompanying notes are an integral part of this statement.
  1
 
 CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 (Unaudited)
 Three
                      months ended June 30,
                  
                  Six
                      months ended June 30,2008
                  
                  2007
                  
                  2008
                  
                  2007REVENUES
                  
                  $
                  5,478,785
                  
                  $
                  5,255,040
                  
                  $
                  9,951,794
                  
                  $
                  9,393,406Less:
                      cost of goods sold
                  
                  
                  4,120,332
                  
                  
                  3,824,722
                  
                  
                  7,550,105
                  
                  
                  6,814,671GROSS
                      PROFIT
                  
                  
                  1,358,453
                  
                  
                  1,430,318
                  
                  
                  2,401,689
                  
                  
                  2,578,735OPERATING
                      EXPENSESelling
                      and marketing
                  
                  
                  49,040
                  
                  
                  224,048
                  
                  
                  136,921
                  
                  
                  437,291General
                      and administrative
                  
                  
                  444,288
                  
                  
                  284,432
                  
                  
                  968,078
                  
                  
                  674,492Depreciation
                      and amortization
                  
                  
                  69,101
                  
                  
                  71,941
                  
                  
                  149,198
                  
                  
                  133,402Research
                      and development
                  
                  
                  51,222
                  
                  
                  31,381
                  
                  
                  91,004
                  
                  
                  90,885Total
                      operating expense
                  
                  
                  613,651
                  
                  
                  611,802
                  
                  
                  1,345,201
                  
                  
                  1,336,070INCOME
                      FROM OPERATIONS
                  
                  
                  744,802
                  
                  
                  818,516
                  
                  
                  1,056,488
                  
                  
                  1,242,665OTHER
                      INCOME (EXPENSE)Interest
                      income
                  
                  
                  10,411
                  
                  
                  1,429
                  
                  
                  17,433
                  
                  
                  3,931Interest
                      expense
                  
                  
                  -
                  
                  
                  (26,835
                  )
                  
                  -
                  
                  
                  (52,780
                  )Bank
                      fees
                  
                  
                  (7,625
                  )
                  
                  -
                  
                  
                  (7,625
                  )
                  
                  -Foreign
                      currency transaction loss
                  
                  
                  (47,615
                  )
                  
                  -
                  
                  
                  (77,712
                  )
                  
                  -Loss
                      on disposal of fixed assets
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (490
                  )
                  
                  -Total
                      other expense
                  
                  
                  (44,829
                  )
                  
                  (25,406
                  )
                  
                  (68,394
                  )
                  
                  (48,849
                  )INCOME
                      BEFORE INCOME TAXES
                  
                  
                  699,973
                  
                  
                  793,110
                  
                  
                  988,094
                  
                  
                  1,193,816PROVISION
                      FOR INCOME TAXES
                  
                  
                  142,283
                  
                  
                  -
                  
                  
                  238,866
                  
                  
                  -NET
                      INCOME
                  
                  
                  557,690
                  
                  
                  793,110
                  
                  
                  749,228
                  
                  
                  1,193,816OTHER
                      COMPREHENSIVE INCOMEForeign
                      currency translation adjustment
                  
                  
                  708,840
                  
                  
                  150,233
                  
                  
                  1,872,058
                  
                  
                  257,197COMPREHENSIVE
                      INCOME
                  
                  $
                  1,266,530
                  
                  $
                  943,343
                  
                  $
                  2,621,286
                  
                  $
                  1,451,013BASIC
                      AND DILUTED EARNINGS PER SHAREWeighted
                      average number of shares
                  
                  
                  31,512,269
                  
                  
                  21,512,269
                  
                  
                  31,017,764
                  
                  
                  21,512,269Earnings
                      per share
                  
                  $
                  0.02
                  
                  $
                  0.04
                  
                  $
                  0.02
                  
                  $
                  0.06
 The
            accompanying notes are an integral part of this statement.
  2
 
 CHINA
                CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' EQUITY
 AccumulatedAdditional
                      
                      Retained
                          Earnings
                      
                      OtherCommon
                            Stock
                      
                      Paid-in
                      
                      Statutory
                      
                      Unrestricted
                      
                      ComprehensiveShares
                      
                      Amount
                      
                      Capital
                      
                      Reserves
                      
                      Earnings
                      
                      Income
                      
                      TotalBalance
                          at December 31, 2006
                      
                      
                      21,512,269
                      
                      $
                      21,512
                      
                      $
                      7,034,473
                      
                      $
                      785,536
                      
                      $
                      2,376,211
                      
                      $
                      415,089
                      
                      $
                      10,632,821Net
                          income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,193,816
                      
                      
                      
                      
                      
                      1,193,816Foreign
                          currency translation adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      257,197
                      
                      
                      257,197Balance
                          at June 30, 2007 (Unaudited)
                      
                      
                      21,512,269
                      
                      
                      21,512
                      
                      
                      7,034,473
                      
                      
                      785,536
                      
                      
                      3,570,027
                      
                      
                      672,286
                      
                      
                      12,083,834Net
                          income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,166,078
                      
                      
                      
                      
                      
                      2,166,078Foreign
                          currency translation adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      539,156
                      
                      
                      539,156Balance
                          at December 31, 2007
                      
                      
                      21,512,269
                      
                      
                      21,512
                      
                      
                      7,034,473
                      
                      
                      785,536
                      
                      
                      5,736,105
                      
                      
                      1,211,442
                      
                      
                      14,789,068Adjustment
                          to 2007 statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      410,210
                      
                      
                      (410,210
                      )
                      
                      
                      
                      
                      -Common
                          stock and warrants for cash
                      
                      
                      10,000,000
                      
                      
                      10,000
                      
                      
                      13,617,403
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,627,403Stock
                          options granted to employees
                      
                      
                      
                      
                      
                      
                      
                      
                      507,238
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      507,238Net
                          income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      749,228
                      
                      
                      
                      
                      
                      749,228Foreign
                          currency translation adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,872,058
                      
                      
                      1,872,058Balance
                          at June 30, 2008 (Unaudited)
                      
                      
                      31,512,269
                      
                      $
                      31,512
                      
                      $
                      21,159,114
                      
                      $
                      1,195,746
                      
                      $
                      6,075,123
                      
                      $
                      3,083,500
                      
                      $
                      31,544,995
 The
                accompanying notes are an integral part of this statement.
  3
 CHINA
                CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
                STATEMENTS OF CASH FLOWS
 FOR
                THE
                SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (Unaudited)2008
                      
                      2007**CASH
                          FLOWS FROM OPERATING ACTIVITIES**Net
                          income
                      
                      $
                      749,228
                      
                      $
                      1,193,816Adjusted
                          to reconcile net income to cash providedby
                          operating activities:Depreciation
                      
                      
                      313,931
                      
                      
                      264,231Recovery
                          of bad debt expense
                      
                      
                      (189,579
                      )
                      
                      -Amortization
                          of intangible assets
                      
                      
                      107,207
                      
                      
                      98,387Stock-based
                          compensation expense
                      
                      
                      507,238
                      
                      
                      -Writedown
                          on inventory
                      
                      
                      29,043
                      
                      
                      -Loss
                          on disposal of assets
                      
                      
                      490
                      
                      
                      -Changes
                          in operating assets and liabilitiesAccounts
                          receivable
                      
                      
                      1,497,611
                      
                      
                      (300,992
                      )Inventories
                      
                      
                      136,437
                      
                      
                      (82,357
                      )Advances
                          for inventory purchase
                      
                      
                      (2,902,377
                      )
                      
                      (364,289
                      )Prepaid
                          expenses and other receivables
                      
                      
                      183,807
                      
                      
                      (270,251
                      )Accounts
                          payable
                      
                      
                      30,537
                      
                      
                      107,239Customer
                          deposit
                      
                      
                      (187,969
                      )
                      
                      -Other
                          payables and accrued liabilities
                      
                      
                      45,657
                      
                      
                      -Value
                          added tax payables
                      
                      
                      (309,474
                      )
                      
                      -Income
                          tax and other tax payables
                      
                      
                      154,177
                      
                      
                      (117,964
                      )Net
                          cash provided by operating activities
                      
                      
                      165,964
                      
                      
                      527,820**CASH
                          FLOWS FROM INVESTING ACTIVITIES**Addition
                          to construction in progress
                      
                      
                      (2,484,544
                      )
                      
                      -Purchase
                          of property and equipment
                      
                      
                      (1,950,320
                      )
                      
                      (89,805
                      )Proceeds
                          from sale of equipment
                      
                      
                      1,747
                      
                      
                      -Advances
                          on equipment purchases
                      
                      
                      (2,408,720
                      )
                      
                      (1,856,322
                      )Net
                          cash used in investing activities
                      
                      
                      (6,841,837
                      )
                      
                      (1,946,127
                      )**CASH
                          FLOWS FROM FINANCING ACTIVITIES**Decrease
                          due to related parties
                      
                      
                      -
                      
                      
                      (6,419
                      )Net
                          proceeds from issuance of common stock
                      
                      
                      13,627,403
                      
                      
                      -Decrease
                          on short-term bank loan
                      
                      
                      (1,054,467
                      )
                      
                      (108,053
                      )(Decrease)
                          increase on long-term bank loans
                      
                      
                      (111,805
                      )
                      
                      328,971Net
                          cash provided by financing activities
                      
                      
                      12,461,131
                      
                      
                      214,499**EFFECT
                          OF EXCHANGE RATE ON CASH**
                      
                      
                      468,834
                      
                      
                      80,431**INCREASE
                          (DECREASE) IN CASH AND CASH EQUIVALENTS**
                      
                      
                      6,254,092
                      
                      
                      (1,123,377
                      )**CASH
                          AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**
                      
                      
                      1,133,555
                      
                      
                      2,241,712**CASH
                          AND CASH EQUIVALENTS AT END OF PERIOD**
                      
                      $
                      7,387,647
                      
                      $
                      1,118,335**SUPPLEMENTAL
                          DISCLOSURE OF CASH FLOW INFORMATION**Cash
                          paid during the period for:Interest
                          expense
                      
                      $
                      36,861
                      
                      $
                      52,780Income
                          taxes
                      
                      $
                      86,113
                      
                      $
                      -
 The
                accompanying notes are an integral part of this statement.
 4
 
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
            30,
            2008
 (UNAUDITED)
 **NOTE
            1 - ORGANIZATION AND BUSINESS**
  China
            Clean Energy Inc. (“CCE”) was incorporated in the State of Delaware on November
            12, 2004.
 
 On
            October 24, 2006, CCE acquired 100% of the issued and outstanding common
            shares
            of China Clean Energy Resources Limited (“CCER”) in exchange for 15,995,000
            newly issued shares of CCE common stock (the “Share Exchange”). As a result of a
            share exchange, CCER became a wholly-owned subsidiary of CCE and CCE
            succeeded
            to the business of Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”).
            Fujian Zhongde synthesizes and distributes renewable fuel products and
            specialty
            chemicals to customers in both the People’s Republic of China (“PRC”) and
            abroad.
  CCER
            was
            formed on February 13, 2006 under the laws of the British Virgin Islands
            as a
            holding company to own Fujian Zhongde. Fujian Zhongde was incorporated
            in the
            province of Fujian, China, on July 10, 1995 under the name “Fuqing City Zhongde
            Chemical Industry, Ltd.” On December 10, 2003, it changed its name to “Fujian
            Zhong De Technology Stock Co., Ltd”. On January 20, 2006, it changed its name to
“Fujian Zhongde Technology Co., Ltd.”
  On
            November 5, 2007, CCER established a wholly-owned subsidiary, Fujian
            Zhongde
            Energy Co., Ltd. (“Zhongde Energy”), in Jiangyin Industrial Zone, Fuqing City,
            Fujian Province, PRC. Zhongde Energy plans to build a biodiesel refinery
            in the
            Jiangyin Industrial Park from which it will produce and sell biodiesel
            products.
            The construction of its production plant is currently in progress.
 
 **NOTE
            2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 Principles
            of Consolidation
 
 The
            accompanying consolidated financial statements of China Clean Energy
            Inc.
            reflect the activities of CCE and its 100% owned subsidiaries CCER, Fujian
            Zhongde and Zhongde Energy (collectively, the “Company”). All inter-company
            balances and transactions have been eliminated in consolidation.
 
 Basis
            of Presentation
 
 The
            financial statements of the Company have been prepared in accordance
            with
            accounting principles generally accepted in the United States and are
            expressed
            in US dollars.
 
 We
            have
            included all normal recurring adjustments that we considered necessary
            to give a
            fair presentation of our operating results for the periods presented.
            Interim
            results are not necessarily indicative of results for a full year. The
            information included in this Form 10-Q should be read in conjunction with
            information included in the 2007 annual report filed on Form
            10-KSB.
 5
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 Use
            of
            Estimates
 
 The
            preparation of financial statements in conformity with accounting principles
            generally accepted in the Unites States requires management to make estimates
            and assumptions that affect the reported amounts of assets and liabilities
            and
            disclosure of contingent assets and liabilities at the date of the financial
            statements and the reported amounts of revenues and expenses during the
            reporting period. For
            example, the Company estimates its potential losses on uncollectible
            receivables. Management believes that the estimates utilized in preparing
            its
            financial statements are reasonable and prudent. Actual
            results could differ from those estimates.
 
 Fair
            Value of Financial Instruments
 
 On
            January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair
            Value
            Measurements, defines fair value, establishes a three-level valuation
            hierarchy
            for disclosures of fair value measurement and enhances disclosures requirements
            for fair value measures. The carrying amounts reported in the balance
            sheets for
            current assets and current liabilities qualified as financial instruments
            are a
            reasonable estimate of fair value because of the short period of time
            between
            the origination of such instruments and their expected realization and
            their
            current market rate of interest. 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 assets or liability, either directly or indirectly, for
                    substantially the full term of the financial
                    instruments. ·
                Level
                    3 -- inputs to the valuation methodology are unobservable and
                    significant
                    to the fair value. 
 The
            Company did not identify any assets or liabilities that are required
            to be
            presented on the balance sheet at fair value in accordance with SFAS
            No. 157.
 
 Foreign
            Currency Translation
 
 The
            functional currency of CCE and CCER is the United States dollar. The
            functional
            currency of Fujian Zhongde and Zhongde Energy is the Chinese Renminbi
            (“RMB”).
            The reporting currency of the Company is the United States dollar.
 
 Fujian
            Zhongde and Zhongde Energy assets and liabilities are translated into
            United
            States dollars at period-end exchange rates of $0.14590 and $0.13710
            at June 30,
            2008 and December 31, 2007, respectively. Fujian Zhongde and Zhongde
            Energy
            revenues and expenses are translated into United States dollars at weighted
            average exchange rates for the periods at $0.14184 and $0.12971 for the
            periods
            ended June 30, 2008 and 2007, respectively. Resulting translation adjustments
            are recorded as a component of accumulated other comprehensive income
            (loss)
            within stockholders’ equity. The
            resulting translation gains and losses that arise from exchange rate
            fluctuations on transactions denominated in a currency other than the
            functional
            currency are included in the results of operations as incurred. Items
            in the
            cash flow statement are translated at the average exchange rate for the
            period.
            As a result, amounts related to assets and liabilities reported on the
            statement
            of cash flows will not necessarily agree with changes in the corresponding
            balances on the balance sheet.
 6
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 As
            of
            June 30, 2008 and December 31, 2007, translation adjustments resulting
            from this
            process included in accumulated other comprehensive income in the consolidated
            statement of stockholders’ equity amounted to $3,083,500 and $1,211,442,
            respectively.
 
 Cash
            and Cash Equivalents
 
 The
            Company considers all highly liquid instruments with original maturities
            of
            three months or less at the time of issuance to be cash
            equivalents.
 
 Accounts
            Receivable
 
 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 recorded based on managements’ assessment of the credit history
            with the customer and current relationships with them.
 
 Inventories
 
 Inventories
            are stated at the lower of cost or market. The method of determining
            cost is
            used consistently from year to year as the first-in, first-out (“FIFO”)
            method.
 
 Property,
            Plant and Equipment
 
 Plant
            and
            equipment are stated at cost. Expenditures for maintenance and repairs
            are
            charged to earnings as incurred; additions, renewals and betterments
            are
            capitalized. When assets 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 plant and equipment
            is
            provided using the straight-line method for substantially all assets
            with
            estimated lives as follows:
 
 Estimated
                      Useful LifeBuildings
                  20
                      yearsVehicle
                  5
                      yearsOffice
                      equipment
                  5
                      yearsProduction
                      equipment
                  10
                      years
 7
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 Construction
            in progress represents the costs incurred in connection with the construction
            of
            buildings or new additions to the Company’s plant facilities. No depreciation is
            provided for construction in progress until such time as the assets are
            completed and placed into service.
 
 Intangible
            assets
 
 Under
            the
            Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other
            Intangible Assets", all goodwill and certain intangible assets determined
            to
            have indefinite lives will not be amortized but will be tested for impairment
            at
            least annually. Intangible assets other than goodwill will be amortized
            over
            their useful lives and reviewed for impairment in accordance with SFAS
            No. 144,
            "Accounting for Impairment or Disposal of Long-Lived Assets".
 
 The
            intangible assets as of June 30, 2008 and December 31, 2007, net of
            amortization, amounted to $5,163,158 and $ 4,879,635 ,
            respectively.
 
 Impairment
            of Long-Lived Assets
 
 The
            Company reviews its long-lived assets for impairment whenever events
            or changes
            in circumstances indicate that the carrying amount of an asset may no
            longer be
            recoverable. When these events occur, the Company measures impairment
            by
            comparing the carrying value of the long-lived assets to the estimated
            undiscounted future cash flows expected to result from the use of the
            assets and
            their eventual disposition. If the sum of the expected undiscounted cash
            flows
            is less than the carrying amount of the assets, the Company would recognize
            an
            impairment loss based on the fair value of the assets. As
            of
            June 30, 2008, the Company expected these assets to be fully recoverable.
 
 Revenue
            Recognition
 
 Sales
            are
            recognized when the revenue is realized or realizable, and has been earned,
            in
            accordance with the U.S. Securities and Exchange Commission’s Staff Accounting
            Bulletin No. 104, “Revenue Recognition in Financial Statements.” The Company’s
            sales are related to sales of product. Revenue for product sales is recognized
            as risk and title to the product transfer to the customer, which usually
            occurs
            at the time when shipment is made, provided that: there
            are
            no uncertainties regarding customer acceptance; persuasive evidence of
            an
            arrangement exists; the sales price is fixed and determinable; and
            collectibility is deemed probable. Substantially
            all of the Company’s products are sold FOB (“free on board”) shipping point.
            Title to the product passes when the product is delivered to the freight
            carrier.
 
 Transportation
            and unloading charges and product inspection charges are included in
            selling
            expenses and totaled $37,512 and $199,344 for the three months ended
            June 30,
            2008 and 2007, respectively and $111,421 and $378,487 for
            the
            six months ended June 30, 2008 and 2007, respectively .
  8
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 Research
            and Development Costs
  Research
            and development (or “R&D”) expenses include salaries, material, contract and
            other outside service fees, and facilities and overhead costs. Under
            the
            guidance of paragraphs 8 to 11 of SFAS 2 “Accounting for Research and
            Development Costs”, the Company expenses the costs associated with the research
            and development activities when incurred.
 
 Stock-based
            Compensation
 
 Stock-based
            compensation is accounted for at fair value in accordance with SFAS No.
            123 (R)
“Accounting for Stock-Based Compensation”. SFAS 123R requires that compensation
            cost relating to stock-based payment transactions be recognized in financial
            statements. That cost is measured based on the fair value of the equity
            or
            liability instruments issued on the grant date of such instruments, and
            are
            recognized over the period during which a party is required to provide
            service
            in exchange for the award (typically the vesting period).
  Income
            Taxes
 
 The
            Company records income taxes pursuant to Statement of Financial Accounting
            Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
            requires
            the recognition of deferred income tax liabilities and assets for the
            expected
            future tax consequences of temporary differences between income tax basis
            and
            financial reporting basis of assets and liabilities. Provision for income
            taxes
            consist of taxes currently due plus deferred taxes. There are no deferred
            tax
            amounts at June 30, 2008 and December 31, 2007.
 
 The
            charge for taxation is based on the results for the year as adjusted
            for items,
            which are non-assessable or disallowed. It is calculated using tax rates
            that
            have been enacted or substantially enacted by the balance sheet
            date.
  Deferred
            tax is accounted for using the balance sheet liability method in respect
            of
            temporary differences arising from differences between the carrying amount
            of
            assets and liabilities in the financial statements and the corresponding
            tax
            basis used in the computation of assessable tax profit. In principle,
            deferred
            tax liabilities are recognized for all taxable temporary differences,
            and
            deferred tax assets are recognized to the extent that it is probably
            that
            taxable profit will be available against which deductible temporary differences
            can be utilized. Deferred tax is calculated at the tax rates that are
            expected
            to apply to the period when the asset is realized or the liability is
            settled.
            Deferred tax is charged or credited in the income statement, except when
            it is
            related to items credited or charged directly to equity, in which case
            the
            deferred tax is also dealt with in equity. Deferred tax assets and liabilities
            are offset when they relate to income taxes levied by the same taxation
            authority and the Company intends to settle its current tax assets and
            liabilities on a net basis.
 9
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 The
            Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
            Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a
            benefit only if it is “more likely than not” that the tax position would be
            sustained in a tax examination, with a tax examination being presumed
            to occur.
            The amount recognized is the largest amount of tax benefit that is greater
            than
            50% likely of being realized on examination. For tax positions not meeting
            the
“more likely than not” test, no tax benefit is recorded. The adoption had no
            effect on the Company’s financial statements.
 
 China
            Income Taxes
 
 The
            Company’s subsidiaries are governed by the Income Tax Law of the People’s
            Republic of China (PRC) concerning Foreign Investment Enterprises and
            Foreign
            Enterprises and various local income tax laws (the Income Tax
            Laws).
 
 Beginning
            January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
            laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
            (“FIEs”).
 
 The
            key
            changes are:
 
 a.
                The
                    new standard EIT rate of 25% replaces the 33% rate applicable
                    to both DES
                    and FIEs, except for High Tech companies that pay a reduced rate
                    of
                    15%; b.
                Companies
                    established before March 16, 2007 continue to enjoy tax holiday
                    treatment
                    approved by local government for a grace period of either for
                    the next 5
                    years or until the tax holiday term is completed, whichever is
                    sooner. 
 Earnings
            Per Share
 
 Basic
            earnings per common share are computed on the basis of the weighted average
            number of common shares outstanding during the period.
 
 Diluted
            earnings per share are computed on the basis of the weighted average
            number of
            common shares and dilutive securities (such as stock options and convertible
            securities) outstanding. Dilutive securities having an anti-dilutive
            effect on
            diluted earnings per share are excluded from the calculation.
 
 Reclassifications
 
 Certain
            reclassifications have been made to the 2007 financial statements to
            conform to
            the 2008 financial statement presentation. These reclassifications had
            no effect
            on net income or cash flows as previously reported.
 
 Recent
            Accounting Pronouncements
 
 In
            February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
            Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
            choose to measure many financial instruments and certain other items
            at fair
            value that are not currently required to be measured at fair value. The
            SFAS 159
            became effective for us on January 1, 2008. The Company chose not to
            elect the
            option to measure the fair value of eligible financial assets and liabilities.
 10
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 In
            December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
            Consolidated Financial Statements - an amendment of Accounting Research
            Bulletin
            No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
            ownership interests ** in
            subsidiaries held by parties other than the parent, the amount of consolidated
            net income attributable to the parent and to the noncontrolling interest,
            changes in a parent’s ownership interest and the valuation of retained
            non-controlling equity investments when a subsidiary is deconsolidated.
            The
            Statement also establishes reporting requirements that provide sufficient
            disclosures that clearly ** identify
            and distinguish between the interests of the parent and the interests
            of the
            non-controlling owners. SFAS 160 is effective for ** fiscal
            years beginning after December 15, 2008. The Company believes that the
            application of SFAS 160 will not ** have
            an
            impact on its consolidated financial statements.
 
 In
            December 2007, Statement of Financial Accounting Standards No. 141(R),
            Business
            Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
            Combinations. SFAS 141R retains the fundamental requirements in SFAS
            141 that
            the acquisition method of accounting (which SFAS 141 called the purchase
            method)
            be used for all business combinations and for an acquirer to be identified
            for
            each business combination. SFAS 141R requires an acquirer to recognize
            the
            assets acquired, the liabilities assumed, and any noncontrolling interest
            in the
            acquiree at the acquisition date, measured at their fair values as of
            that date,
            with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
            required the cost of an acquisition to be allocated to the individual
            assets
            acquired and liabilities assumed based on their estimated fair values.
            SFAS 141R
            also requires the acquirer in a business combination achieved in stages
            (sometimes referred to as a step acquisition) to recognize the identifiable
            assets and liabilities, as well as the noncontrolling interest in the
            acquiree,
            at the full amounts of their fair values (or other amounts determined
            in
            accordance with SFAS 141R). 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.
            An entity
            may not apply it before that date. The Company believes adopting SFAS
            No. 141R
            will significantly impact its financial statements for any business combination
            completed after December 31, 2008.
 
 In
            June
            2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
            an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
            No. 07-5”). This Issue is effective for financial statements issued for fiscal
            years beginning after December 15, 2008, and interim periods within those
            fiscal
            years. Early application is not permitted. Paragraph 11(a) of Statement
            of
            Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
            Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
            definition of a derivative but is both (a) indexed to the Company’s own
            stock and (b) classified in stockholders’ equity in the statement of
            financial position would not be considered a derivative financial instrument.
            EITF No.07-5 provides a new two-step model to be applied in determining
            whether
            a financial instrument or an embedded feature is indexed to an issuer’s own
            stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope
            exception.
            The Company believes adopting this statement will have a material impact
            on the
            financial statements because among other things, any option or warrant
            previously issued and all new issuances denominated is US dollars will
            be
            required to be carried as a liability and marked to market each reporting
            period.
 11
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 In
            April
            2008, the FASB issued 142-3 “Determination of the useful life of Intangible
            Assets”, which amends the factors a company should consider when developing
            renewal assumptions used to determine the useful life of an intangible
            asset
            under SFAS142. This Issue is effective for financial statements issued
            for
            fiscal years beginning after December 15, 2008, and interim periods within
            those
            fiscal years. SFAS 142 requires companies to consider whether renewal
            can be
            completed without substantial cost or material modification of the existing
            terms and conditions associated with the asset. FSP 142-3 replaces the
            previous
            useful life criteria with a new requirement—that an entity consider its own
            historical experience in renewing similar arrangements. If historical
            experience
            does not exist then the Company would consider market participant assumptions
            regarding renewal, including 1) highest and best use of the asset by
            a market
            participant, and 2) adjustments for other entity-specific factors included
            in
            SFAS 142. The Company is currently evaluating the impact that adopting
            SFAS
            No.142-3 will have on its financial statements.
 
 **NOTE
            3 - ACCOUNTS RECEIVABLE**
 
 Accounts
            receivable consisted of the following:
 
 June
                      30, 2008
                  
                  December
                      31, 2007(Unaudited)Accounts
                      receivable
                  
                  $
                  1,868,136
                  
                  $
                  3,202,956Less:
                      allowance for doubtful accounts
                  
                  
                  238,759
                  
                  
                  407,593Accounts
                      receivable, net of allowance
                  
                  $
                  1,629,377
                  
                  $
                  2,795,363
 
 The
            following table consists of allowance for doubtful accounts at June 30,
            2008 and
            December 31, 2007.
 
 Allowance
                      for doubtful accounts at December 31, 2007
                  
                  $
                  407,593Recovery
                      of bad debt expense
                  
                  
                  (189,579
                  )Effect
                      of foreign currency translation gain
                  
                  
                  20,745Allowance
                      for doubtful accounts at June 30, 2008
                  
                  $
                  238,759
  12
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 **NOTE
            4 - INVENTORIES**
  Inventories
            consist of the following:
 
 June
                      30, 2008
                  
                  December
                      31, 2007(Unaudited)Raw
                      materials
                  
                  $
                  710,671
                  
                  $
                  564,993Work
                      in progress and packaging material
                  
                  
                  4,506
                  
                  
                  11,728Finished
                      goods
                  
                  
                  593,378
                  
                  
                  784,757Total
                  
                  
                  1,308,555
                  
                  
                  1,361,478Reserve
                      for obsolete inventories
                  
                  
                  (29,874
                  )
                  
                  -Net
                  
                  $
                  1,278,681
                  
                  $
                  1,361,478
 
 **NOTE
            5 - PROPERTY, PLANT AND EQUIPMENT**
 
 Property,
            plant and equipment, net consist of:
 
 June
                      30, 2008
                  
                  December
                      31, 2007(Unaudited)Buildings
                  
                  $
                  2,443,582
                  
                  $
                  2,227,928Equipment
                      and machinery
                  
                  
                  7,592,413
                  
                  
                  5,309,511Automobiles
                  
                  
                  30,407
                  
                  
                  37,898Office
                      equipment
                  
                  
                  20,693
                  
                  
                  18,100Construction
                      in progress
                  
                  
                  3,843,294
                  
                  
                  1,209,953Total
                  
                  
                  13,930,389
                  
                  
                  8,803,390Less
                      accumulated depreciation
                  
                  
                  (3,476,734
                  )
                  
                  (2,983,345
                  )Property,
                      plant and equipment, net
                  
                  $
                  10,453,655
                  
                  $
                  5,820,045Advances
                      on equipment purchases
                  
                  $
                  3,406,694
                  
                  $
                  872,974
 
 Construction
            in progress represents material, labor costs, and capitalized interest
            incurred
            to construct the Zhongde Energy Co., Ltd in Jiangyin, Fujian. Management
            expects
            construction will be completed by the end of 2008. No depreciation is
            provided
            for construction in progress until such time until construction is complete
            and
            assets are placed into service. As of June 30, 2008, the Company invested
            $13.5
            million in the new plant .
 
 Depreciation
            expense for the six months ended June 30, 2008 and 2007 was $313,931
            and
            $264,231, respectively; and for three months ended June 30, 2008 and
            2007 was
            $187,560 and $138,387, respectively. During the six months ended June
            30, 2008
            and 2007, interest expense of $36,861 and $0 was capitalized into construction
            in progress, respectively; and for, the three months ended June 30, 2008
            and
            2007, interest expense of $9,106 and $0 was capitalized into construction
            in
            progress, respectively.
 13
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 **NOTE
            6 - INTANGIBLE ASSETS**
 
 Intangible
            assets, net consist of:
 
 June
                      30, 2008
                  
                  December
                      31, 2007(Unaudited)Land
                      use rights
                  
                  $
                  4,923,541
                  
                  $
                  4,550,853Patents
                      and licenses
                  
                  
                  1,342,280
                  
                  
                  1,261,292Total
                  
                  
                  6,265,821
                  
                  
                  5,812,145Less
                      accumulated amortization
                  
                  
                  (1,102,663
                  )
                  
                  (932,510
                  )Total
                      intangible assets, net
                  
                  $
                  5,163,158
                  
                  $
                  4,879,635
 
 Amortization
            expense for the six months ended June 30, 2008 and 2007 amounted to $107,207
            and
            $98,387, respectively, and $47,800
            and $49,139 for the three months ended June 30, 2008 and 2007,
            respectively.
 
 **NOTE
            7 - BANK INDEBTEDNESS**
 
 Bank
            indebtedness consists of:
 
 June
                      30, 2008
                  
                  December
                      31, 2007(Unaudited)Due
                      bank under revolving credit agreement,interest
                      at 115% of PRC prime rate,secured
                      by certain buildings and landuse
                      rights owned by Fujian Zhongde
                  
                  $
                  -
                  
                  $
                  1,028,219Due
                      bank, interest at 115% of PRC prime rate,due
                      in monthly installments of principaland
                      interest of $18,170 throughJanuary
                      2010, secured by certain buildings and land use rights
                  
                  
                  366,985
                  
                  
                  443,898Total
                  
                  
                  366,985
                  
                  
                  1,472,117Less
                      current portion
                  
                  
                  (225,413
                  )
                  
                  (1,231,020
                  )Noncurrent
                      portion of bank indebtedness
                  
                  $
                  141,572
                  
                  $
                  241,097
 
 Total
            interest expense on the bank loans for the six months ended June 30,
            2008 and
            2007 amounted to $36,861 and $52,780, respectively, and $9,106
            and $26,835 for the three months ended June 30, 2008 and 2007,
            respectively.
 14
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 **NOTE
            8 - PENSION AND EMPLOYMENT LIABILITIES**
 
 The
            full
            time employees of the Company are entitled to employee benefits including
            medical care, welfare subsidies, unemployment insurance and pension benefits
            through a Chinese government mandated multi-employer defined contribution
            plan.
            The Company is required to accrue for those benefits based on certain
            percentages of the employees’ salaries and make contributions to the plans out
            of the amounts accrued for medical and pension benefits. The total provisions
            and contributions made for such employee benefits was $11,940 and $5,922
            for the
            six months ended June 30, 2008 and 2007, respectively, and amounted to $3,450
            and $4,097 for
            the
            three months ended June 30, 2008 and 2007, respectively.  The
            Chinese government is responsible for the medical benefits and the pension
            liability to be paid to these employees.
 
 As
            of
            June 30, 2008 and December 31, 2007, the Company had no liability for
            pension or
            post-employment benefits. The Company does not have a pension or other
            retirement plan.
 
 **NOTE
            9 - $15,000,000 PRIVATE PLACEMENT**
 
 On
            January 9, 2008, CCE completed a private placement, pursuant to which
            CCE issued
            10,000,000 shares of common stock and 5,000,000 five-year warrants at
            an initial
            exercise price of $2.00 per share for aggregate gross proceeds of $15,000,000.
            In connection with this private placement, CCE incurred placement agent
            cash
            fees of approximately $1,200,000, and issued the placement agent 1,200,000
            five-year warrants at an initial exercise price of $2.00 per share. The
            net
            proceeds of $13.6 million were recorded as equity. The fair value of
            the
            warrants issued to the placement agent, was determined to be part of
            the cost of
            raising capital and therefore netted against the additional paid-in capital.
 
 In
            connection with the private placement, four shareholders and officers
            placed a
            total of 1,500,000 shares of their personally owned CCE common stock
            into an
            escrow account, to be released to the investors of this offering if the
            Company
            fails to (1) commence the production of biodiesel at its proposed production
            facility in Jiangyin, PRC on or before January 1, 2009, or (2) record
            at least
            $14,000,000 of adjusted net income for the fiscal year ending December
            31, 2009.
            Should the Company successfully satisfy each of these two milestones,
            these
            shares of CCE common stock will be returned to the four shareholders
            and
            officers.
 
 In
            connection with the private placement, CCE entered into a registration
            rights
            agreement and agreed to file a registration statement with the Securities
            and
            Exchange Commission covering the resale of the common stock issued and
            underlying the warrants on or before February 23, 2008 and to cause such
            registration statement to be declared effective by the Securities and
            Exchange
            Commission on or before May 8, 2008. On February 1, 2008, the Company
            filed the
            registration statement. On February 8, 2008, the registration statement
            was
            declared effective by the Securities and Exchange Commission.
 15
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 On
            January 11, 2008, CCER made a capital contribution of $10,000,000 to
            Zhongde
            Energy to fulfill the registered capital investment requirements stipulated
            by
            the Fuqing City Foreign Trading and Economy Cooperation Bureau.
 
 **NOTE
            10 - OPTIONS AND WARRANTS**
  On
            January 9, 2008, the Company adopted the 2008 Equity Incentive Plan.
            Under the
            2008 Equity Incentive Plan, CCE is authorized to issue up to 2,000,000
            options,
            1,000,000 will have an exercise price equal to the greater of (i) $2.50
            or (ii)
            the fair market value of the common stock on the date of grant (“Tranche 1
            Options”) and 1,000,000 will have an exercise price equal to the greater of (i)
            $3.00 or (ii) 100% of the fair market value of the common stock on the
            date of
            grant (“Tranche 2 Options”). Under the 2008 Equity Incentive Plan, CCE is
            authorized to issue incentive stock options intended to qualify under
            Section
            422 of the Internal Revenue Code of 1986, as amended, and non-qualified
            stock
            options and all options under the Plan shall vest quarterly over three
            years.
            The 2008 Equity Incentive Plan is administered by CCE’S board of directors.
 
 On
            January 9, 2008, CCE granted options to purchase a total of 1,680,000
            shares of
            common stock under the 2008 Equity Incentive Plan, including 1,350,000
            granted
            to Company officers and directors. 840,000 options are exercisable at
            a price of
            $2.50 per share and 840,000 options are exercisable at a price of $3.00
            per
            share; all 1,680,000 options expire 10 years from the date of grant.
            The
            $3,043,429 fair value of the options will be expensed ratably over the
            three
            year requisite service period. The fair value of the options was estimated
            on
            the date of grant using the Black-Scholes option-pricing model with the
            following assumptions: exercise prices of $2.50 (for 840,000 options)
            and $3.00
            (for 840,000 options), expected life of options of 10 years, expected
            volatility
            of 98%, expected dividend yield of 0%, and risk-free interest rate of
            3.82%. For
            the six months ended June 30, 2008, $507,238 was amortized and recorded
            as
            compensation expense. For the three months ended June 30, 2008, $253,619
            was
            amortized and recorded as compensation expense.
  As
            of
            June 30, 2008, the outstanding options and warrants consist of the
            following:
  **Options**Summary
                      of Option Activity
                  
                  Outstanding
                  
                  Exercisable
                  
                  Unvested
                  
                  Weighted
                      Average Exercise Price
                  
                  Weighted
                      Average Remaining Contractual Term (years)
                  
                  Intrinsic
                      ValueDecember
                      31, 2007
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Granted
                  
                  
                  1,680,000
                  
                  
                  280,000
                  
                  
                  1,400,000
                  
                  $
                  2.75
                  
                  
                  9.50
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -June
                      30, 2008
                  
                  
                  1,680,000
                  
                  
                  280,000
                  
                  
                  1,400,000
                  
                  $
                  2.75
                  
                  
                  9.50
                  
                  
                  -
 16
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 **Warrants**Summary
                      of Warrant Activity
                  
                  Outstanding
                  
                  Exercisable
                  
                  Fair
                      Market Value
                  
                  Weighted
                      Average Exercise Price
                  
                  Weighted
                      Average Remaining Contractual Term (years)December
                      31, 2007
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Granted
                  
                  
                  6,200,000
                  
                  
                  6,200,000
                  
                  $
                  0.75
                  
                  $
                  2.00
                  
                  
                  4.50Exercised
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -June
                      30, 2008
                  
                  
                  6,200,000
                  
                  
                  6,200,000
                  
                  $
                  0.75
                  
                  $
                  2.00
                  
                  
                  4.50
 **NOTE
              11 - EARNINGS PER SHARE**
  For
            the
            three and six months ended June 30, 2008, all warrants and options were
            excluded
            from the calculation of diluted earnings per share because the exercise
            prices
            of $2.00, $2.50, and $3.00 were higher than the average trading price
            of the
            Company’s stock, making these warrants anti-dilutive. There were no options or
            warrants outstanding at June 30, 2007. The basic and diluted earnings
            per share
            for the three months ended June 30, 2008 and 2007 were $0.02 and $0.04,
            respectively. The basic and diluted earnings per share for the six months
            ended
            June 30, 2008 and 2007 were $0.02 and $0.06, respectively.
 
 **NOTE
            12 - STATUTORY RESERVES**
 
 The
            Company’s PRC subsidiaries are required to make appropriations to reserve funds,
            comprising the statutory surplus reserve, statutory public welfare fund
            and
            discretionary surplus reserve, based on after-tax net income determined
            in
            accordance with generally accepted accounting principles of the People’s
            Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus
            reserve should be at least 10% of the after tax net income determined
            in
            accordance with PRC GAAP until the reserve is equal to 50% of the entities’
registered capital. Appropriations to the statutory public welfare fund
            are at
            10% of the after tax net income determined in accordance with PRC GAAP.
            The
            statutory public welfare fund is established for the purpose of providing
            employee facilities and other collective benefits to the employees and
            is
            non-distributable other than in liquidation. Appropriations to the discretionary
            surplus reserve are made at the discretion of the Board of Directors.
            Effective
            January 1, 2006, the Company is only required to contribute to one statutory
            reserve fund at 10% of net income after tax per annum. This contribution
            will be
            made to meet 50% of the respective companies’ registered capital.
 
 As
            of
            June 30, 2008 and December 31, 2007, the Company allocated $1,195,746
            and
            $785,536, respectively, to the statutory reserves.
 17
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 **NOTE
            13 - INCOME TAXES**
 
 Income
            Taxes
 
 Income
            taxes consist of:
 
 Six
                      months ended June 30,2008
                  
                  2007(Unaudited)
                  
                  (Unaudited)Current:PRC
                  
                  $
                  238,866
                  
                  $
                  -United
                      States
                  
                  
                  -
                  
                  
                  -Total
                      current
                  
                  
                  238,866
                  
                  
                  -Deferred
                  
                  
                  -
                  
                  
                  -Total
                  
                  $
                  238,866
                  
                  $
                  -
 
 Fujian
            Zhongde has been subject to a PRC 33% standard enterprise income tax.
            In 2006,
            Fujian Zhongde became a wholly-owned foreign enterprise (“WOFE”). PRC income tax
            laws provide that certain WOFEs may be exempt from income taxes for two
            years,
            commencing with their first profitable year of operations, after taking
            into
            account any losses brought forward from prior years, and thereafter 50%
            exempt
            for the next three years. In December 2006, Fujian Zhongde applied for
            PRC
            approval of these income tax exemptions. In March 31, 2007, the PRC tax
            authorities approved a full income tax exemption for the year 2007 and
            a 12%
            income tax rate for years 2008, 2009 and 2010.
 .
 The
            following table reconciles the
            U.S.
            statutory rates to
            the
            Company’s effective tax rate for the periods ended June 30, 2008 and
            2007:
 
 June
                      30,
                  
                  June
                      30,2008
                  
                  2007U.S.
                      Statutory rates
                  
                  
                  35
                  %
                  
                  35
                  %Foreign
                      income not recognized in USA
                  
                  
                  (35
                  )
                  
                  (35
                  )China
                      income taxes
                  
                  
                  25
                  
                  
                  33Tax
                      exemption
                  
                  
                  (13
                  )
                  
                  (33
                  )Total
                      provision for income taxes
                  
                  
                  12
                  %
                  
                  -
                  %
 
 The
            estimated tax savings for the six months ended June 30, 2008 and 2007
            amounted
            to $227,719 and $532,066. The net effect on earnings per share had the
            income
            tax been applied would decrease earnings per share from $0.02 to $0.017
            in 2008
            and $0.06 to $0.03 in 2007. The estimated tax savings for the three months
            ended
            June 30, 2008 and 2007 amounted to $135,644 and $307,432. The net effect
            on
            earnings per share had the income tax been applied would decrease earnings
            per
            share from $0.02 to $0.01 in 2008 and $0.04 to $0.02 in 2007.
 18
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 At
            June
            30, 2008 CCE had an unrecognized deferred United States income tax liability
            relating to undistributed earnings of Fujian Zhongde. These earnings
            are
            considered to be permanently invested in operations outside the United
            States.
            Generally, such earnings become subject to United States income tax upon
            the
            remittance of dividends and under certain other circumstances. Determination
            of
            the amount of the unrecognized deferred United States income tax liability
            with
            respect to such earnings is not practicable because the amount of PRC
            foreign
            tax credits available to offset United States income taxes will depend
            on the
            timing of future remittances, if any, and such timing is not known or
            predictable. China Clean Energy Inc. was incorporated in the United States
            and
            have incurred net operating losses for income tax purposes for the periods
            ended
            June 30, 2008. The net operating loss carry forwards for United States
            income
            taxes amounted to $434,815 which may be available to reduce future years’
taxable income. These carry forwards will expire, if not utilized, through
            2027
            and 2024. Management believes that the realization of the benefits from
            these
            losses appears uncertain due to the Company’s limited operating history and
            continuing losses for United States income tax purposes. Accordingly,
            the
            Company has provided a 100% valuation allowance on the deferred tax asset
            benefit to reduce the asset to zero. The valuation allowance as of June
            30, 2008
            was $434,815 and the valuation allowance was increased by $135,527 for
            the six
            months ended June 30, 2008. Management will review this valuation allowance
            periodically and make adjustments as warranted.
 
 Value
            Added Tax
 
 Enterprises
            or individuals who sell commodities, engage in repair and maintenance
            or import
            and export goods in the PRC are subject to a value added tax, VAT, in
            accordance
            with Chinese laws. The VAT standard rate is 17% of the gross sales price.
            A
            credit is available whereby VAT paid on the purchases of semi-finished
            products
            or raw materials used in the production of the Company’s finished products can
            be used to offset the VAT due on sales of the finished product. A preferential
            rate is also applied for exporting products.
 
 VAT
            on
            sales and VAT on purchases amounted to $1,258,536 and $932,041 for the
            6 months
            ended June 30, 2008 and $889,402 and $518,673 for the six months ended
            June 30,
            2007, respectively. VAT on sales and VAT on purchases amounted to $729,902
            and
            $686,542 for the three months ended June 30, 2008 and $489,696 and $253,034
            for
            the three months ended June 30, 2007, respectively. Sales and purchases
            are
            recorded net of VAT collected and paid as the Company acts as an agent
            because
            the VAT taxes are not impacted by the income tax holiday. As of June
            30, 2008
            and December 31, 2007, the VAT payable amounted to $22,638 and $320,397,
            respectively.
 
 **NOTE
            14 - RELATED PARTY TRANSACTIONS**
 
 Fujian
            Zhongde purchases raw materials from companies affiliated with the Company’s
            majority stockholder. Yang Fan, one of the shareholders of this “affiliated”
company, Fujian Zhongde Waste Oil Co. Ltd., is the niece of Ms. Yang
            Qin,
            director and a major shareholder of the Company. In the six months ended
            June
            30, 2008 and 2007, such purchases totaled $855,619 and $1,618,679, respectively.
            As of June 30, 2008 and December 31, 2007, there were no outstanding
            payables
            due to these companies.
 19
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 **NOTE
            15 - SEGMENT INFORMATION**
  The
            Company operates in one industry segment - the synthesization and distribution
            of renewable fuel products and specialty chemicals to customers in both
            the PRC
            and abroad. Substantially all of the Company’s identifiable assets at June 30,
            2008 were located in the PRC.
 
 Net
            sales
            for the six months and three months ended June 30, 2008 and 2007 consist
            of:
 
 For
                      the six months ended June 30,
                  
                  2008
                  
                  2007Sales
                  
                  GP%
                  
                  Sales
                  
                  GP%Domestic
                      Sales
                  
                  $
                  7,403,151
                  
                  
                  25
                  %
                  $
                  5,231,774
                  
                  
                  28
                  %International
                      Sales
                  
                  
                  2,548,643
                  
                  
                  22
                  %
                  
                  4,161,632
                  
                  
                  26
                  %Total
                      Sales
                  
                  $
                  9,951,794
                  
                  
                  24
                  %
                  $
                  9,393,406
                  
                  
                  27
                  %For
                      the three months ended June 30,Domestic
                      Sales
                  
                  $
                  4,303,601
                  
                  
                  26
                  %
                  $
                  2,877,678
                  
                  
                  28
                  %International
                      Sales
                  
                  
                  1,184,184
                  
                  
                  25
                  %
                  
                  2,377,362
                  
                  
                  27
                  %Total
                      Sales
                  
                  $
                  5,478,785
                  
                  
                  25
                  %
                  $
                  5,255,040
                  
                  
                  27
                  %
  **NOTE
            16 - CONCENTRATIONS AND RISKS**
 
 The
            Company’s cash demand deposits are in accounts maintained with state **** owned
            banks within the People’s Republic of China. Total cash deposited with these
            banks at June 30, 2008 and December 31, 2007 amounted to $7,365,023 and
            $1,133,555, respectively. No deposits are covered by insurance. The Company
            has
            not experienced any losses in such accounts and believes it is not exposed
            to
            any risks on its cash in bank accounts.
 
 For
            the
            six months ended June 30, 2008, no customer (for both biodiesel and specialty
            chemical products) accounted for over 10% of net sales. In 2007, two
            customers
            (for biodiesel products) accounted for 14.52% and 11.01%, respectively,
            of net
            sales. The accounts receivable due from these customers amounted to $904,175
            as
            of December 31, 2007. For the three months ended June 30, 2008, no customer
            (for
            both biodiesel and specialty chemical products) accounted for over 10%
            of net
            sales. For the three months ended June 30, 2007, one customer (for biodiesel
            product) accounted for 16% of net sales. The accounts receivable due
            from this
            customer amounted to $360,000 as of December 31, 2007.
 20
 
 **CHINA
                  CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
                  30,
                  2008
 (UNAUDITED)
 For
            the
            six months ended June 30, 2008, two suppliers for feedstock and raw materials
            accounted for 12.87% and 10.36%, respectively, of the total raw material
            purchased. There were no accounts payables due to these suppliers as
            of June 30,
            2008. In 2007, three suppliers for feedstock and raw materials accounted
            for
            25.86%, 18.22%, and 15.30%, respectively, of the total raw material purchased.
            The accounts payable due to these suppliers amounted to $19,959 as of
            December
            31, 2007. For the three months ended June 30, 2008, two suppliers for
            feedstock
            and raw materials accounted for 17.32% and 10.41%, respectively, of the
            total
            raw material purchased. There were no accounts payable due to these suppliers
            as
            of June 30, 2008. In 2007, two suppliers for feedstock and raw materials
            accounted for 42.80% and 15.72% respectively, of the total raw material
            purchased. The accounts payable due to these suppliers amounted to $0
            as of
            December 31, 2007.
 
 The
            Company's operations are carried out in the PRC. Accordingly, the Company's
            business, financial condition and results of operations may be influenced
            by the
            political, economic and legal environments in the PRC, and by the general
            state
            of the economy in the regions where the Company’s customers are located. The
            Company's operations in the PRC are subject to specific considerations
            and
            significant risks not typically associated with companies in 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
            PRC
            government imposes controls on the convertibility of RMB (Chinese Yuan)
            into
            foreign currencies and, in certain cases, the remittance of currency
            out of the
            PRC. Under existing PRC foreign exchange regulations, payment of current
            account
            items, including profit distributions, interest payments and expenditures
            from
            the transaction, can be made in foreign currencies without prior approval
            from
            the PRC State Administration of Foreign Exchange by complying with certain
            procedural requirements. However, approval from appropriate governmental
            authorities is required where RMB is to be converted into foreign currency
            and
            remitted out of the PRC to pay capital expenses, such as the repayment
            of bank
            loans denominated in foreign currencies. The PRC government may also
            at its
            discretion restrict access in the future to foreign currencies for current
            account transactions.
  21
  **Item
        2.**  **Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
  **Company
        Overview**
  We
        were
        originally incorporated in Delaware under the name “Hurley Exploration Inc.” on
        November 12, 2004 in order to conduct mineral exploration activities. On
        October
        13, 2006, in anticipation of our acquisition of China Clean Energy Resources,
        Ltd., we abandoned this enterprise and changed our name to China Clean Energy
        Inc. On October 24, 2006, we acquired China Clean Energy Resources, Ltd.,
        pursuant to the terms of a Share Exchange Agreement. This transaction was
        accounted for as a reverse acquisition (recapitalization), with China Clean
        Energy Resources, Ltd. deemed to be the accounting acquirer and us as the
        legal
        acquirer. Upon the closing of this transaction, we became a Chinese renewable
        resource-based biodiesel and specialty chemicals
        manufacturer/distributor.
  China
        Clean Energy Resources, Ltd. was incorporated in the British Virgin Islands
        on
        February 13, 2006, for the purpose of holding a 100% interest in Fujian Zhongde
        Technology Co., Ltd. As such, China Clean Energy Resources, Ltd. does not
        conduct any substantive operations of its own, but rather conducts its primary
        business operations through Fujian Zhongde Technology Co., Ltd., a Chinese
        company that was incorporated in the Province of Fujian, China on July 10,
        1995.
        On November 5, 2007, Fujian Zhongde Energy Co., Ltd., was incorporated in
        the
        Province of Fujian, China as a 100% owned subsidiary of China Clean Energy
        Resources, Ltd. for the development and operation of our new 100,000 tons
        per
        year biodiesel/specialty chemical refinery in Jiangyin Industrial Park, Fuqing
        City, Fujian Province, China.
 
 **Recent
        Events**
 
 In
        March
        2008, we temporarily halted the production of biodiesel and shifted our focus
        to
        higher value added specialty chemicals in an effort to mitigate recent sharp
        increases in the cost of raw materials coupled with stagnant wholesale diesel
        pricing in China. Commencing in February 2008, the price of waste cooking
        oil,
        cotton seed waste and rapeseed waste feedstock, the principal raw materials
        used
        to produce our biodiesel product, increased to over $500 per ton compared
        to an
        average of $368 per ton in the fourth quarter of 2007. In contrast, diesel
        wholesale prices, which are set by the Chinese government, have remained
        at
        approximately $750 per ton, rendering it impossible for us to generate profits
        from our biodiesel operations. Nonetheless, we intend to closely monitor
        our
        feedstock raw material prices, wholesale diesel prices and conditions in
        the
        biodiesel industry in China in order to reassess our biodiesel production
        on an
        ongoing basis.
  To
        minimize the impact from the near term discontinuation of biodiesel production,
        which accounted for 27% of our total revenue in 2007, we shifted our focus
        to
        the production of higher value added specialty chemicals, including high
        performance hot melt adhesives, the market for which is not regulated by
        the
        Chinese government. We completed the upgrade of our specialty chemical refinery
        in June 2008 by installing a high purity dimer acid processing unit. This
        upgrade now enables us to produce 3,000 tons per year of high purity dimer
        acid,
        which can be used as raw materials for high performance hot melt adhesives
        or
        sold at $3,500 per ton. Currently, China imports approximately 30,000 tons
        of
        high performance hot melt adhesives each year at $7,000 per ton from countries
        like Germany. Once operational, we believe that our high performance hot
        melt
        adhesives will be sold for between $5,000 and $6,000 per ton in
        China.
 
 The
        construction of our 100,000 tons per year biodiesel/specialty chemical refinery
        in Jiangyin Industrial Park commenced in December 2007 and refinery equipment
        has been ordered and fabrication is in progress. In light of the recent rapid
        changes in the market environment, drastic increase in the price of crude
        oil,
        waste cooking oil, waste cottonseed oil, and waste rapeseed oil and the increase
        in price of government controlled wholesale and retail fuel, we have decided
        to
        revise our original refinery design to include a specialty chemical production
        facility as part of our new biodiesel plant, in order to provide us with
        strategic as well as operational flexibility. We plan to take advantage of
        access to a deep water sea port, rail and highway transport connected to
        the
        national grid in order to build our Jiangyin biodiesel/specialty chemical
        refinery. By importing palm oil leavings from Indonesia and Malaysia we will
        expand our capacity in an effort to increase sales. Once this new facility
        is
        completed by the end of 2008, the refinery will have the flexibility to produce
        100,000 tons of biodiesel, or 100,000 tons of specialty chemicals, or a
        combination of biodiesel and specialty chemicals for a total output of 100,000
        tons per year.
 
 22
 **Results
        of Operations**
  **Three
        Months** **Ended** **June
        30, 2008** **Compared to the** **Three
        Months** **Ended** **June
        30, 2007** **.**
  *Revenues* .
        During
        the quarter ended June 30, 2008, we had net sales of $5,478,785 (100% from
        specialty chemical sales), as compared to net sales of $5,255,040 (26.75%
        from
        biodiesel sales and 73.24% from specialty chemical sales) during the quarter
        ended June 30, 2007, representing an overall increase in net sales of
        approximately 4.26%. This increase in revenue resulted from an expanded
        production capacity, increases in specialty chemical product lines, increased
        sales volume and increased selling prices. These increases, however, were
        offset
        by a decrease in our biodiesel production and biodiesel sales. This was due
        to a
        significant increase in the price of feedstocks beginning in February 2008
        and
        an increase in government controlled diesel wholesale and retail prices.
        Since
        our biodiesel profit margin shrunk, in March 2008 we decided to temporarily
        halt
        biodiesel production. Our feedstock cost in the quarter ended June 30, 2007
        was
        approximately $350/ton (RMB 2,600/ton), as compared to $709/ton (RMB
        5,000/ton) in the quarter ended June 30, 2008. Although the Chinese
        government raised the wholesale and retail price of fuel by 18% in June of
        2008,
        we were not able to offset the feedstock price increase for biodiesel
        production, even when using lower cost waste cooking oil, waste rapeseed
        oil and
        waste cottonseed oil. However, we continue to closely monitor the market
        conditions and are actively securing lower cost waste palm oil from Indonesia
        and Malaysia. We currently intend to resume our biodiesel production as soon
        as
        we believe it will be profitable to do so.
 
 *Gross
        Profit* .
        Cost of
        goods sold, which consists of labor, overhead and product costs, was $4,120,332
        for the quarter ended June 30, 2008, as compared to cost of goods sold of
        $3,824,722 for the quarter ended June 30, 2007. We had a gross profit of
        $1,358,453 for the quarter ended June 30, 2008, as compared to gross profit
        of
        $1,430,318 for the quarter ended June 30, 2007, representing gross margins
        of
        approximately 24.79% and 27.22%, respectively. This decrease in gross profits
        is
        attributable to significant increase in the cost of our feedstock and a decrease
        in Chinese government export rebates from 13% to 5% effective July 1,
        2007.
 
 *Selling
        Expenses* .
        Selling
        expenses, which consist of advertising and promotion expenses, freight charges,
        exporting expenses, wages and salaries totaled $49,040 for the quarter ended
        June 30, 2008, as compared to $224,048 for the quarter ended June 30, 2007,
        representing a decrease of approximately 78.11%. This decrease was primarily
        attributable to a decrease in our special chemical product exports (27.14%
        and
        59.50% of our total sales for the quarter ended June 30, 2008 and June 30,
        2007,
        respectively).
 
 *General
        and Administrative and Other Operating Expenses* .
        General
        and administrative and other operating expenses totaled $444,288 for the
        quarter
        ended June 30, 2008, as compared to $284,432 for the quarter ended June 30,
        2007, representing an increase of approximately 56.20%. This increase was
        primarily attributable to amortization of $253,620 of stock-based compensation
        cost due to the issuance of employee stock options in January 2008. The employee
        stock option related stock-based compensation costs will be recorded over
        three
        years.
 
 *Net
        Income* .
        We had
        net income of $557,690 for the quarter ended June 30, 2008, as compared to
        net
        income of $793,110 for the quarter ended June 30, 2007, representing a decrease
        of approximately 29.68%. This decrease in net income was attributable to
        a
        $223,745 increase in net revenue and decrease in selling expenses of $175,008
        which was offset by the increase in cost of goods sold, general administrative
        expenses, and income taxes ($295,610, $159,856, and $142,283 respectively).
        On
        March 9, 2008, our principal subsidiary, Fujian Zhongde Technology Co. Ltd.,
        received official approval from the Chinese tax authority for corporate income
        tax exempt and reduction status in 2007. This results in a reduced income
        tax
        rate of 12% (versus a normal 25% rate) between January 1, 2008 and December
        31,
        2010. This was the result of our WOFE (Wholly Owned Foreign Enterprise) status
        approval. This tax exempt and tax reduced status will be favorable to our
        net
        income over the next three years.
  23
 **Six
          Months Ended June 30, 2008 Compared to the Six Months Ended June 30,
          2007**
  *Revenues* .
          During
          the six months ended June 30, 2008, we had net sales of $9,951,794 (94.37%
          from
          specialty chemical sales), as compared to net sales of $9,393,406 (25.54%
          from
          biodiesel sales and 74.46% from specialty chemical sales) during the six
          months
          ended June 30, 2007, an increase of approximately 5.94%.
  *Gross
          Profit* .
          Cost of
          goods sold, which consists of direct labor, overhead and product costs,
          was
          $7,550,105 for the six months ended June 30, 2008, compared to cost of
          goods
          sold of $6,814,671 for the six months ended June 30, 2007. We had a gross
          profit
          of $2,401,689 for the six months ended June 30, 2008, compared to gross
          profit
          of $2,578,735 for the same period ended June 30, 2007, representing gross
          margins of approximately 24.13% and 27.45%, respectively. The decrease
          in gross
          profits is attributable to significant increases in feedstock prices and
          a
          decrease in Chinese government export tax rebates from 13% to 5% effective on
          July 1, 2007.
  *Selling
          Expenses* .
          Selling
          expenses, which consist of advertising and promotion expenses, freight
          charges,
          exporting expenses, and wages and salaries totaled $136,921 for the six
          months
          ended June 30, 2008, compared to $437,291 for the same period ended June
          30,
          2007, a decrease of approximately 68.69%. This decrease is primarily
          attributable to the decrease in our special chemical product exports (25.61%
          vs.
          44.30% of total sales in the six month ended June 30, 2008 and 2007,
          respectively).
  *General
          and Administrative and Other Operating Expenses* .
          General
          and administrative and other operating expenses totaled $968,078 and $674,492
          for the six months ended June 30, 2008 and 2007, respectively, an increase
          of
          approximately 43.53%. This increase is primarily attributable to amortization
          of
          $507,238 stock based compensation costs due to employee stock options issued
          in
          January 2008. The employee stock option fair value of the stock options
          will be
          amortized on a quarterly basis over three years.
  *Net
          Income* .
          We had
          a net income of $749,228 for the six months ended June 30, 2008, as compared
          to
          net income of $1,193, 816 for the six months ended June 30, 2007, an decrease
          of
          approximately 37.24%. This decrease in net income was attributable to an
          increase in cost of goods sold, higher general administrative expenses
          and
          higher income taxes. On March 9, 2008, our principal subsidiary, Fujian
          Zhongde
          Technology Co. Ltd., received official approval from the Chinese tax authority
          for corporate income tax exempt and reduction status in 2007. This results
          in a
          reduced income tax rate of 12% (versus a normal 25% rate) between January
          1,
          2008 and December 31, 2010. This was the result of our WOFE (Wholly Owned
          Foreign Enterprise) status approval. We believe this tax exempt and tax
          reduced
          status will be favorable to our net income over the next three
          years.
 **Liquidity
        and Capital Resources**
  As
        of
        June 30, 2008, and December 31, 2007, we had cash and cash equivalents of
        $7,387,647 and $1,133,555, respectively. The increase in cash and cash
        equivalents was primarily due to $13,627,403 net capital raised in January
        2008,
        by means of a $15 million PIPE investment. This increase however was partially
        offset by a $6,841,837 increase in fixed assets, and a $2,902,377 increase
        in
        advanced payments to feedstock suppliers, and $1,166,272 payment of bank
        loans.
 
 24
 The
        $165,964 net cash provided by operating activities during the six months
        ended
        June 30, 2008 was primarily attributable to the $749,228 in net income,
        $1,497,611 reduction in accounts receivables and $507,238 in stock based
        compensation, which was offset by a $2,902,377 increase in advanced payment
        for
        raw materials.
 
 The
        $6,841,837 net cash used in investing activities during the six months ended
        June 30, 2008 was primarily attributable to $2,484,544 in additional
        construction costs, $1,950,320 to the purchase of property and equipment
        and
        $2,408,720 advances to equipment purchases.
 
 We
        have
        historically met our liquidity and capital requirements from a variety of
        sources, including internally generated cash, short-term borrowings from
        both
        related parties and financial institutions and sales of common
        stock.
 
 To
        compensate the loss of revenue from our temporary halt of biodiesel production,
        we began to upgrade our specialty chemical refinery by installing a high
        purity
        dimer acid processing unit. The installation process commenced in March 2008
        and
        was completed in June 2008. As a result of this upgrade we are currently
        able to
        produce 3,000 tons per year of high purity dimer acid, which can be used
        as a
        raw material for high performance hot melt adhesives or sold as-is at $3,500
        per
        ton. China consumes over 30,000 tons of high performance holt melt adhesives
        each year, which is imported from countries such as Germany, at $7,000 per
        ton.
        We currently believe that our high performance hot melt adhesive products
        will
        be sold at a minimum price of $5,000 per ton, providing us with a greater
        than
        50% gross margin.
 
 Since
        specialty chemical products are currently sold at several times the price
        of
        biodiesel with typically higher gross margins, in the current environment,
        and
        since the specialty chemical products market is currently not regulated by
        the
        Chinese government, we believe that our flexibility in producing both biodiesel
        and specialty chemicals will offer a competitive advantage.
 
 **Critical
        Accounting Policies and Estimates**
  The
        discussion and analysis of our financial condition presented in this Report
        is
        based upon our consolidated financial statements. Our consolidated financial
        statements have been prepared in accordance with generally accepted accounting
        principles in the United States (“GAAP”). During the preparation of the
        financial statements we are required to make estimates and judgments that
        affect
        the reported amount of assets, liabilities, revenues, expenses and the related
        disclosure of contingent assets and liabilities. On an ongoing basis, we
        evaluate our estimates, including those related to sales, returns, pricing
        concessions, bad debts, inventories, investments, fixed assets, intangible
        assets, income taxes and other contingencies. We based our estimates on
        historical experience and various other assumptions that we believe are
        reasonable under the set of current conditions. Actual results may differ
        from
        these estimates under a different set of assumptions or set of
        conditions.
  In
        response to the Securities and Exchange Commission’s Release No. 33-8040,
“Cautionary Advice Regarding Disclosure About Critical Accounting Policy,” we
        identified the most critical accounting principals upon which our financial
        status depends. We determined that those critical accounting principles are
        related to the use of estimates, inventory valuation, revenue recognition,
        income tax, impairment of intangibles and other long-lived assets. We present
        these accounting policies in the relevant sections in this management’s
        discussion and analysis, including the Recently Issued Accounting Pronouncements
        discussed below.
  *Revenue
        Recognition.* We
        recognize a sale when the revenue has been realized or realizable and has
        been
        earned, in accordance with Securities and Exchange Commission Staff Accounting
        Bulletin No. 104, “Revenue Recognition in Financial Statements”. Our sales are
        related to the sale of a product. Revenue for a product sale is recognized
        as
        risk and title to the product transfer to the customer, which usually occurs
        at
        the time shipment is made. Substantially all of our products are sold FOB
        (“free
        on board”) shipping point. Title to the product passes when the product is
        delivered to the freight carrier.
  Sales
        revenue represents the invoiced value of goods, net of a value-added tax
        (VAT).
        All products that are sold in the People’s Republic of China are subject to a
        local value-added tax at a rate of 17% of the gross sales price, or at a
        rate
        that is approved by the local government. This VAT may be offset by a VAT
        paid
        on raw materials and other materials included in the cost of producing the
        finished product.
 
 25
  *Accounts
        Receivable, Trade and Allowance for Doubtful Accounts.* Substantial portions on our business operations are conducted in the People’s
        Republic of China. During the normal course of business, we extend unsecured
        credit to our customers. Accounts receivable and trades outstanding on June
        30,
        2008 and December 31, 2007 totaled $1,629,377 and $2,795,363, respectively.
        Management reviews our accounts receivable on a regular basis to determine
        if
        the allowance for doubtful accounts is adequate. An estimate for doubtful
        accounts is recorded when collection of the full amount is no longer likely.
        As
        of June 30, 2008 and December 31, 2007, allowances for doubtful accounts
        totaled $238,759 and $407,593, respectively.
  *Off-Balance
        Sheet Arrangements.* We have
        not entered into any third party financial guarantees. We have not entered
        into
        any derivative contracts that are indexed to our shares being classified
        as
        stockholder’s equity or that are not reflected in our financial statements.
        Furthermore, we do not have any retained or contingent interest in assets
        transferred to an unconsolidated entity that serves as credit, liquidity
        or
        market risk support to such entity. We do not have any variable interest
        in any
        unconsolidated entity that provides financing, liquidity, market risk or
        credit
        support to us or engages in leasing, hedging or research and development
        services with us.
 
 **Recently
        Issued Accounting Pronouncements**
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
        choose to measure many financial instruments and certain other items at fair
        value that are not currently required to be measured at fair value. The SFAS
        159
        became effective for us on January 1, 2008. We chose not to elect the option
        to
        measure the fair value of eligible financial assets and
        liabilities.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests in subsidiaries held by parties other than the parent,
        the
        amount of consolidated net income attributable to the parent and to the
        noncontrolling interest, changes in a parent’s ownership interest and the
        valuation of retained non-controlling equity investments when a subsidiary
        is
        deconsolidated. SFAS 160 also establishes reporting requirements that provide
        sufficient disclosures that clearly identify and distinguish between the
        interests of the parent and the interests of the non-controlling owners.
        SFAS
        160 is effective for fiscal years beginning after December 15, 2008. We believe
        that the application of SFAS 160 will not have an impact on our consolidated
        financial statements.
 
 In
        December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
        to all transactions or other events in which an entity obtains control of
        one or
        more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
        consideration. This statement replaces FASB Statement No. 141 and applies
        to all
        business entities, including mutual entities that previously used the
        pooling-of-interests method of accounting for some business combinations.
        We
        believe that adoption of SFAS 141R will materially effect our accounting
        for all
        future acquisitions.
  In
          June
          2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
          an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
          No. 07-5”). This Issue is effective for financial statements issued for fiscal
          years beginning after December 15, 2008, and interim periods within those
          fiscal
          years. Early application is not permitted. Paragraph 11(a) of Statement
          of
          Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
          Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
          definition of a derivative but is both (a) indexed to a company’s own stock
          and (b) classified in stockholders’ equity in the statement of financial
          position would not be considered a derivative financial instrument. EITF
          No.07-5
          provides a new two-step model to be applied in determining whether a financial
          instrument or an embedded feature is indexed to an issuer’s own stock and thus
          able to qualify for the SFAS 133 paragraph 11(a) scope exception. We believe
          adopting this statement will have a material impact on our financial
          statements because among other things, any option or warrant previously
          issued
          and all new issuances denominated is US dollars will be required to be
          carried
          as a liability and marked to market each reporting period.
  In
          April
          2008, the FASB issued 142-3 “Determination of the useful life of Intangible
          Assets”, which amends the factors a company should consider when developing
          renewal assumptions used to determine the useful life of an intangible
          asset
          under SFAS 142, This Issue is effective for financial statements issued
          for
          fiscal years beginning after December 15, 2008, and interim periods within
          those
          fiscal years. SFAS 142 requires companies to consider whether renewal can
          be
          completed without substantial cost or material modification of the existing
          terms and conditions associated with the asset. FSP 142-3 replaces the
          previous
          useful life criteria with a new requirement—that an entity consider its own
          historical experience in renewing similar arrangements. If historical experience
          does not exist then a company would consider market participant assumptions
          regarding renewal, including 1) highest and best use of the asset by a
          market
          participant, 2) adjustments for other entity-specific factors included
          in SFAS
          142. We are currently evaluating the impact that adopting SFAS No.  42-3
          will have on our financial statements.
 **Certain
        Risks and Uncertainties**
  Certain
        statements in this Quarterly Report on Form 10-Q, including certain statements
        contained in “Management’s Discussion and Analysis,” constitute forward-looking
        statements. The words or phrases “can be,” “may,” “could,” “would,” “expects,”
“believes,” “seeks,” “estimates,” “projects” and similar words and phrases are
        intended to identify such forward-looking statements. Such forward-looking
        statements are subject to various risks and uncertainties. Any forward-looking
        information provided by us or on our behalf is not a guarantee of future
        performance. Our actual results could differ materially from those anticipated
        by such forward-looking statements due to a number of factors, some of which
        are
        beyond our control. All such forward-looking statements are current only
        as of
        the date on which such statements were made. We do not undertake any obligation
        to publicly update any forward-looking statement to reflect events or
        circumstances after the date on which any such statement is made or to reflect
        the occurrence of unanticipated events.
  26
 **Item
        4T. Controls and Procedures.**
  We
        carried out an evaluation, under the supervision and with the participation
        of
        our management, including our chief executive officer and interim chief
        financial officer, of our disclosure controls and procedures (as defined
        in Rule
        13a-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange
        Act’’)). Disclosure controls and procedures include, without limitation,
        controls and procedures designed to ensure that information required to be
        disclosed by an issuer in the reports that it files or submits under the
        Exchange Act is accumulated and communicated to the issuer’s management,
        including its principal executive and principal financial officers, or persons
        performing similar functions, as appropriate to allow timely decisions regarding
        required disclosure. Based upon our evaluation, our chief executive officer
        and
        interim chief financial officer concluded that our disclosure controls and
        procedures are effective, as of the end of the period covered by this report,
        in
        ensuring that material information that we are required to disclose in reports
        that we file or submit under the Exchange Act is recorded, processed, summarized
        and reported within the time periods specified in the Securities and Exchange
        Commission rules and forms.
 
 There
        were no changes in our internal control over financial reporting during
        the three month period ended June 30, 2008 that have materially affected,
        or are reasonably likely to materially affect, our internal control over
        financial reporting.
  **PART
        II - OTHER INFORMATION**
  **Item
        6.**  **Exhibits.**
  **Exhibit
                No.**
              **Description**31.1*
              Section
                  302 Certification by Principal Executive Officer31.2*
              Section
                  302 Certification by Principal Financial Officer32.1*
              Section
                  906 Certification by Principal Executive Officer and Principal
                  Financial
                  Officer
 ________________________
 *
        Filed
        herewith
  27
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  CHINA
                CLEAN ENERGY
                INC.Date:August
                13, 2008
              By:
              /s/
                Tai-Ming OuTai-Ming Ou
                Chief Executive Officer(Principal
                Executive Officer)
 Date:August
                  13, 2008
                By:
                /s/
                  Ri-wen XueRi-wen Xue
                  Chief Operating Officer(Principal
                  Financial Officer)
 
 28
 
 **EXHIBIT
        INDEX**
 **Exhibit
                  No.**
                **Description**31.1*
                Section
                    302 Certification by Principal Executive Officer31.2*
                Section
                    302 Certification by Principal Financial Officer32.1*
                Section
                    906 Certification by Principal Executive Officer and Principal
                    Financial
                    Officer
 ________________________
 *
          Filed
          herewith
  29