**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




(Mark
      One)




x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
                1934




For
      the
      quarterly period ended March 31, 2008




o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT




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.)17
                Candlewood Drive
              West
                Windsor, New Jersey
            
            08550(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





(609)
                799-8921(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.




Large
                accelerated filer o
            Accelerated
                filer oNon-accelerated
                filer o
              (Do
                not check if a smaller reporting company)
            Smaller
                reporting company x





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




As
      of May
      7, 2008, there were 31,512,269 shares of the issuer’s common stock
      outstanding.







Table
        of Contents
  **Page****Part
                  I**
              
              **FINANCIAL
                  INFORMATION**
              
              2**Item
                  1.**
              
              Financial
                  Statements (Unaudited)
              
              2Consolidated
                  Balance Sheets as of March 31, 2008 and December 31, 2007
              
              2Consolidated
                  Statements of Income and Other Comprehensive Income for the three-month
                  periods ended March 31, 2008 and 2007
              
              3Consolidated
                  Statements of Stockholders’ Equity for the three-month period ended March
                  31, 2008
              
              4Consolidated
                  Statements of Cash Flows for the three-month periods ended March
                  31, 2008
                  and 2007
              
              5Notes
                  to Consolidated Financial Statements
              
              6**Item
                  2.**
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              21**Item
                  4.**
              
              Controls
                  and Procedures
              
              26**Part
                  II**
              
              **OTHER
                  INFORMATION**
              
              27**Item
                  4.**
              
              Submission
                  of Matters to a Vote of Security Holders
              
              27**Item
                  6.**
              
              Exhibits
              
              27
  i
  **PART
        I**
 **FINANCIAL
        INFORMATION**
  **Item
            1.** **Financial
            Statements.**
  CHINA
        CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
          BALANCE SHEETS
 AS
          OF
          MARCH 31, 2008 AND DECEMBER 31, 2007
 
 March
                    31,
                
                December
                    31,2008
                
                2007(Unaudited)A
                    S S E T SCURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                6,199,022
                
                $
                1,133,555Accounts
                    receivable, net of allowance for doubtful accounts of $310,495
                    and
                    $407,593, as of March 31, 2008 and December 31, 2007,
                    respectively
                
                
                1,860,909
                
                
                2,795,363Refundable
                    income taxes
                
                
                54,948
                
                
                147,485Inventories
                
                
                967,714
                
                
                1,361,478Advances
                    for inventory purchase
                
                
                933,541
                
                
                -Prepaid
                    expenses and other receivables
                
                
                -
                
                
                32,330Total
                    current assets
                
                
                10,016,134
                
                
                5,470,211PROPERTY,
                    PLANT AND EQUIPMENT, NET
                
                
                9,855,850
                
                
                5,820,045INTANGIBLE
                    ASSETS
                
                
                5,101,131
                
                
                4,879,635ADVANCES
                    FOR CONSTRUCTION MATERIAL AND EQUIPMENT PURCHASE
                
                
                5,977,930
                
                
                872,974TOTAL
                    ASSETS
                
                $
                30,951,045
                
                $
                17,042,865L
                    I A B I L I T I E S   A N D   S H A R E H O L D E R
                    S'   E Q U I T YCURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                111,178
                
                $
                150,557Customer
                    deposits
                
                
                145,248
                
                
                181,825Accrued
                    liabilities
                
                
                149,633
                
                
                83,824Salaries
                    payable
                
                
                34,544
                
                
                31,425VAT
                    payable
                
                
                92,054
                
                
                320,397Other
                    taxes payable
                
                
                9,970
                
                
                13,652Short-term
                    bank loans
                
                
                -
                
                
                1,028,228Long-term
                    bank loans - current portion
                
                
                195,532
                
                
                202,792Total
                    current liabilities
                
                
                738,159
                
                
                2,012,700NONCURRENT
                    LIABILITIESLong-term
                    bank loans
                
                
                215,796
                
                
                241,097TOTAL
                    LIABILITIES
                
                
                953,955
                
                
                2,253,797SHAREHOLDERS'
                    EQUITYPreferred
                    stock, par value $0.0001 per share, authorized 10,000,000 shares,
                    0 shares
                    issued and outstanding
                
                
                -
                
                
                -Common
                    stock, par value $0.0001 per share, authorized 90,000,000 shares,
                    31,512,269 and 21,512,269 shares issued and outstanding as of
                    March 31,
                    2008 and December 31, 2007, respectively
                
                
                3,151
                
                
                2,151Additional
                    paid-in capital
                
                
                20,933,855
                
                
                7,053,834Statutory
                    reserves
                
                
                785,536
                
                
                785,536Retained
                    earnings
                
                
                5,899,888
                
                
                5,736,105Accumulated
                    other comprehensive income (loss)
                
                
                2,374,660
                
                
                1,211,44229,997,090
                
                
                14,789,068Total
                    liabilities and shareholders' equity
                
                $
                30,951,045
                
                $
                17,042,865
  The
          accompanying notes are an integral part of this statement.
  2
 
 CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
          THE
          THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (UNAUDITED)
 
 2008
                
                2007REVENUES
                
                $
                4,473,009
                
                $
                4,138,366COSTS
                    OF GOODS SOLD
                
                
                3,429,773
                
                
                2,989,949GROSS
                    PROFIT
                
                
                1,043,236
                
                
                1,148,417OPERATING
                    EXPENSESelling
                    and marketing
                
                
                87,881
                
                
                213,243General
                    and administrative
                
                
                523,790
                
                
                367,375Depreciation
                    and amortization
                
                
                80,097
                
                
                61,461Research
                    and development
                
                
                39,782
                
                
                59,504Total
                    operating expense
                
                
                731,550
                
                
                701,583INCOME
                    FROM OPERATIONS
                
                
                311,686
                
                
                446,834OTHER
                    INCOME (EXPENSE)Interest
                    income
                
                
                7,022
                
                
                2,524Interest
                    expense
                
                
                (27,755
                )
                
                (25,945
                )Bank
                    fee
                
                
                (4,934
                )
                
                (6,628
                )Foreign
                    Currency Transaction Loss
                
                
                (25,163
                )
                
                (16,079
                )Loss
                    on Disposal of Fixed Assets
                
                
                (490
                )
                
                -Total
                    other income (expense)
                
                
                (51,320
                )
                
                (46,128
                )INCOME
                    BEFORE PROVISION FOR INCOME TAXES
                
                
                260,366
                
                
                400,706PROVISION
                    FOR INCOME TAXES
                
                
                96,583
                
                
                -NET
                    INCOME
                
                
                163,783
                
                
                400,706OTHER
                    COMPREHENSIVE INCOMEForeign
                    currency translation adjustment
                
                
                1,163,218
                
                
                106,964COMPREHENSIVE
                    INCOME
                
                $
                1,327,001
                
                $
                507,670BASIC
                    AND DILUTED EARNINGS PER SHAREWeighted
                    average number of shares
                
                
                30,523,258
                
                
                21,512,269Earnings
                    per share
                
                $
                0.01
                
                $
                0.02
  The
          accompanying notes are an integral part of this statement.
  3
  
 CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR
          THE
          THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)
 
 Additional
                
                
                
                
                
                Accumulated OtherCommon Stock
                
                Paid-in
                
                Statutory
                
                Retained
                
                ComprehensiveShares
                
                Amount
                
                Capital
                
                Reserves
                
                Earnings
                
                Income
                
                TotalBalance, December 31,
                    2007
                
                
                21,512,269
                
                $
                2,151
                
                $
                7,053,834
                
                $
                785,536
                
                $
                5,736,105
                
                $
                1,211,442
                
                $
                14,789,068Common
                    stocks and warrants issued cash
                
                
                10,000,000
                
                
                1,000
                
                
                13,626,403
                
                
                
                
                
                
                
                
                
                
                
                13,627,403Stock
                    options granted to employees
                
                
                
                
                
                
                
                
                253,618
                
                
                
                
                
                
                
                
                
                
                
                253,618Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                163,783
                
                
                
                
                
                163,783Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,163,218
                
                
                1,163,218Balance
                    at March 31, 2008, unaudited
                
                
                31,512,269
                
                $
                3,151
                
                $
                20,933,855
                
                $
                785,536
                
                $
                5,899,888
                
                $
                2,374,660
                
                $
                29,997,090
 
 The
          accompanying notes are an integral part of this statement.
  4
 
 CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
          THE
          THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (UNAUDITED)
 
 2008
                
                2007**CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    income
                
                $
                163,783
                
                $
                400,706Adjusted
                    to reconcile net income to cash providedby
                    operating activities:Depreciation
                
                
                126,371
                
                
                125,844Amortization
                
                
                59,407
                
                
                49,248Amortization
                    of stock-based compensation expense
                
                
                253,618
                
                
                -Loss
                    on disposal of assets
                
                
                490
                
                
                -Changes
                    in operating assets and liabilitiesAccounts
                    receivable
                
                
                1,028,595
                
                
                (282,933
                )Inventories
                
                
                440,923
                
                
                (73,565
                )Other
                    receivables and prepaid expenses
                
                
                32,330
                
                
                (111,639
                )Advances
                    for inventory purchase
                
                
                (23,660
                )
                
                -Accounts
                    payable
                
                
                (42,189
                )
                
                246,604Customer
                    deposit
                
                
                (43,216
                )
                
                -Other
                    payables and accrued liabilities
                
                
                66,010
                
                
                -Value
                    added tax payables
                
                
                (236,551
                )
                
                -Income
                    tax and other tax payables
                
                
                92,421
                
                
                (117,964
                )Net
                    cash provided by operating activities
                
                
                1,918,332
                
                
                236,301**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Addition
                    to construction in progress
                
                
                (3,711,599
                )
                
                -Purchase
                    of property and equipment
                
                
                (127,150
                )
                
                (26,815
                )Proceeds
                    from sale of equipment
                
                
                1,747
                
                
                -Advances
                    for construction material and equipment purchase
                
                
                (5,850,585
                )
                
                (1,826,940
                )Net cash used in investing activities
                
                
                (9,687,587
                )
                
                (1,853,755
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Increase
                    (decrease) due to related parties
                
                
                -
                
                
                (6,419
                )Net
                    proceeds from issuance of common stock
                
                
                13,627,403
                
                
                -Payments
                    on short-term bank loan
                
                
                (1,048,275
                )
                
                242,410Payments
                    on long-term bank loans
                
                
                (49,977
                )
                
                -Net cash provided by financing activities
                
                
                12,529,151
                
                
                235,991**EFFECT
                    OF EXCHANGE RATE ON CASH**
                
                
                305,571
                
                
                36,929**INCREASE
                    IN CASH AND CASH EQUIVALENTS**
                
                
                5,065,467
                
                
                (1,344,534
                )**CASH
                    AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**
                
                
                1,133,555
                
                
                2,241,712**CASH
                    AND CASH EQUIVALENTS AT END OF PERIOD**
                
                $
                6,199,022
                
                $
                897,178**SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION**Cash
                    paid during the period for:Interest
                    expense
                
                $
                27,755
                
                $
                25,945Income
                    taxes
                
                $
                86,113
                
                $
                -
  The
          accompanying notes are an integral part of this statement.
  5
 
 **CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
          31,
          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”). In connection
          with the Share Exchange, CCE accepted subscriptions for a total of 1,300,000
          shares of common stock at a price of $1.00 per share and issued 1,605,000
          shares
          of common stock to certain consultants for financial consulting and advisory
          services (together with the Share Exchange, the “Transaction”).
  Prior
          to
          the Transaction, as adjusted for a 2.26187510124-for-1 reverse stock split
          and
          the cancellation of 8,842,222 post-split shares, CCE had 2,432,269 shares
          of
          common stock issued and outstanding. After the Transaction, CCE had 21,082,269
          shares of common stock outstanding and the former shareholders of CCER
          owned
          75.87% of the issued and outstanding shares. Accordingly, CCER is considered
          the
          acquirer for accounting purposes and the Share Exchange has been accounted
          for
          as a “reverse acquisition”.
  As
          a
          result of the Share Exchange, CCER became a wholly-owned subsidiary of
          CCE and
          CCE succeeded to the business of Fujian Zhongde Technology Co., Ltd. (“Fujian
          Zhongde”). Fujian Zhongde synthesizes and distributes renewable fuel products
          and specialty chemicals to customers in both the People’s Republic of China
          (“PRC”) and abroad.
  CCER
          was
          formed on February 13, 2006 under the laws of the British Virgin Islands
          as a
          holding company to own Fujian Zhongde. Fujian Zhongde was incorporated
          in the
          province of Fujian, China, on July 10, 1995 under the name “Fuqing City Zhongde
          Chemical Industry, Ltd.” On December 10, 2003, it changed its name to “Fujian
          Zhong De Technology Stock Co., Ltd”. On January 20, 2006, it changed its name to
“Fujian Zhongde Technology Co., Ltd.”
  On
          November 5, 2007, CCER established a new 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 and 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.
  6
 
 **CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
          31,
          2008
 (UNAUDITED) 
  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.
 
 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.
 
 As
          of
          March 31, 2008 and December 31, 2007, the short term and long term bank
          loans
          amounted to $411,328 and $1,472,117, respectively. In accordance with SFAS
          157,
          the Company determined that the carrying value of these loans approximated
          the
          fair value using the level 2 inputs by comparing the stated loan interest
          rate
          to the rate charged by the Bank of China to similar loans, since no quoted
          market is available.
  7
 
 **CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
          31,
          2008
 (UNAUDITED) 
  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 ($0.14281 and $0.13710 at March
          31,
          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 ($0.13977 and $0.12901 for the years
          ended March 31, 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.
 
 As
          of
          March 31, 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 $2,374,660 and
          $1,211,442.
 
 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.
  8
 
 **CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
          31,
          2008
 (UNAUDITED)
 Property,
          Plant and Equipment
 
 Property,
          plant and equipment are stated at cost less accumulated depreciation.
          Depreciation is calculated on a straight-line basis over the estimated
          useful
          lives of the respective assets (20 years for buildings, 10 years for equipment
          and machinery, and 5 years for automobiles and office equipment). Expenditures
          for additions, major renewals and betterments are capitalized and expenditures
          for maintenance and repairs are charged to expense as incurred.
 
 Intangible
 
 Intangible
          and other long-lived assets are stated at cost, less accumulated amortization
          and impairments. Land use rights are being amortized on a straight-line
          basis
          over the terms of the related agreements. Patents and licenses are being
          amortized over their expected useful economic life.
 
 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
          March 31, 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 $73,909 and $179,143 for the three months ended March
          31,
          2008 and 2007, respectively.
  9
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            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, 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
          is
          recognized over the period during which a party is required to provide
          service
          in exchange for the award (typically the vesting period).
  Income
          Taxes
 
 Deferred
          income taxes are recognized for temporary differences between the tax bases
          of
          assets and liabilities and their reported amounts in the financial statements,
          net of operating loss carry forwards and credits, by applying enacted statutory
          tax rates applicable to future years. Deferred tax assets are reduced by
          a
          valuation allowance when, in the opinion of management, it is not more
          likely
          than not that some portion or all of the deferred tax assets will be realized.
          Current income taxes are provided for in accordance with the laws of the
          relevant taxing authorities.
 
 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%;
  10
 
 **CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
          31,
          2008
 (UNAUDITED)
 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
          prior year amounts have been reclassified to conform to the current year
          presentation.
 
 Recent
          Accounting Pronouncements
 
 In
          September 2006, FASB issued Statement 157, Fair Value Measurements. This
          statement defines fair value and establishes a framework for measuring
          fair
          value in generally accepted accounting principles (GAAP). More precisely,
          this
          statement sets forth a standard definition of fair value as it applies
          to assets
          or liabilities, the principle market (or most advantageous market) for
          determining fair value (price), the market participants, inputs and the
          application of the derived fair value to those assets and liabilities.
          The
          effective date of this pronouncement is for all full fiscal and interim
          periods
          beginning after November 15, 2007. The Company adopted SFAS No. 157 as
          of
          January 1, 2008 and the adoption did not have an impact on the Company’s results
          of operations or financial condition.
 
 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.
 
 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.
  11
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            2008
 (UNAUDITED)
 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.
          The
          Company believes that adoption of SFAS 141R will materially effect the
          accounting for all future acquisitions.
 
 **NOTE
          3 - ACCOUNTS RECEIVABLE**
 
 Accounts
          receivable consisted of the following:
 
 March 31, 2008
                
                December 31, 2007(unaudited)Accounts
                    receivable
                
                $
                2,171,404
                
                $
                3,202,956Less:
                    allowance for doubtful accounts
                
                
                310,495
                
                
                407,593Accounts
                    receivable, net of allowance
                
                $
                1,860,909
                
                $
                2,795,363
 
 **NOTE
          4 – INVENTORIES**
 
 Inventories
          consist of the following:
 
 March 31,
                
                December 31,2008
                
                2007(Unaudited)Raw
                    materials
                
                $
                392,045
                
                $
                564,993Work
                    in progress and packaging material
                
                
                53,331
                
                
                11,728Finished
                    goods
                
                
                522,338
                
                
                784,757Total
                    Inventories
                
                $
                967,714
                
                $
                1,361,478
  12
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            2008
 (UNAUDITED)
 **NOTE
          5 – PROPERTY, PLANT AND EQUIPMENT**
 
 Property,
          plant and equipment, net consist of:
 
 March 31,
                
                December 31,2008
                
                2007(Unaudited)
                
                (Audited)Buildings
                
                $
                2,391,868
                
                $
                2,227,928Equipment
                    and machinery
                
                
                5,598,371
                
                
                5,309,511Automobiles
                
                
                29,764
                
                
                37,898Office
                    equipment
                
                
                19,844
                
                
                18,100Construction
                    in progress
                
                
                5,052,770
                
                
                1,209,953Total
                
                
                13,092,617
                
                
                8,803,390Less
                    accumulated depreciation
                
                
                (3,236,767
                )
                
                (2,983,345
                )Net
                
                $
                9,855,850
                
                $
                5,820,045
 
 Depreciation
          expense for the three months ended March 31, 2008 and 2007 was $126,371
          and
          $125,844, respectively. No interest was capitalized into construction in
          progress during either period.
 
 **NOTE
          6 – INTANGIBLE ASSETS**
 
 Intangible
          assets, net consist of:
 
 March 31,
                
                December 31,2008
                
                2007(Unaudited)Land
                    use rights
                
                $
                4,819,343
                
                $
                4,550,853Patents
                    and licenses
                
                
                1,313,873
                
                
                1,261,292Total
                
                
                6,133,216
                
                
                5,812,145Less
                    accumulated amortization
                
                
                (1,032,085
                )
                
                (932,510
                )Net
                
                $
                5,101,131
                
                $
                4,879,635
 
 Amortization
          expense for the three months ended March 31, 2008 and 2007 amounted to
          $59,407
          and $49,248, respectively.
  13
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            2008
 (UNAUDITED)
 **NOTE
          7 – BANK INDEBTEDNESS**
 
 Bank
          indebtedness consists of:
 
 March
                    31,
                
                December
                    31,2008
                
                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
                    principal and interest of $18,170 through January 2010, secured
                    by certain
                    buildings and land use rights
                
                
                411,328
                
                
                443,898Total
                
                
                411,328
                
                
                1,472,117Less
                    current portion
                
                
                (195,532
                )
                
                (1,231,020
                )Noncurrent
                    portion of bank indebtedness
                
                $
                215,796
                
                $
                241,097
 
 Total
          interest expense on the bank loans for the three months ended March 31,
          2008 and
          2007 amounted to $27,755 and $25,945, respectively.
 
 **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 $8,490 and $1,825
          for the
          three months ended March 31, 2008 and 2007, respectively. The Chinese government
          is responsible for the medical benefits and the pension liability to be
          paid to
          these employees.
 
 At
          March
          31, 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
          10 – $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 five-year warrants to purchase 5,000,000
          shares of common stock 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 fees of approximately $1,200,000,
          and
          issued the placement agent five-year warrants to purchase an aggregate
          of
          1,200,000 shares of common stock at an initial exercise price of $2.00
          per
          share. The net proceeds of $13.6 million were recorded as paid in capital.
          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.
  14
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            2008
 (UNAUDITED)
 In
          connection with the private placement, four shareholders and officers placed
          a
          total of 1,500,000 shares of 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 currently 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 with the purchasers 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.
 
 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
          11 - OPTIONS AND WARRANTS**
  On
          January 9, 2008, the Company adopted the 2008 Equity Incentive Plan. The
          purpose
          of the 2008 Equity Incentive Plan is to provide an incentive to attract
          and
          retain directors, officers, consultants, advisors and employees whose services
          are considered valuable, to encourage a sense of proprietorship and to
          stimulate
          an active interest of such persons in our development and financial success.
          Under the 2008 Equity Incentive Plan, CCE is authorized to issue up to
          2,000,000
          stock options, 1,000,000 of which shall have an exercise price per share
          equal
          to the greater of (i) $2.50 or (ii) 100% of the Fair Market Value of a
          share of
          common stock on the date of grant (“Tranche 1 Options”) and 1,000,000 of which
          shall have an exercise price per share equal to the greater of (i) $3.00
          or (ii)
          100% of the Fair Market Value of a share of 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.
  15
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            2008
 (UNAUDITED)
 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 1,680,000 stock options will be expensed ratably
          over the three year requisite service period of the respective personnel.
          The
          fair value of the stock 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 stock options) and $3.00 (for 840,000 stock
          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
          three months ended March 31, 2008, $253,618 was amortized and recorded
          as
          compensation expense.
 
  As
          of
          March 31, 2008, the outstanding options and warrants consist of the
          following:
  OptionsSummary
                    of Option Activity
                
                Outstanding
                
                Exercisable
                
                Unvested
                
                Weighted
                  Average
                  Exercise
                  Price
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                  (years)
                
                Intrinsic
                  ValueDecember
                    31, 2007
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Granted
                
                
                1,680,000
                
                
                140,000
                
                
                1,540,000
                
                $
                2.75
                
                
                9.75
                
                
                -Exercised
                
                
                -
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -
                
                
                -March
                    31, 2008
                
                
                1,680,000
                
                
                140,000
                
                
                1,540,000
                
                $
                2.75
                
                
                9.75
                
                
                -
 
 WarrantsSummary
                    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
                
                $
                1.54
                
                $
                2.00
                
                
                4.75Exercised
                
                
                -
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -
                
                
                -March
                    31, 2008
                
                
                6,200,000
                
                
                6,200,000
                
                $
                1.54
                
                $
                2.00
                
                
                4.75
  16
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            2008
 (UNAUDITED)
 **NOTE
          12 - EARNINGS PER SHARE**
  For
          the
          three months ended March 31, 2008, the warrants and options outstanding
          to
          purchase 7,880,000 shares of the Company’s common stock 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 $1.83 for
          the
          three months ended March 31, 2008, making these warrants anti-dilutive.
          There
          were no options or warrants outstanding at March 31, 2007. The basic and
          diluted
          earnings per share for the three months ended March 31, 2008 and 2007 were
          $0.01
          and $0.02, respectively.
 
 **NOTE
          13 – 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
          March 31, 2008 and December 31, 2007, the Company allocated $785,536 and
          $785,536, respectively, to the statutory reserves.
 
 **NOTE
          14 – INCOME TAXES**
 
 Income
          Taxes
 
 Income
          taxes consist of:
 Three
                    months ended March 31,2008
                
                2007(Unaudited)
                
                (Unaudited)Current:PRC
                
                $
                96,583
                
                $
                -United
                    States
                
                
                -
                
                
                -Total
                    current
                
                
                96,583
                
                
                -Deferred
                
                
                -
                
                
                -Total
                
                $
                96,583
                
                $
                -
  17
 
 **CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
          31,
          2008
 (UNAUDITED)
 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.
 
 At
          March
          31, 2007, 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.
 
 The
          provision for income taxes differs from the amount computed by applying
          the
          statutory United States federal income tax rate to income before income
          taxes.
          The following table reconciles the statutory rates to the Company’s effective
          tax rate for the three months ended March 31, 2008 and 2007:
 
 2008
                
                2007(Unaudited)
                
                (Unaudited)Expected
                    tax at 35%
                
                $
                91,128
                
                $
                140,247Tax
                    effect of unutilized losses of CCE and CCER
                
                
                159,356
                
                
                98,001Tax
                    effect of Fujian Zhongde income taxed at lower rate
                
                
                (96,583
                )
                
                (238,248
                )Permanent
                    differences
                
                
                (57,318
                )
                
                -Actual
                    provision for inconme taxes
                
                $
                96,583
                
                $
                -
 
 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 $528,634 and $245,499 for the period
          ended March 31, 2008 and $399,706 and $265,639 for the period ended March
          31,
          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 March 31, 2008 and December 31, 2007, the
          VAT
          payable amounted to $92,054 and $320,397.
  18
 **CHINA
            CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
            31,
            2008
 (UNAUDITED)
 **NOTE
          15  – RELATED PARTY RANSACTIONS**
 
 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 of China Clean Energy Inc. and a major shareholder of the company.
          In
          the three months ended March 31, 2008 and 2007, such purchases totaled
          $843,132
          and $147,419, respectively. As of March 31, 2008 and December 31, 2007,
          there
          were no outstanding payables due to these companies.
  **NOTE
          16 – 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 March 31,
          2008 were located in the PRC.
 
 Net
          sales
          for the three months ended March 31, 2008 and 2007 consist of:
 
 2008
                
                2007(Unaudited)
                
                (Unaudited)Specialty
                    chemicals products
                
                $
                3,920,882
                
                $
                3,142,855Biodiesel
                    products
                
                
                552,127
                
                
                995,511Total
                
                $
                4,473,009
                
                $
                4,138,366
 
 **NOTE
          17 – CONCENTRATIONS AND RISKS**
 
 Cash
          demand deposits in accounts maintained with state **** owned
          banks within the People’s Republic of China. Total cash deposited with these
          banks at March 31, 2008 and December 31, 2007 amounted to $6,199,022 and
          $1,133,555, respectively, of which 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
          three months ended March 2008, one customer (for specialty chemical products)
          accounted for 16.3% of net sales. The accounts receivable due from this
          customer
          was $409,336 as of March 31, 2008. In 2007, two customers (for biodiesel
          products) accounted for 13.1% and 10.9%, respectively, of net sales; and
          one
          customer (for specialty chemicals products) accounted for 10.4% of net
          sales.
          The accounts receivable due from these customers amounted to $904,175 as
          of
          December 31, 2007.
 
 For
          the
          three months ended March 2008, three suppliers for feedstock and raw materials
          accounted for 29%, 11%, and 10%, respectively, of the total raw material
          purchase. No accounts payable due to these suppliers as of March 31, 2008.
          In
          2007, two suppliers for feedstock and raw materials accounted for 38% and
          15%,
          respectively, of the total raw material purchase. The accounts payable
          due to
          these suppliers amounted to $19,959 as of December 31, 2007.
  19
 
 **CHINA
          CLEAN ENERGY INC. AND SUBSIDIARIES**
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
          31,
          2008
 (UNAUDITED)
 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 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.
  20
 
 **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.
  21
 
 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 are currently in the process of upgrading our current
        specialty chemical refinery by installing a high purity dimer acid processing
        unit. The installation process commenced in March 2008 and is expected to
        be
        completed by the middle of May 2008. Upon completion, we will be able 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
        produced, 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 Jiangyin biodiesel plant is currently on schedule. In
        light
        of conditions described above, we decided to include a specialty chemical
        production facility at this plant in addition to the previously planned
        biodiesel refinery. 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.
 
 **Quarter
        Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007.**
 
 *Revenues.* During
        the quarter ended March 31, 2008, we had net sales of $4,473,009 (12% from
        biodiesel sales and 88% from specialty chemical sales), as compared to net
        sales
        of $4,138,366 (24% from biodiesel sales and 76% from specialty chemical sales)
        during the quarter ended March 31, 2007, representing an overall increase
        in net
        sales of approximately 8%. This increase in revenue resulted from higher
        sales
        volumes and higher sales prices for our specialty chemicals. These increases,
        however, were offset by a decrease in biodiesel production and sales due
        a
        significant increase in raw material feedstock prices coupled with government
        capped pricing for diesel products. Our feedstock cost in the quarter ended
        March 31, 2007 was approximately $320 per ton (RMB 2,560 per ton), as compared
        to $500 per ton (RMB 3,700 per ton) starting in late February 2008.
 
 *Gross
        Profit.* Cost
        of
        goods sold, which consists of labor, overhead and product costs, was $3,429,773
        for the quarter ended March 31, 2008, as compared to cost of goods sold of
        $2,989,949 for the quarter ended March 31, 2007. We had a gross profit of
        $1,043,236 for the quarter ended March 31, 2008, as compared to gross profit
        of
        $1,148,417 for the quarter ended March 31, 2007, representing gross margins
        of
        approximately 23% and 28%, respectively. In addition, gross margins for our
        biodiesel decreased from 30% in the quarter ended March 31, 2007 to 14% for
        the
        quarter ended March 31, 2008. This decrease in gross profits and margins
        resulted from significant increases in the cost of our feedstock, a decrease
        in
        Chinese government export tax rebates from 13% to 5% effective on July 1,
        2007
        and stagnant pricing in China for diesel products.
  22
 
 *Selling
        Expenses.* Selling
        expenses, which consist of advertising and promotion expenses, freight charges,
        exporting expenses and wages totaled $87,881 for the quarter ended March
        31,
        2008, as compared to $213,243 for the quarter ended March 31, 2007, representing
        a decrease of approximately 59%. This decrease was primarily attributable
        to a
        decrease in specialty chemical exports (which comprised 31% of our net revenue
        during the quarter ended March 31, 2008, as compared to 43% of our net revenue
        during the quarter ended March 31, 2007) and related export and freight charges
        due to the Chinese New Year and a severe snow storm in February 2008, which
        disrupted transportation and shipping in Southern Part of China for three
        weeks.
 
 *General
        and Administrative and Other Operating Expenses.* General
        and administrative and other operating expenses totaled $643,669 for the
        quarter
        ended March 31, 2008, as compared to $488,340 for the quarter ended March
        31,
        2007, representing an increase of approximately 32%. This increase was primarily
        attributable to amortization of $253,618 of stock-based compensation expenses
        related to our grant of 2,000,000 stock options in January 2008. The costs
        related to these stock options will be recorded over three years.
 
 *Net
        Income.* We
        had
        net income of $163,783 for the quarter ended March 31, 2008, as compared
        to net
        income of $400,706 for the quarter ended March 31, 2007, representing a decrease
        of approximately 59%. This decrease in net income was attributable to an
        increase in cost of goods sold, higher general administrative expenses and
        higher income taxes. Going forward, our principal subsidiary, Fujian Zhongde
        Technology Co. Ltd., received approval from the Chinese Tax authority on
        March
        9, 2008 to be treated as a tax exempt entity for its operations in 2007 and
        to
        be taxed at a reduced rate of 12% between January 1, 2008 and December 31,
        2010,
        as opposed to the normal rate of 25%.
 
 **Liquidity
        and Capital Resources**
 
 As
        of
        March 31, 2008, and December 31, 2007, we had cash and cash equivalents of
        $6,199,022 and $1,133,555, respectively. This increase in cash and cash
        equivalents was primarily due to our $15
        million private placement of common stock and warrants in January
        2008 ,
        that
        resulted in $13,627,403 of net proceeds to us. This increase, however, was
        partially offset by a $3,838,749 increase in expenditures related to plant
        and
        equipment maintenance and improvements, ongoing construction, and a $5,850,585
        increase in advanced payments to equipment vendors, construction material
        vendors and construction contractors.
 
 We
        recorded $1,918,332 of net cash from operating activities during the quarter
        ended March 31, 2008, as compared to $236,301 during the quarter ended March
        31,
        2007. This increase in cash flow from operations was attributable to $1.03
        million of accounts receivable reductions, $440,923 in inventory reductions
        and
        our amortization of $253,618 of stock-based compensation expenses.
 
 We
        had
        $12,529,151 of net cash provided by financing activities during the quarter
        ended March 31, 2008, which amount was primarily attributable to $13,627,403
        of
        net proceeds that we received from our $15 million private placement of common
        stock and warrants in January 2008, offset by $1,048,275 of repayments on
        short
        term bank loans.
  23
 
 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.
 
 **Critical
        Accounting Policies and Estimates**
  The
        discussion and analysis of our financial condition presented in this section
        is
        based upon the consolidated financial statements. The consolidated financial
        statements have been prepared in accordance with accounting principles generally
        accepted in the United States. During the preparation of the financial
        statements we are required to make estimates and judgment 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.
  24
 
 *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 March
        31,
        2008 and December 31, 2007 totaled $1,860,909 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 March 31, 2008 and December 31, 2007, allowances for doubtful accounts
        totaled $310,495 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
        September 2006, the FASB issued Statement 157, Fair Value Measurements. This
        statement defines fair value and establishes a framework for measuring fair
        value in generally accepted accounting principles (GAAP). More precisely,
        this
        statement sets forth a standard definition of fair value as it applies to
        assets
        or liabilities, the principle market (or most advantageous market) for
        determining fair value (price), the market participants, inputs and the
        application of the derived fair value to those assets and liabilities. The
        effective date of this pronouncement is for all full fiscal and interim periods
        beginning after November 15, 2007. We adopted SFAS No. 157 as of January
        1, 2008
        and the adoption did not have an impact on our results of operations or
        financial condition.
 
 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. 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. We believe
        that the application of SFAS 160 will not have an impact on our consolidated
        financial statements.
  25
 
 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 the accounting
        for all
        future acquisitions.
 
 **Item
        4. Controls and Procedures.**
  We
        carried out an evaluation, under the supervision and with the participation
        of
        our management, including our chief executive officer and chief financial
        officer, of the effectiveness of the design and operation of our disclosure
        controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
        the
        Securities Exchange Act of 1934, as amended (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 chief financial officer
        concluded that our disclosure controls and procedures are effective, as of
        the
        end of the period covered by this Report (March 31, 2008), 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 March 31, 2008 that have materially affected, or
        are
        reasonably likely to materially affect, our internal control over financial
        reporting.
  26
  **PART
        II**
 **OTHER
        INFORMATION**
  **Item
        4. Submission of Matters to a Vote of Security Holders**
  On
        January 9, 2008, stockholders holding 15,455,200 shares of our common stock,
        or
        71.84%, approved, by a majority written consent, the adoption of our 2008
        Equity
        Incentive Plan.
  **Item
            6.** **Exhibits**
  **Exhibit**
                **Number**
              
              **Description**31.1*
              
              Section
                  302 Certification of Principal Executive Officer31.2*
              
              Section
                  302 Certification of Principal Financial Officer32.1*
              
              Section
                  906 Certification of Principal Executive Officer and Principal
                  Financial
                  Officer
 
 *
              Filed
                  herewith.
  27
  **SIGNATURES**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 CHINA
                  CLEAN ENERGY, INC.Dated:
                  May 12, 2008
              By:
              /s/
                  Gary ZhaoGary
                  Zhao
                Chief
                  Financial Officer
  28
  **EXHIBIT
        INDEX**
  **Exhibit**
                **Number**
              
              **Description**31.1*
              
              Section
                  302 Certification of Principal Executive Officer31.2*
              
              Section
                  302 Certification of Principal Financial Officer32.1*
              
              Section
                  906 Certification of Principal Executive Officer and Principal
                  Financial
                  Officer
 
 *
              Filed
                  herewith.
  29