**U.S.
      Securities and Exchange Commission**


Washington,
      DC 20549





**Form
      10-QSB**





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED





**June
      30, 2006**





Commission
      File Number 000-30017





Franklyn
      Resources III, Inc.


(Name
      of
      small business issuer as specified in its charter)





Nevada
            
            84-1491682(State
                or other jurisdiction of incorporation)
            
            (I.R.S.
                Employer Identification No.)





234-5149
                Country Hills Blvd. NW; Suite 429, Calgary, Alberta, Canada T3A
                5K8(Address
                of principal executive offices)




Issuer’s
                telephone number: (832) 274-3766








Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act during the past 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 checkmark whether the Registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act). Yes o  No
x





As
      of
      August 15, 2006 there were 14,636,472 shares
      of
      the common stock, par value $.001 per share, outstanding.





Transitional
      Small Business Disclosure Format (check one): Yes o  No
x







Index





PagePart
                I. Financial InformationItem
                1. Financial StatementsBalance
                sheets at June 30, 2006 (unaudited) and December 31, 2005
            3Unaudited
                statements of operations for the three and six months ended June
                30, 2006
                and 2005
            4Unaudited
                statements of cash flows for the three and six months ended June
                30, 2006
                and 2005
            5Unaudited
                statement of stockholders’ equity for the six months ended June 30,
                2006
            6Notes
                to financial statements
            7Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            22Item
                3. Controls and Procedures
            30Part
                II. Other InformationItem 5. Other
              Information
            30Item
                6. Exhibits
            30




2


**Franklyn
        Resources III Inc and Subsidiaries**
 **Condensed
        Consolidated Balance Sheets**
 **(In
        thousands of United States dollars)**
 June
                    30, 2006
                
                December
                    31, 2005Note(s)
                
                Unaudited
                
                Audited**ASSETS**CURRENT
                    ASSETSCash
                    and cash equivalents
                
                
                
                
                
                1,212
                
                
                332Accounts
                    receivable-third party (net)
                
                
                3-Related
                    party
                
                
                
                
                
                -
                
                
                1,346-Third
                    party
                
                
                
                
                
                6,407
                
                
                1,780Other
                    receivables-
                
                
                4-Related
                    party
                
                
                
                
                
                2,556
                
                
                464-Third
                    party
                
                
                
                
                
                489
                
                
                275Deposits
                    and prepayments
                
                
                5-Related
                    parties
                
                
                
                
                
                5,000
                
                
                4,986-
                    Third parties
                
                
                
                
                
                963
                
                
                1,027Inventories
                
                
                6
                
                
                1,812
                
                
                1,825TOTAL
                    CURRENT ASSET
                
                
                
                
                
                18,439
                
                
                12,035LONG
                    TERM ASSETSProperty,
                    plant and equipment (net)
                
                
                7
                
                
                3,405
                
                
                3,455Intangible
                    assets
                
                
                8
                
                
                239
                
                
                268Long
                    term deferred tax asset
                
                
                
                
                
                19
                
                
                17TOTAL
                    ASSETS
                
                
                
                
                
                22,102
                
                
                15,775**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**CURRENT
                    LIABILITIESNotes
                  Payable
                
                
                
                
                
                689Short
                    term loan
                
                
                9
                
                
                2,500
                
                
                2,478Accounts
                    payable-third party
                
                
                
                
                
                1,186
                
                
                480Other
                    payables-
                    Related party
                
                
                10
                
                
                486
                
                
                396-
                    Third parties
                
                
                
                
                
                1,862
                
                
                830Accrued
                    expenses
                
                
                
                
                
                32
                
                
                23Warranty
                    accrual
                
                
                
                
                
                26
                
                
                14Advances
                    from customers
                
                
                11
                
                
                1,821
                
                
                2,234Income
                    taxes payable
                
                
                12
                
                
                1,766
                
                
                1,162TOTAL
                    CURRENT LIABILITIES
                
                
                
                
                
                10,368
                
                
                7,616Long
                    term deferred tax liabilities
                
                
                13
                
                
                28
                
                
                28Minority
                    interests
                
                
                14
                
                
                678
                
                
                641TOTAL
                    LIABILITIES
                
                
                
                
                
                11,074
                
                
                8,285STOCKHOLDERS’
                    EQUITYCommon
                    stock - $.001 Par Value; 14,615,386 Shares Issues and
                    Outstanding
                
                
                
                
                
                15
                
                
                15Paid-in
                    capital
                
                
                
                
                
                7,661
                
                
                4,935Capital
                    surplus
                
                
                
                
                
                67
                
                
                67Statutory
                    surplus reserve fund
                
                
                16
                
                
                329
                
                
                329Retained
                    earnings
                
                
                
                
                
                2,764
                
                
                2,019Accumulated
                    other comprehensive income
                
                
                
                
                
                192
                
                
                124Total
                    stockholders’ equity
                
                
                
                
                
                11,028
                
                
                7,489TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                
                
                
                
                22,102
                
                
                15,775
  The
        accompanying notes are an integral part of these
        financial statements.
  3
  **Franklyn
        Resources III Inc and Subsidiaries**
 **Condensed
        Consolidated Statements of Operations (Unaudited)**
 **(In
        thousands of United States dollars)**
 
 
 Note(s)
              
              Three
                  Months Ended June 30, 2006
              
              Six
                  Months Ended June 30, 20062006
              
              2005
              
              2006
              
              2005NET
                  REVENUE
              
              
              17
              
              
              3,383
              
              
              1,475
              
              
              5,883
              
              
              2,049COST
                  OF REVENUE
              
              
              
              
              
              (2,033
              )
              
              (929
              )
              
              (3,278
              )
              
              (1,033
              )GROSS
                  PROFIT
              
              
              
              
              
              1,350
              
              
              546
              
              
              2,605
              
              
              1,016OPERATING
                  EXPENSESSelling
                  expenses
              
              
              
              
              
              58
              
              
              4
              
              
              122
              
              
              38General
                  and administrative expenses
              
              
              
              
              
              495
              
              
              98
              
              
              760
              
              
              179TOTAL
                  OPERATING EXPENSES
              
              
              
              
              
              553
              
              
              102
              
              
              882
              
              
              217INCOME(LOSS)
                  FROM OPERATIONS
              
              
              
              
              
              797
              
              
              444
              
              
              1,723
              
              
              799OTHER
                  INCOME(EXPENSES)Other
                  non-operating income
              
              
              
              
              
              7
              
              
              65
              
              
              9
              
              
              65Interest
                  expense
              
              
              
              
              
              (356
              )
              
              -
              
              
              (398
              )
              
              -Other
                  expenses
              
              
              
              
              
              -
              
              
              -
              
              
              (3
              )
              
              -OTHER
                  INCOME (LOSS) NET
              
              
              
              
              
              (349
              )
              
              65
              
              
              (392
              )
              
              65INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              
              
              
              448
              
              
              509
              
              
              1,331
              
              
              864Income
                  tax
              
              
              12
              
              
              (240
              )
              
              (170
              )
              
              (553
              )
              
              (279
              )INCOME
                  BEFORE MINORITY INTEREST
              
              
              
              
              
              208
              
              
              339
              
              
              778
              
              
              585Minority
                  interest
              
              
              
              
              
              11
              
              
              (5
              )
              
              (33
              )
              
              (5
              )NET
                  INCOME
              
              
              
              
              
              197
              
              
              344
              
              
              745
              
              
              590
 
 The
        accompanying notes are an integral part of these financial
        statements.
  4
  **Franklyn
        Resources III Inc and Subsidiaries**
 **Condensed
        Consolidated Statements of Changes in Stockholders’ Equity**
 **(In
        thousands of United States dollars)**
 
 
 Number
                  of Shares
              
              Par
                  Value Common Stock
              
              CAPITAL
                PAID-UP
              
              STATUTORY
                SURPLUS
                RESERVE
              
              ACCUMULATED
                  COMPREHENSIVE INC0ME
              
              RETAINED
                  EARNINGS
              
              CAPTIAL
                  SURPLUS
              
              TOTAL
                STOCKHOLDERS’
                  EQUITYBalance,
                  December 31, 2005
              
              
              14,246,385
              
              
              15
              
              
              4,935
              
              
              329
              
              
              124
              
              
              2,019
              
              
              67
              
              
              7,489Issuance
                  of common stock
              
              
              369,001
              
              
              
              
              
              2,726
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,102Net
                  income for the six months ended June 30, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              745
              
              
              
              
              
              745Transfer
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              68
              
              
              
              
              
              
              
              
              68Balance,
                  June 30, 2006
              
              
              14,615,386
              
              
              15
              
              
              7,661
              
              
              329
              
              
              192
              
              
              2,764
              
              
              67
              
              
              11,028
  The
        accompanying notes are an integral part of these
        financial statements.
  5
  **Franklyn
        Resources III Inc and Subsidiaries**
 **Condensed
        Consolidated Statements of Cash Flows (Unaudited)**
 **(In
        thousands of United States dollars)**
 
 For
                  the Three Months ended June 30,
              
              For
                  the Six Months ended June 30,2006
              
              2005
              
              2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              
              197
              
              
              344
              
              
              745
              
              
              590Minority
                  interest
              
              
              11
              
              
              -
              
              
              11Depreciation
              
              
              72
              
              
              65
              
              
              145
              
              
              115Amortization
                  of intangible assets
              
              
              19
              
              
              11
              
              
              32
              
              
              15Provision
                  for doubtful debts
              
              
              4
              
              
              -
              
              
              4
              
              
              -Changes
                  in operating assets and liabilities:Increase
                  in accounts receivable
              
              
              (1,577
              )
              
              (99
              )
              
              (3,359
              )
              
              (90
              )Increase
                  in other receivables, deposits and prepayments
              
              
              (1,947
              )
              
              (676
              )
              
              (2,097
              )
              
              (1,153
              )(Decrease)/increase
                  in inventories
              
              
              252
              
              
              (330
              )
              
              29
              
              
              (302
              )(Decrease)/increase
                  in accounts payable
              
              
              (28
              )
              
              (1
              )
              
              702
              
              
              1(Decrease)/Increase
                  in accrued expenses
              
              
              15
              
              
              2
              
              
              20
              
              
              2Decrease/(increase)
                  in deferred expenses
              
              
              4
              
              
              (40
              )
              
              6
              
              
              (68
              )(Decrease)
                  in advance from customers
              
              
              (97
              )
              
              (143
              )
              
              (431
              )
              
              79(Decrease)/increase
                  in other payables
              
              
              665
              
              
              616
              
              
              1,134
              
              
              496Increase
                  in income tax payable
              
              
              99
              
              
              132
              
              
              591
              
              
              251Deferred
                  tax credit/(debit)
              
              
              (2
              )
              
              23
              
              
              (2
              )
              
              13Net
                  cash provided by operating activities
              
              
              (2,313
              )
              
              (96
              )
              
              (2,470
              )
              
              (51
              )CASH
                  FLOWS FROM INVESTING ACTIVITESPayment
                  for purchase of property, plant and equipment
              
              
              -
              
              
              (60
              )
              
              (65
              )
              
              (108
              )Net
                  cash used in investing activities
              
              
              -
              
              
              (60
              )
              
              (65
              )
              
              (108
              )CASH
                  FLOWS FROM FINANCING ACTIVITESCash
                  received from short term borrowing
              
              
              -
              
              
              -
              
              
              -
              
              
              -Cash
                  received from capital contribution
              
              
              312
              
              
              -
              
              
              312
              
              
              -Cash
                  received /(paid) for other financing activities
              
              
              -
              
              
              287
              
              
              -
              
              
              287Net
                  cash used in financing activities
              
              
              3,413
              
              
              287
              
              
              3,413
              
              
              287Net
                  increase/(decrease) in cash and cash equivalents
              
              
              1,100
              
              
              130
              
              
              878
              
              
              127Cash
                  and cash equivalents at beginning of the period
              
              
              112
              
              
              38
              
              
              334
              
              
              41Cash
                  and cash equivalents at end of the period
              
              
              1,212
              
              
              168
              
              
              1,212
              
              
              168
 
 The
        accompanying notes are an integral part of these financial
        statements.
  6
 
 **Franklyn
        Resources III Inc and Subsidiaries**
 **Notes
        to the Condensed Consolidated Financial Statements (Unaudited)**
 **Three
        and Six Moths Ended June 30, 2006 and 2005**
 
 **1.** **The
        Company**
  (1)
        Recapitalization Transaction
  Franklyn
        Resources III, Inc. (“Franklyn”) was incorporated in Nevada on March 2,
        1999.
  On
        June
        2, 2006, Franklyn entered into the following agreements:
  ·
              An
                  agreement with Sinoenergy Holding Limited (“Sinoenergy”), a British Virgin
                  Islands corporation and its stockholders, pursuant to which Franklyn
                  issued 14,215,385 shares of common stock to the former stockholders
                  of
                  Sinoenergy. Sinoenergy owns all of the registered capital of Qingdao
                  Sinogas General Machinery Limited Corporation (“Sinogas”), a wholly
                  foreign owned enterprise (“WFOE”) registered under laws of the People’s
                  Republic of China (the “PRC”). Sinoenergy had no business other than its
                  ownership of SInogas. As a result of this transaction, Sinoenergy
                  and its
                  subsidiary, Sinogas, became subsidiaries of Franklyn and the business
                  of
                  Sinogas became the business of
                  Franklyn.
  ·
              An
                  agreement with Franklyn’s principal stockholders, pursuant to which
                  Franklyn purchased 3,305,000 shares of common stock for $213,525
                  using the
                  proceeds of the financing described
                  below.
  ·
              A
                  securities purchase agreement pursuant to which Franklyn issued
                  6%
                  convertible notes in the amount of $3,500,000, 369,001 shares of
                  common
                  stock and warrants to purchase an aggregate of 18,000,003 shares
                  of common
                  stock...
                  This agreement was amended in July 2006, and the Franklyn issued,
                  for
                  $200,000, a 6% convertible note in the principal amount of $200,000,
                  21,086 shares of common stock and warrants to purchase an aggregate
                  of
                  1,028,571 shares of common stock.
   Under
        generally accepted accounting principles, both acquisitions described above
        are
        considered to be capital transactions in substance, rather than business
        combinations. That is, the acquisitions are equivalent, in the acquisition
        of
        Sinoenergy and Sinogas, to the issuance of stock by Sinogas for the net monetary
        assets of Sinoenergy, and in the Franklyn/Sinoenergy acquisition, the issuance
        of stock by Sinoenergy for the net monetary assets of Franklyn. Each transaction
        is accompanied by a recapitalization, and is accounted for as a change in
        capital structure. Accordingly, the accounting for the acquisition is identical
        to that resulting from a reverse acquisition, except that no goodwill is
        recorded. Under reverse takeover accounting, the comparative historical
        financial statements in the Franklyn/Sinoenergy acquisition of the “legal
        acquirer”, Franklyn, are those of the “accounting acquirer”, Sinoenergy. The
        accompanying financial statements reflect the recapitalization of the
        shareholders’ equity as if the transactions occurred as of the beginning of the
        first period presented.
  7
  (1)
        Recapitalization Transaction (continued)
  Franklyn
        including, when the context so requires, its subsidiaries is referred to
        herein
        as the “Company”. The Company through its subsidiaries(describe below) mainly
        operates pressure containers of class 1, 2, 3 petroleum refinery equipment’s
        manufacturing and sales, designs and installs compressed natural gas station
        equipment, and compressed natural gas storage and transportation
        equipment.
 
 As
        at
        June 30 2006, there is no market for Franklyn’s our common stock, and it has not
        paid dividends.
  Issuance
          of Convertible Notes and Warrants
 
 The
          6%
          convertible note matures on March 31, 2007 and is convertible into Series
          A
          Preferred Stock at a conversion price of $.65 per share.
 
 There
          are
          6,000,000 Series "A" warrants exercisable at $.85 per share and 6,000,000
          Series
          "B" warrants exercisable at $1.20 per share both exercisable through June
          11,
          2006. There are 6,000,000 series "C" warrants exercisable at $1.75 per
          share
          through December 31, 2006.
 
 All
          Warrant Exercise Prices shall be reduced by the percentage that fully diluted
          EPS fall below $.1272 and $.2118 for the Years Ended 12/31/06 and 12/31/07,
          respectively, to a maximum of 40%. The warrants were valued using a Black
          Schoels Option Pricing Model.
 
 The
          excess fair value of the preferred "A" shares into which the notes can
          convert
          at the commitment date over the net proceeds is recorded as a conversion
          premium
          and is limited to the amount of the proceeds of the debentures.
 
 The
          embedded conversion premium and the warrants were recorded based on EITF
          Issues
          00-27 and 98-05 and recorded as an adjustment to Paid in Capital.
 
 The
          proceeds from the note are net of expenses $398,525 related to the costs
          of
          raising funds.
 (2)
        Subsidiaries of the Company
 
 Sinogas
        was registered in Qingdao, China in September 2004, as a limited liability
        company under the laws of the PRC.
 
 Based
        on
        a board of directors’ resolution, on November 8, 2005, Sinogas entered into a
        share transfer agreement with Sinoenergy. Pursuant to this Agreement, 100%
        of
        the shares of Sinogas held by Jiangsu Dong Fang Hong Chemical Fertilizer
        Co.,
        Ltd (5% of total) and Beijing Sanhuan Technology Development Co., Ltd (Bejing
        Sanhan) (95%of total) were acquired by Sinoenergy Holding Limited. On November
        29, 2005 Qingdao Foreign Trade and Economic Cooperation Bureau approved the
        Sinoenergy Holding Limited purchase of all the shares from the former
        stockholders of Sinogas and Sinogas changed from the local investment limited
        liability company into a WFOE.
 
 Together
        with Qingdao Kangtai Machinery Equipment Manufacture Co. Limited (Kantai),
        Sinogas established Qingdao Sinogas Yuhan Chemical Equipment Co., Ltd. (Yuhan).
        Sinogas contributed capital totaling $681,000 $in the form of property and
        equipment, representing 55% of the registered capital, and Kangtai contributed
        capital of $558,000 $in the form of cash, cash equivalents and intangible
        assets, which represents 45% of the registered capital.
 
 The
        term
        of the business of Yuhan is from May 25, 2005 to April 30, 2009 and the business
        scope is to manufacture, process and install machinery facilities (not including
        special equipments and cars); as the wholesaler and retailer of steels,
        machinery and electronic products, hardware, chemical equipments (not including
        dangerous equipments).
  **2.
          Summary of Significant Accounting Policies**
  **(a)
            Basis of Presentation**
 
 The
            accompanying financial statements and its subsidiary were prepared in
            accordance
            with the accounting principles generally accepted in the United States
            of
            America (“US GAAP”).
 **(b)
          Use of Estimates**
 
 In
          preparing financial statements in conformity with accounting principles
          generally accepted in the United States of America, management is required
          to
          make estimates and assumptions that affect the reported amounts of assets
          and
          liabilities and the disclosure of contingent assets and liabilities at
          the date
          of the financial statements and revenues and expenses during the reported
          periods. Significant estimates include depreciation and allowance for doubtful
          accounts receivable. Actual results could differ from those
          estimates.
 8
 **2.
            Summary of Significant Accounting Policies (continued)**
  **(c)
            Cash and Cash Equivalents**
 
 The
            Company considers all highly liquid investments with original maturities
            of
            three months or less at the time of purchase to be cash equivalents.
            As of June
            30, 2006 and December 31, 2005 the Company did not have any cash
            equivalents.
 
 **(d)
            Allowance for Doubtful Accounts**
 
 The
            Company recognizes an allowance for doubtful accounts to ensure accounts
            receivable are not overstated due to uncollectibility. An allowance for
            doubtful
            accounts is maintained for all customers based on a variety of factors,
            including the length of time the receivables are past due, significant
            one-time
            events and historical experience. An additional reserve for individual
            accounts
            is recorded when the Company becomes aware of a customer’s inability to meet its
            financial obligations, such as in the case of bankruptcy filings or
            deterioration in the customer’s operating results or financial position. If
            circumstances related to customers change, estimates of the recoverability
            of
            receivables would be further adjusted.
 
 **(e)
            Inventories**
 
 Inventories
            comprise of raw materials, work in process, finished goods and low value
            consumable articles. Amounts are stated at the lower of cost or market.
            Substantially all inventory costs are determined using the weighted average
            basis. Costs of finished goods include direct labor, direct materials,
            and
            production overhead before the goods are ready for sale. Inventory costs
            do not
            exceed net realizable value.
  **(f)
          Property, Plant and Equipment**
 
 Property,
          plant and equipment are stated at cost. Depreciation is provided principally
          by
          use of the straight-line method over the useful lives of the related assets.
          Expenditures for maintenance and repairs, which do not improve or extend
          the
          expected useful life of the assets, are expensed to operations while major
          repairs are capitalized.
 
 Management
          estimates a 10% residual value for its property, plant and equipment according
          to industry standards in the PRC. The estimated useful lives are as
          follows:
 
 Building
                    and facility
                20
                    yearsMachinery
                    and equipment
                8
                    yearsMotor
                    vehicles
                10
                    yearsOffice
                    equipment and others
                5~8
                    years
 
 The
          gain
          or loss on disposal of property, plant and equipment is the difference
          between
          the net sales proceeds and the carrying amount of the relevant assets,
          and, if
          any, is recognized in the statements of operations.
 
 **(g)
          Intangible Assets**
 
 Intangible
          assets, representing patents and technical know-how acquired, are stated
          at cost
          less accumulated amortization and impairment losses. Amortization is calculated
          on the straight-line method over the estimated useful lives of 10 years.
          The
          technical know how, which is acquired in the end of year 2004 is valued
          and
          amortized according to relative industry standard. The patent is acquired
          in May
          of 2005, and is amortized according to its validated period. Till the balance
          sheet date, the patent is evaluated with no value change.
 
 **(h)
          Impairment of Assets**
 
 In
          accordance with Statement of Financial Accounting Standards (‘SFAS”) No. 144,
          "Accounting for Impairment or Disposal of Long-Lived Assets", the Company
          evaluates its long-lived assets to determine whether later events and
          circumstances warrant revised estimates of useful lives or a reduction
          in
          carrying value due to impairment. If indicators of impairment exist and
          if the
          value of the assets is impaired, an impairment loss would be
          recognized.
 
 **(i)
          Revenue Recognition**
  Revenue
          Recognition - The Company recognizes revenue when the significant risks
          and
          rewards of ownership have been transferred to the customer pursuant to
          PRC law,
          including factors such as when persuasive evidence of an arrangement exists,
          delivery has occurred, the sales price is fixed or determinable, sales
          and value
          added tax laws have been complied with, and collectibility is probable.
          The
          Company recognizes product sales generally at the time the product is
          shipped.
  The
          Company has a large construction contract open at the fiscal year end.
          Revenue
          is recognized at the balance sheet date on the percentage of completion
          basis,
          measured by reference to the proportion of physical construction work completed
          to the total estimated work according to the report provided by technical
          department of the Company.
  Revenue
          is presented net of any sales tax and value added tax.
  Sales
          Taxes - The Company is subject to value added tax (“VAT”). The applicable VAT
          tax rate is 17% for products sold in the PRC. The amount of VAT liability
          is
          determined by applying the applicable tax rate to the invoiced amount of
          goods
          sold less VAT paid on purchases made with the relevant supporting invoices.
          VAT
          is collected from customers by the Company on behalf of the PRC tax authorities
          and is therefore not charged to the consolidated statements of operations.
  **(
          j ) Warranty reserves**
 
 Warranty
          reserves represent the Company’s obligation to repair or replace defective
          products under certain conditions.  The estimate of the warranty reserves
          is based on historical experience.  In year 2005 and the first half year of
          2006, the warranty rate was determined to be 0.2 % of gross sales.
  **2.
            Summary of Significant Accounting Policies
            (continued)**
 At
          present, the nearly all the products sold are pressure vessels, of which
          the
          operating permission is firmly controlled by PRC government. As a result,
          all
          the pressure vessels being sold must be tested by the Qingdao Bureau of
          Quality
          and Technical Supervision.
  **(k)
          Income Taxes**
 
 The
          Company accounts for income taxes under SFAS No. 109, "Accounting for Income
          Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
          for the future tax consequences attributable to differences between the
          financial statement carrying amounts of existing assets and liabilities
          and
          their respective tax bases. Deferred tax assets and liabilities are measured
          using enacted tax rates expected to apply to taxable income in the years
          in
          which those temporary differences are expected to be recovered or settled.
          Under
          SFAS No. 109, the effect on deferred tax assets and liabilities of a change
          in
          tax rates is recognized in income in the period that includes the enactment
          date.
 
 The
          Company reviewed the differences between the tax basis under PRC tax laws
          and
          financial reporting under PRC GAAP. Timing differences, relative deferred
          tax
          asset or liabilities have been recognized.
 
 9
 **2.
          Summary of Significant Accounting Policies (continued)**
  **(k)
          Foreign Currency Transactions**
 
 The
          Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
          U.S. dollars. The Company’s balance sheet accounts are
          translated using the closing exchange rate in effect at the balance sheet
          date
          and operating accounts are translated using the average exchange rate prevailing
          during the reporting period. Translation gains and losses are deferred and accumulated as a component
          of
          other comprehensive income in owners’ equity. Transaction gains and losses that
          arise from exchange rate fluctuations from transactions denominated in
          a
          currency other than the functional currency are included in the statement
          of
          operations as incurred.
 
 **(l)
          Fair Value of Financial Instruments**
 
 SFAS
          No.
          107, “Disclosures about Fair Values of Financial Instruments”, requires
          disclosing fair value to the extent practicable for financial instruments
          that
          are recognized or unrecognized in the balance sheet. The fair value of
          the
          financial instruments disclosed herein is not necessarily representative
          of the
          amount that could be realized or settled, nor does the fair value amount
          consider the tax consequences of realization or settlement.
 
 For
          certain financial instruments, including cash, account receivable, related
          party
          and other receivables, accounts payable, other payables and accrued expenses,
          it
          was assumed that the carrying amounts approximate fair value because of
          the near
          term maturities of such obligations.
 
 **(m)
          Minority Interest**
 
 The
          minority shareholders’ interest refers to the percentage of the owner’s equity
          of Qingdao Yuhen owned by Kangtai. The minority shareholders’ interest in the
          consolidated financial statements means the percentage of the Company’s net
          assets owned by Kangtai other than the Company, according to their respective
          investment ratios.
  **(n)
          Earnings Per Share**
 
 Basic
          earnings per share is computed by dividing the earnings for the year by
          the
          weighted average number of common shares outstanding for the year. Diluted
          earnings per share reflects the potential dilution of securities by including
          other potential common stock, including stock options and warrants, in
          the
          weighted average number of common shares outstanding for a period, if dilutive.
  The
          results of operations for the three months and six months ended June 30,
          2006
          are not necessarily indicative of the results of operations to be expected
          for
          the full fiscal year ending December 31, 2006.
 
 Comprehensive
          Income - The Company has adopted the provisions of Statement of Financial
          Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).
          SFAS No. 130 establishes standards for the reporting and display of
          comprehensive income, its components and accumulated balances in a full
          set of
          general purpose financial statements. SFAS No. 130 defines comprehensive
          income
          to include all changes in equity except those resulting from investments
          by
          owners and distributions to owners, including adjustments to minimum pension
          liabilities, accumulated foreign currency translation, and unrealized gains
          or
          losses on marketable securities.
 
 For
          the
          three months and six months ended June 30, 2006, the Company’s only component of
          other comprehensive income is foreign currency translation gain of $19,136
          and
          $48,939. For the three months and six months ended June 30, 2005, foreign
          exchange between $ and RMB was kept stable, no translation gain or loss
          occurred. These amounts have been recorded as a separate component of
          stockholders’ equity.
 Income
          Per Share - Basic income per share is calculated by dividing net income
          by the
          weighted average number of common shares outstanding during the period.
          Diluted
          earnings per share reflects the potential dilution of securities by including
          other potential common stock, including stock options and warrants, in
          the
          weighted average number of common shares outstanding for a period, if dilutive.
 10
  **3.** **Account
        Receivables and Allowance for Doubtful Receivables**
 
 Details
        of allowance for doubtful receivables deducted from accounts receivable are
        as
        follows:-
 
 June
                  June 30, 2006
              
              December
                  31 31, 2005US$’000
              
              US$’000Accounts
                  receivable
              
              
              6,415
              
              
              3,130Less:
                  allowance for doubtful accounts
              
              
              8
              
              
              4Balance,
                  end of year
              
              
              6,407
              
              
              3,126
 
 
 Within
        the balance at June 30, 2006, $1,506,000 represents the receivable balance
        for a
        22CNG gas stations contract, which has been signed and completed in year
        2005,
        and $2,133,000 represents receivables for another CNG gas station construction
        contract, which has been signed in the end of 2005 and began in the first
        quarter of year 2006. The Company is in the process of fulfilling this contract
        and the revenue is recognized according to percentage of completion basis.
 
 **4.
        Other Receivables**
 
 (1)
            Other
                Receivable With Related Party 
 The
        balance as at June 30, 2006 includes $1,900,000 temporary transferred to
        Beijing
        Sanhuan for foreign currency investment capital verification and RMB currency
        exchange $346,000 unsecured demand loans to Sanhuan $309,000 receivables
        for
        plant rental charge and unsecured loan due from Kangtai.
 
 The
        balance at December 31, 2005, represents power and water fee receivables
        from
        Kangtai..
 
 (2)
            Other
                Receivable With Third Party 
 The
        other
        receivables with third parties represents receivable amount to unrelated
        parties
        as unsecured demand loans with no stated interest rate or due date.
 
 **5.
        Deposits and Prepayments**
 
 The
        related parties balance as at June 30, 2006 and December 31, 2005 is of
        US$4,999,937 prepayment to Beijing Sanhuan for land use right transferring/
 
 The
        third
        parties balances represent advance payments to suppliers by the Company,
        as well
        as its subsidiary for routine operations.
 
 11
  **6.
        Inventories**
 Inventories
        at December 31, 2005 and June 30, 2006 are summarized as follows:
  June
                  30, 2006
              
              December
                  31,2005US$’000
              
              US$’000Raw
                  materials
              
              
              321
              
              
              423Work
                  in progress
              
              
              1,094
              
              
              1,249Finished
                  goods
              
              
              348
              
              
              55Low
                  value consumable articles
              
              
              49
              
              
              48Total
              
              
              1,812
              
              
              1,825
 
 There
        was
        no allowance for losses on inventories as of December 31, 2005 and June 30,
        2006.
 
 To
        make
        more liquid for working capital, the Company kept stock level to the minimum
        level of production, so there is no big fluctuation in inventory balance.
 
 **7.
        Property, Plant and Equipment**
 
 As
        of
        December 31, 2005 and June 30, 2006, property, plant and equipment consist
        of
        following:
 
 June
                  30, 2006
              
              December
                  31 2005US$’000
              
              US$’000**Cost**Buildings
                  and facility
              
              
              2,587
              
              
              2,571Machinery
                  equipment
              
              
              2,110
              
              
              2,031Motor
                  vehicles
              
              
              36
              
              
              36Office
                  equipment and others
              
              
              32
              
              
              214,765
              
              
              4,659**Accumulated
                  depreciation**Buildings
                  and facility
              
              
              238
              
              
              215Machinery
                  equipment
              
              
              1,088
              
              
              985Motor
                  vehicles
              
              
              22
              
              
              19Office
                  equipment and others
              
              
              12
              
              
              11,360
              
              
              1,204**Carrying
                  value**Buildings
                  and facility
              
              
              2,349
              
              
              2,356Machinery
                  equipment
              
              
              1,022
              
              
              1,046Motor
                  vehicles
              
              
              12
              
              
              17Office
                  equipment and others
              
              
              26
              
              
              203,405
              
              
              3,455
 
 Within
        the fixed asset balance as at June 30, 2006, there is $64,053 of work in
        progress on machinery which the Company is manufacturing for
        itself.
  12
 
 **8.
        Intangible Assets**
 
 June
                  30 2006
              
              December
                  31 2005Patent
                  and technology know how
              
              US$’000
              
              US$’000Cost
              
              
              285
              
              
              285Accumulated
                  amortization
              
              
              (46
              )
              
              (17
              )Carrying
                  value
              
              
              239
              
              
              268
 
 Patents
        as well as technology know how of the Company are amortized over 10 years
        up to
        September 2014
 
 In
        connection with the formation of Yuhan, in May 2005, Kangtai transferred,
        as
        part of its investment in Yuhan, a technology know how relating to the
        manufacture of pressure containers manufacturing with cost of $207,000.
 
 **9.
        Short Term Loan**
 
 The
        balance totaled $ 2,478,455 represents the short term loan borrowed from
        the
        Qingdao First Branch of Shibei District, Agriculture Bank of China, (hereafter
        refers to as 1st Branch) on November 1, 2005. According to the loan contract,
        the type of loan is specified as short-term working capital loan with the
        borrowing date starting from November 2, 2005 for 12 million RMB and from
        November 7, 2005 for 8 million RMB and maturing on November 1, 2006. The
        interest rate for the short term loan is 6.669% annually.
 
 The
        1st
        Branch and Beijing Zhongyou Environment Tech. Corp. signed the ceiling guarantee
        contract, with Beijing Zhongyou Environment Tech. Corp. provided a voluntary
        guarantee for the loan contract. According to this contract, the guarantee
        period starts from the next day after the loan matures as specified in the
        master contract and lasts for two years. The guarantor is a subsidiary of
        a
        major customer and the loan was incurred in connection with the project for
        that
        customer.
 
 **10.
        Other Payables**
 
 (1)
            Other
                Payables to Related Party: 
 The
        balances as at December 31, 2005 and June 30, 2006 consist of unsecured demand
        loans from related party Kangtai, with no stated interest rate or due
        date;
  (2)
            Other
                Payables to Third Party 
 The
        balances are mainly for payables for sales tax (VAT and business tax), unsecured
        demand loans from third parties and miscellaneous payables to other creditors.
        Within the balance as at June 30, 2006 and December 31, 2005, separately
        there
        represent US$574K and US$298K VAT and BT payables
  13
  **11.
        Advance from Customers**
 
 The
        balances as at December 31, 2005 and June 30, 2006 was mainly the advance
        received by Yuhan, the subsidiary of the Company. To all the sales order,
        Yuhan
        receives 30% to 60% of contract amount as down-payment before product
        manufacturing. The balance fluctuation is mainly due to different products
        orders with different production period fulfilled by Yuhan in different
        periods.
 
 **12.
        Income Taxes Payable**
 
 Pursuant
        to the PRC Income Tax Laws, the Company’s subsidiaries are subject to enterprise
        income tax at a statutory rate of 33% (30% national income tax plus 3% local
        income tax).
 
 Being
        licensed as wholly foreign owned manufacturing enterprise, Sinogas is in
        the
        process of applying tax-free permission, so no income tax payment has been
        made
        in the first two quarters. Under United States generally accepted accounting
        principles (“USGAAP”), corporate income tax has been accrued subject to 33% tax
        rate. When the tax abatement and income tax refund is approved by the
        government, those income tax accruals will be reversed.
 
 
 No
        provision for American tax and for British tax is made as Franklyn and
        Sinoenergy are all investment holding companies, and has no assessable income
        either in the United State or the British Virgin Islands for the three months
        ended June 30, 2006
 
 **13.
        Long Term Deferred Tax Liabilities**
 
 During
        the establishment of Yuhan, the actual contributed capital amount by Kangtai
        is
        $158,084 higher than shared registered capital. Under PRC accounting policy,
        the
        Company records 55% of that over contributed capital as $86,946 into capital
        surplus. Under PRC tax law, that capital surplus would not be regarded as
        taxable income until the investment to Yuhan is disposed. Under USGAAP, the
        negative goodwill amount is recognized as operating income. Deferred tax
        liabilities resulting from timing differences are recognized.
  14
  **14.
        Minority Interests’ Equity**
 
 The
        activities of the minority interests’ equity during the year ended December 31,
        2005 and June 30, 2006 are summarized as follows:
 
 US$’000Beginning
                  balance (May 2005)
              
              $
              -Add:
                  contribution by minority shareholders
              
              
              557,835Minority
                  interests’ income
              
              
              13,893Others
              
              
              69,236Balance,
                  December 31, 2005
              
              $
              640,964Add:
                  contribution by minority shareholders
              
              
              24,413Minority
                  interests’ incomeBalance,
                  March 31, 2006
              
              $
              665,377Add:
                  contribution by minority shareholders
              
              
              -Minority
                  interests’ income
              
              
              12,468$
              677,845
 
 **15.**  **Related
        Party Relationships and Transactions**
 
 The
        principal related companies with which the Company had transactions during
        the
        first two quarters of year 2006 are as follows:
 
 Name
                  of the Company
              
              RelationshipBeijing
                  Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)
              
              Parent
                  company before November 8, 2005.Qingdao
                  Kangtai Machinery Equipment Manufacture Co. Limited
                  (Kangtai)
              
              Minority
                  investor from May 2005
 
 Significant
        transactions between the Company and its related company during the year
        are as
        follows:
 
 (1)
            Sales
                and purchase transactions with related
                parties 
 Name
                  of the Company
              For
                  the three months ended June 30,
              For
                  the six months ended June 30,2006
              2005
              2006
              2005Kangtai
              Sales
                  of $672,945
              --
              Sales
                  of $1,481,503
              --
  15
  Kangtai
        is the predecessor Company of Qingdao Yuhan. Kangtai purchases products from
        Yuhan to fulfill open purchase orders. Yuhan completes those contracts fulfilled
        by Kantai prior the separation.
  The
        sales
        and purchases to and from related parties were made at a mutually agreed
        price based on prevailing market prices.
  (2)
            Inter-company
                receivables 
 December
                  31,2005
              June
                  30, 2006Name
                  of the CompanyBeijing
                  Sanhuan
              $4,986,279
                  prepayment for transfer of land use right
              $4,999,937
                  prepayment for transfer ofland
                  use right;
                $1,900,000
                  for RMB currency exchange for the Company;
                $346,000
                  for unsecured loan;Kangtai
              $2,921,415
                  including rents
                  receivable of $1,063,606
              $309,758
                  inter-company loan
 
 (3)
            Inter-company
                payables 
 Name
                  of the Company
              December
                  31, 2005
              June
                  30, 2006Kangtai
              $395,726
                  inter-company loan
              $486,075
                  unsecured inter-company loan
 
 The
        amount due from/to related parties are interest-free, unsecured and have
        no
        fixed terms
 
 
 **16.
        Statutory Surplus Reserve Fund**
 
 In
        accordance with PRC regulations, Sinogas is required to make appropriations
        to
        the statutory surplus reserve fund, based on after-tax net income determined
        in
        accordance with PRC GAAP. According to the Memorandum and Articles of
        Association of Sinogas, appropriation to the statutory surplus reserve fund
        should be at least 10% of the after-tax net income determined in accordance
        with
        the PRC GAAP until the reserve fund is equal to 50% of the entity’s registered
        capital. Appropriations to the statutory public welfare fund should be at
        least
        5% of the after-tax net income determined in accordance with the PRC GAAP.
        Statutory surplus reserve is established for the purpose of remedying Sinogas’
losses, expanding operations, or increasing registered capital, and is
        non-distributable other than in liquidation.
  16
  **17.
          Revenue** **Gross
          Profit Margin**
 
 According
          to products sold, the revenue is mainly composed of the following:
  Three
                    months ended June 30,Revenue
                Gross
                    margin2006
                
                
                2005
                
                
                2006
                
                
                2005US$’000
                
                
                US$’000
                
                
                
                %
                
                
                %CNG
                    Vehicle and CNG Equipment
                
                
                (i)(1)
                
                
                299
                
                
                811
                
                
                55
                %
                
                6
                %CNG
                    Gas stations
                
                
                (i)(2)
                
                
                1,067
                
                
                -
                
                
                78
                %
                
                -Pressure
                    Containers
                
                
                (ii)
                
                
                1,862
                
                
                180
                
                
                18
                %
                
                9
                %Rentalincome
                    and others
                
                
                
                
                
                155
                
                
                484
                
                
                -3,383
                
                
                1,475
  Six months
                    ended June 30,Revenue
                
                Gross
                    margin2006
                
                
                2005
                
                
                2006
                
                
                2005US$’000
                
                
                US$’000
                
                
                %
                
                
                
                %CNG
                    Vehicle and CNG Equipment
                
                
                (i)(1)
                
                
                542
                
                
                918
                
                
                61
                %
                
                6
                %CNG
                    Gas stations
                
                
                (i)(2)
                
                
                2,131
                
                
                467
                
                
                78
                %
                
                67
                %Pressure
                    Containers
                
                
                (ii)
                
                
                3,055
                
                
                180
                
                
                19
                %
                
                9
                %Rentalincome
                    and others
                
                
                
                
                
                155
                
                
                4845,883
                
                
                2,049
 
 ( i )
            The CNG
            vehicle and gas station equipment business include two product lines.
 
 (1)
            Manufacture and installation of CNG vehicle and gas station equipment,
            including
            following products:
  ·
                CNG
                    trailer; ·
                CNG
                    deposited system for gas station usage ·
                Conversion
                    kits for various types of vehicle ·
                CNG
                    compressor skid ·
                CNG
                    dispenser (retail measurement system) 
 (2)
            CNG
            station system business includes the design of CNG station and construction
            plans, construction of CNG stations and installation of CNG station equipment
            and related systems. Due to rapid development and early stage of CNG
            station
            business in the PRC, the Company is able to sell these products and services
            at
            a high gross margin both because of its specialty in this area and a
            relative
            lack of competition.
  17
 ( ii )
          Non-standard equipment and pressure container business reflects the Company’s
          original business. It is a traditional chemical equipment manufacture business
          with low profit margin. It includes:
  ·
              design
                  and manufacture of various types of pressure containers in the
                  petroleum
                  and chemical industries. ·
              design
                  and manufacture of various types of pressure containers in the
                  metallurgy
                  and electricity generation industries. ·
              design
                  and manufacture of various types of pressure containers in the
                  food and
                  brewery industries. ·
              design
                  and manufacture of various types of non-standard
                  equipment. 
 The
          gross
          margin for CNG gas stations was high in both 2006 and 2005, as a result
          of the
          Company’s know-how in CNG system design and the absence of significant
          competition. Due to rapid development and early stage of CNG station business
          in
          the PRC, the Company is able to generate high gross margins in this portion
          of its business.
 
 Similarly,
          with the sale of CNG gas station equipment, in the first half year of 2005
          (before Yuhan was established) the Company subcontracted most of the
          manufacturing process for pressure container to third parties, so the gross
          margin was lower. The pressure container sales in the first half year of
          2006
          were from the operations of Yuhan, which was a pressure container manufacturing
          company, so the gross margin increased significantly compared with the
          same
          period of 2005.
  **18.
        Concentrations and Credit Risk**
 
 The
        Company operates principally in the PRC and grants credit to its customers
        in
        this geographic region. Although the PRC is economically stable, it is always
        possible that unanticipated events in foreign countries could disrupt the
        Company’s operations.
 
 At
        June
        30, 2006, the Company has a credit risk exposure of uninsured cash in banks
        of
        approximately $1,212,000. The Company does not require collateral or other
        securities to support financial instruments that are subject to credit
        risk.
 
 **19.
        Commitments and Contingencies**
  (1)
        Legal
        Proceedings - The Company is not currently a party to any threatened or pending
        legal proceedings, other than incidental litigation arising in the ordinary
        course of business. In the opinion of management, the ultimate disposition
        of
        these matters will not have a material adverse effect on the Company’s
        consolidated financial position, results of operations or cash flows.
  The
        Company has the following material contractual obligations and capital
        expenditure commitments:
  (a) *CNG
        Gas Station Construction Contract* signed
        between the Company and CNPC New Energy Enterprise Group Corp. on December
        26,
        2005. According to the contract, the Company will construct 22 CNG gas stations
        for CNPC New Energy Enterprise Group Corporation. The construction project
        includes design, construction, equipment installation, and related engineering
        work. The total contract price is $3,200,000 . The contract is subject to
        execution by both parties; however, the Company is operating under the contract
        terms in anticipation of its execution.
  18
  The
        Company has no liability insurance under this contract.
  (b)
        The
        agreement between the Sinogas and Beijing Sanhuan on April 6, 2005. According
        to
        the agreement, Sinogas is responsible for obtaining a change in the designation
        of the land to land for commercial use. Upon the effectiveness of the
        change, Beijing Sanhuan is to transfer the real property on which Sinogas’
facilities are located to Sinogas for $12,000,000. At June 30, 2006, $4,958,534
        has been paid. The land use right ownership transfer is in
        process.
 
 (c)
        The
        contract between Sinogas and Qingdao Jinyu Industrial Development Co., Ltd.
        on
        May 20, 1997. According to the contract, Sinogas leases the real property
        at No.
        18, Siliu South Road (within its factory site) to Qingdao Jinyu Industrial
        Development Co., Ltd. for a term of 20 years. The rent is $7,500 for the
        first
        year with annual 6% increases through the eighth year and 8% for the balance
        of
        the term. It goes into effect after being signed by both parties and is legally
        binding. Meanwhile, the rights and obligations of both parties are protected
        by
        Chinese laws.
 
 **20.
        Retirement Benefits**
 
 The
        full-time employees of the Company are entitled to staff welfare benefits
        including medical care, casualty, housing benefits, education benefits,
        unemployment insurance and pension benefits through a Chinese
        government-mandated multi-employer defined contribution plan. The Company
        is
        required to accrue the employer-portion for these benefits based on certain
        percentages of the employees’ salaries. The total provision for such employee
        benefits was US$22,370 and US$3,275 for the second quarter of year 2006 and
        2005, respectively and were recorded as other payables. The PRC government
        is
        responsible for the staff welfare benefits including medical care, casualty,
        housing benefits, unemployment insurance and pension benefits to be paid
        to
        these employees. The Company is responsible for the education benefits to
        be
        paid.
  **21.
        Subsequent Events**
  (1)
        2006
        Long-Term Incentive Plan
  In
        June
        2006, we adopted, subject to stockholder approval, the 2006 long-term incentive
        plan covering 2,000,000 shares of common stock. The plan provides for the
        grant
        of incentive and non-qualified options, stock grants, stock appreciation
        rights
        and other equity-based incentives to employees, including officers, and
        consultants. The 2006 Plan is to be administered by a committee of not less
        than
        two directors each of which is to be an independent director. In the absence
        of
        a committee, the plan is administered by the board of directors. Independent
        directors are not eligible for discretionary options.
  Each
        newly elected independent director receives at the time of his election,
        a
        five-year option to purchase 30,000 shares of common stock at the market
        price
        on the date of his or her election. In addition, the plan provides for the
        annual grant of an option to purchase 5,000 shares of common stock on April
        1st
        of each year, commencing April 1, 2007. In July 2006, in connection with
        their
        election as directors, we granted options to purchase 30,000 shares of common
        stock at an exercise price of $.65 per share to each of Robert I. Adler,
        Renjie
        Lu, Greg Marcinkowsky and Baoheng Shi. No other options were granted under
        the
        plan.
  19
  (2)
        Purchase of Minority interest in Yuhan
  Pursuant
        to an agreement among Sinoenergy, Sinogas, Kangtai and Mr Guili Shi, who
        purchased 25% of Yuhan’s equity from Kangtai in July 2006, Sinoenergy and
        Sinogas will purchase all the 45% minority interest in Yuhan, which is held
        by Kangtai and Mr. Guili Shi, for $1.5 million, payable in three
        installments.
  On
        August
        2, 2006, Sinoenergy paid $375,000 to Mr. Guili Shi, and the 25% equity, which
        had been hold by Mr.Guili Shi, was transferred to Sinoenergy. At the same
        day,
        the business license for Yuhan has been renewed by relative Qingdao Government.
        After the equity purchase, through it wholly owned subsidiary as Sinoenergy,
        the
        Company holds 80% of equity of Yuhan\.
   (3)
        New
        Subsidiary Company
  On
        June
        6, 2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its deputy, see
        below
        for detail), Wuhan Fukang Automotive Cleaning Energy Company (Wuhan Cleaning
        Energy) and Wuhan Yixiang Industry Trade Company (Wuhan Yixiang), signed
        an
        cooperation agreement to establish Wuhan Sinoenergy Gas Company (Wuhan
        Sinoenergy) to operate CNG stations. Based on the agreement, Sinoenergy
        will contribute capital of $1,875,000, representing 50% of the registered
        capital; Sinogas will contribute $1,500,000, representing 40% of the registered
        capital, and each of Wuhan Clean Energy and Wuhan Yixianng will contribute
        $190,000 for 5% of the total registered capital. Simultaneously,
        Sinogas and Beijing Sanhuan signed a deputy agreement, pursuant to which
        Sinogas
        has appointed Beijing Sanhuan as its deputy to hold the 40% of shares of
        Wuhan
        Sinoenergy. According to the deputy agreement, except for providing any
        required information for Wuhan Sinoenergy’s registration, Beijing Sanhuan, as a
        deputy of Sinogas, does not have any rights or liabilities of a shareholder
        and does not take part in the management of Wuhan Sinoenergy.
 
 In
        August
        2, 2006, Wuhan Administration Bureau for Industry and Commerce issued Business
        License to Wuhan Sinoenergy. The term of the business of Wuhan Sinoenergy
        is
        from August 2, 2006 to August 2, 2026 and the business scope is the
        manufacture and sales of automotive conversion kits, and establishing and
        operating CNG stations.
 
 (4)
        Amended purchase agreement for new investor’s purchase
 
 On
        July
        6, 2006, the Purchase agreement mentioned in Note 1 has been revised to add
        IRA
        f/b/o John P. O’Shea as an investor. Pursuant to the amendment, the Company
        sold, for $200,000, its 6% convertible notes in the principal amount of
        $200,000, 21,086 shares of common stock, and warrants to purchase 1,028,571
        shares of common stock. These securities were issued on July 26,
        2006.
 
 20
  **22.
        New Accounting Pronouncements**
 
 In
        January 2003, the Financial Accounting Standards Board (“FASB”) issued
        interpretation No. 46 “Consolidation of Variable Interest Entities, an
        Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies when a company should
        consolidate in its financial statements the assets, liabilities and activities
        of a variable interest entity. FIN 46 provides general guidance as to the
        definition of a variable interest entity and requires a variable interest
        entity
        to be consolidated if a company absorbs the majority of the variable interest
        entity’s expected losses, or is entitled to receive majority of the variable
        interest entity’s residual returns, or both. In December 2003, the FASB issued a
        revised interpretation of FIN 46 (“FIN 46-R”), which supersedes FIN 46 and
        clarifies and expands current accounting guidance for variable interest
        entities. Both interpretations are effective immediately for any variable
        interest entity created subsequent to January 31, 2003, and for variable
        interest entities created before February 1, 2003, no later than the end
        of the
        first reporting period after March 15, 2004. The adoption of FIN 46-R has
        no
        impact on the Company’s financial statements.
 
 In
        April
        2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
        Instruments and Hedging Activities", which clarifies financial accounting
        and
        reporting for derivative instruments, including certain derivative instruments
        embedded in other contracts and for hedging activities under SFAS No. 133,
        "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
        149 is
        effective for contracts entered into or modified after June 30, 2003 and
        for
        hedging relationships designated after June 30, 2003. The adoption of SFAS
        No.
        149 has no impact on the Company’s financial reporting and
        disclosures.
 
 In
        May
        2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments
        with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”). SFAS No.
        150 revises the accounting for certain financial instruments that previously
        could be classified as liabilities (or, in some circumstances, assets) in
        the
        statement of financial condition. SFAS No. 150 also requires disclosure of
        the
        terms of those instruments and settlement alternatives. SFAS No. 150 generally
        is effective for all financial instruments entered into or modified after
        May
        31, 2003, and is otherwise effective at the beginning of the first interim
        period beginning after June 15, 2003. The adoption of SFAS No. 150 has no
        impact
        on the Company’s financial statements.
 
 In
        December 2003, the FASB issued SFAS No. 132R “Employers’ Disclosures about
        Pensions and Other Postretirement Benefits” (“SFAS No. 132R”). This Statement
        revises disclosures by employers about pensions and other postretirement
        benefits. The additional disclosures are about the asset, obligations, cash
        flows and net periodic benefit cost of defined benefit pension plans and
        other
        defined benefit postretirement plans. The required information must be provided
        separately for pension plans and other postretirement benefit plans. New
        disclosures for interim periods beginning after December 15, 2003 are also
        required by SFAS No. 132R. The adoption of SFAS No. 132R has no impact on
        the
        Company’s financial statements.
 
 In
        December 2003, the staff of the Securities and Exchange Commission (“SEC”)
        issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition, which
        supersedes SAB 101, “Revenue Recognition in Financial Statements.” The primary
        purpose of SAB 104 is to rescind the accounting guidance included in SAB
        101
        about multiple element revenue arrangements. SAB 104 also revises the SEC’s
“Revenue Recognition in Financial Statements Frequently Asked Questions and
        Answers that have been codified in Topic 13. SAB 104 was effective immediately
        upon issuance and did not have a material impact of the Company’s financial
        reporting and disclosures.
 
 21
  The
        FASB
        has issued SFAS No. 148 “Accounting for Stock-Based Compensation - Transition
        and Disclosures”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based
        Compensation”, to provide alternative methods of transition for a voluntary
        change to the fair value based method of accounting for stock-based employee
        compensation. In addition, SFAS No. 148 amends the disclosure requirements
        of
        SFAS No. 123 to require prominent disclosures in both annual and interim
        financial statements about the method of accounting for stock-based employee
        compensation and the effect of the method used on reported results. The Company
        has adopted the disclosure requirements of SFAS No. 148. The Company has
        no
        stock-based compensation.
 
 In
        December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment, an Amendment
        of SFAS No. 123." SFAS No. 123R requires companies to recognize in the statement
        of operations the grant-date fair value of stock options and other equity-based
        compensation issued to employees. The Company has no stock-based
        compensation.
 
 In
        December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets."
        The Statement is an amendment of APB Opinion No. 29. SFAS No. 153 eliminates
        the
        exception for non-monetary exchanges of similar productive assets and replaces
        it with a general exception for exchanges of non-monetary assets that do
        not
        have commercial substance. The adoption of SFAS No. 153 has no impact on
        the
        Company’s financial statements.
 
 
 22
  **Item
        2. Management’s Discussion and Analysis of Financial Condition and Results of
        Operation**





**Forward-Looking
      Statements**





Statements
      in this quarterly report may be “forward-looking statements.” Forward-looking
      statements include, but are not limited to, statements that express our
      intentions, beliefs, expectations, strategies, predictions or any other
      statements relating to our future activities or other future events or
      conditions. These statements are based on current expectations, estimates and
      projections about our business based, in part, on assumptions made by
      management. These statements are not guarantees of future performance and
      involve risks, uncertainties and assumptions that are difficult to predict.
      Therefore, actual outcomes and results may, and are likely to, differ materially
      from what is expressed or forecasted in the forward-looking statements due
      to
      numerous factors, including those described above and those risks discussed
      from
      time to time in this quarterly report, including the risks described under
“Risk
      Factors,” and “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” in our Form 10-KSB and in our registration statement on
      Form SB-2, as filed with the Securities and Exchange Commission, and
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” in this quarterly report. In addition, such statements could be
      affected by risks and uncertainties related to the ability to conduct business
      in the PRC, product demand, including the demand for CNG, our ability to
      develop, construct and operate a CNG station business, our ability to raise
      any
      financing which we may require for our operations, competition, government
      regulations and requirements, pricing and development difficulties, our ability
      to make acquisitions and successfully integrate those acquisitions with our
      business, as well as general industry and market conditions and growth rates,
      and general economic conditions. Any forward-looking statements speak only
      as of
      the date on which they are made, and we do not undertake any obligation to
      update any forward-looking statement to reflect events or circumstances after
      the date of this quarterly report.





**Overview**




We
      design, manufacture and market a range of pressurized containers for CNG.
      Although our initial business involved the manufacture of non-standard equipment
      and pressure containers, our business has evolved as an increasing market is
      developing in the PRC for the use of CNG. Our CNG vehicle and gas station
      equipment business consists of two divisions, the manufacture of CNG vehicle
      and
      gas station equipment, and the design of construction plans for CNG stations,
      the construction of the CNG stations, and the installation of CNG station
      equipment and related systems at the CNG station.




In
      addition to our CNG related products, we continue to manufacture a wide variety
      of pressure containers for use in different industries, including the design
      and
      manufacture of various types of pressure containers in the petroleum and
      chemical industries, the metallurgy and electricity generation industries and
      the food and brewery industries. In addition, we can design and manufacture
      various types of non-standard equipment.




All
      of
      our products and services are performed pursuant to agreements with our
      customers, which provide the specifications for the products and services.
      We do
      not sell our products from inventory. As a result, our revenue is dependent
      upon
      the flow of contracts. In any fiscal period, a small number of customers may
      represent a disproportionately large percentage of our business in one period
      and a significantly lower percentage, if any, in a subsequent period. For
      example, our largest customer for the year ended December 31, 2005, Millennium
      Group Limited (Hong Kong), which accounted for revenue of approximately $3.8
      million, or 46% of our revenue for the year, and is not a significant customer
      in the first half of 2006. Our contract with Millenium Group related to the
      construction of CNG stations for Millenium, and that contract was completed
      in
      2005, and does not require any significant products or services after the
      completion of the station. For the six months ended June 30, 2006, we derived
      $2,128,000, or 37% of our revenue, from sales to one customer, China Xinxin
      Energy Company, for the construction of CNG stations. Our contracts are
      generally for one-year terms, and there is no assurance that the contracts
      will
      be renewed at the end of the term.




23





We
      commenced operations on October 29, 2004, did not have any business activity
      until the first quarter of 2005, and during the first quarter of 2005 we were
      in
      a start-up phase. As a result, there is no meaningful comparison between the
      period October 29, 2004 to December 31, 2004 and the year ended December 31,
      2005. Also, since the first quarter of 2005 does not reflect fully developed
      operations, the comparisons between the three and six months ended June 30,
      2006
      and 2005 reflect our ability to scale up our operations and not any indication
      of a quarter to quarter growth rate.




Commencing
      in 2006, we began to construct and we intend to operate CNG stations. This
      aspect of our business is different from our present business whereby we will
      be
      operating CNG stations. The business of operating CNG stations will require
      a
      substantial capital investment, and we anticipate that we will seek debt funding
      for a portion of the costs. Further, the nature of the operation of the business
      and the risks associated with that business are significantly different from
      the
      manufacture of equipment or the construction of CNG stations. One aspect of
      the
      operation of CNG stations is the price controls, whereby both the price at
      which
      we purchase CNG and the price at which we sell CNG are subject to by price
      controls. The operation of CNG stations will be reported as a separate
      segment.





Our
      CNG
      vehicle and gas station equipment business include two product
      lines:




·
            CNG
                vehicle and gas station equipment manufacture and installation; and


·
            the
                design of CNG station and construction plans, construction of CNG
                stations
                and installation of CNG station equipment and related systems. Due
                to
                rapid development and early stage of CNG station business in the
                PRC, the
                Company is able to sell these products and services at a very high
                gross
                margin in this segment by utilizing its specialty in this
                area.




Our
      nonstandard equipment and pressure container business reflects our original
      business. It is a traditional chemical equipment manufacture business with
      low
      profit margin.




The
      gross
      margin for CNG gas stations was high in both 2006 and 2005, as a result of
      our
      know-how in CNG system design and the absence of significant competition. Due
      to
      rapid development and early stage of CNG station business in the PRC, we have
      been able to generate substantial gross margins in this portion of its business.




Similarly,
      with the sale of CNG gas station equipment, in the first half year of 2005
      (before we acquired a 55% interest in Yuhan) we subcontracted most of the
      manufacturing process for pressure container to third parties, so our gross
      margin was lower. The pressure container sales in the first half year of 2006
      were from the operations of Yuhan, which was a pressure container manufacturing
      company, so the gross margin increased significantly compared with the same
      period of 2005.




Our
      ability to develop our CNG business is dependent upon the continued growth
      of
      natural gas in China. The recent growth in this business has resulted in
      increased production capacity, which in turn, may lead to increased competition
      and lower prices, which would affect both our revenue and our
      margins.




A
      major
      raw material for our products is steel and steel tube supply. We purchase steel
      from a Chinese domestic manufacturer, and we believe that alternative suppliers
      are available. We purchase steel tubing from an Italian supplier. Any
      interruption in our supply of tubing can materially affect our ability to
      operate profitably. Although we have a long relationship with our suppliers,
      factors beyond our control could affect both our ability to purchase steel
      and
      steel tubing and the price at which these materials are available to us,
      particularly steel tubing from our Italian supplier. These factors include
      relationships between China and Italy or the European Economic Community,
      changes in currency rates between the Chinese currency and the Euro, increased
      freight costs, world conflicts and terrorism.




At
      June
      30, 2006, we held a 55% interest in our subsidiary, Qingdao
      Sinogas Yuhan Chemical Equipment Co., Ltd. (“Yuhan”), with
      the
      other 45% being owned by Qingdao
      Kangtai Machinery Equipment Manufacture Co. Limited (“Kangtai”). We subcontract
      construction work for CNG stations to Kangtai on terms that are commercially
      reasonable. We paid Kangtai $ 288,333 for these services during the six months
      ended June 30, 2006 and $658,025 for the year ended December 31, 2005.
      Subsequent to June 30, 2006, we entered into an agreement to acquire for
      $1,500,000 the remaining 45% interest from Kangtai and an individual to whom
      Kangtai transferred an interest in Yuhan. We paid $375,000 and acquired an
      additional 25% interest, raising our interest in Yuhan to 80%, in August
      2006.




24





Yuhan
      was
      set up by Sinogas and Kangtai on May 25, 2005. In connection with Yuhan’s
      organization, Kangtai transferred equipment to Yuhan as part of its investment
      in Yuhan. Kangtai transferred certain contracts to Yuhan, and Yuhan assumed
      the
      manufacturing obligations under these contract and purchased the related
      inventories from Kangtai at fair market value. Kangtai purchased the
      manufactured products from Yuhan at fair market value and sold the products
      to
      the end users. The sales of these products to Kangtai amounted to $1,481,503
      for
      the six months ended June 30, 2006 and $979,000 for the year ended December
      31,
      2005. Because a portion of these transactions relate to sales to third parties
      through Kangtai, we treat that portion as a third-party receivable. Subsequent
      to June 30, 2006, we entered into an agreement to purchase the 45% minority
      interest in Yuhan for $1,500,000. As of August 20, 2006, we had paid $375,000
      for a 25% interest in Yuhan, increasing our ownership in Yuhan to
      80%.


In
        June
        2006, we entered into an agreement with Wuhan Fukang Automotive Cleaning
        Energy
        Company and Wuhan Yixang Industry Trade Company to establish a new subsidiary
        which would be 90% owned by us. We will contribute $3,375,000 and the other
        two
        entities would each contribute $190,000 for a 5% interest. This subsidiary,
        Wuhan Sinoenergy, has obtained a business license for manufacturing and
        sales of automobile conversion kits and establishing and operating CNG
        stations.


**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our financial statements which have been prepared in accordance
      with
      accounting principles generally accepted in the United States. The preparation
      of these financial statements requires us to make estimates and judgments that
      affect the reported amounts of assets and liabilities. On an on-going basis,
      we
      evaluate our estimates including the allowance for doubtful accounts, the
      salability and recoverability of inventory, income taxes and contingencies.
      We
      base our estimates on historical experience and on other assumptions that we
      believes to be reasonable under the circumstances, the results of which form
      our
      basis for making judgments about the carrying values of assets and liabilities
      that are not readily apparent from other sources. Actual results may differ
      from
      these estimates under different assumptions or conditions.




In
      estimating the collectability of accounts receivable we analyze historical
      write-offs, changes in our internal credit policies and customer concentrations
      when evaluating the adequacy of our allowance for doubtful accounts. Differences
      may result in the amount and timing of expenses for any period if we make
      different judgments or uses difference estimates.




Inventories
      comprise raw materials, work on process, finished goods and low value consumable
      articles are stated at the lower of cost or market. Substantially all inventory
      costs are determined using the weighted average basis. Costs of finished goods
      include direct labor, direct materials, and production overhead before the
      goods
      are ready for sale. Inventory costs do not exceed net realizable
      value.




Property,
      plant and equipment are stated at cost. Depreciation is provided principally
      by
      use of the straight-line method over the useful lives of the related assets.
      Expenditures for maintenance and repairs, which do not improve or extend the
      expected useful life of the assets, are expensed to operations while major
      repairs are capitalized. The gain or loss on disposal of property, plant and
      equipment is the difference between the net sales proceeds and the carrying
      amount of the relevant assets, and, if any, is recognized in the statements
      of
      operations. We perform impairment tests on our long-term assets
      annually.




Intangible
      assets are reviewed at least annually for impairment, or more frequently if
      we
      have reason to believe that there is an impairment. Intangible assets are tested
      by comparing net book value of the to fair value. Our assumptions about fair
      values require significant judgment because broad economic factors, industry
      factors and technology considerations can result in variable and volatile fair
      values.




25




We
      cannot
      predict what future laws and regulations might be passed that could have a
      material effect on our results of operations. We assess the impact of
      significant changes in laws and regulations on a regular basis and update the
      assumptions and estimates used to prepare our financial statements when we
      deem
      it necessary.




We
      recognize product sales generally at the time the product is shipped. Shipping
      and handling costs are included in cost of goods sold. Revenue is presented
      net
      of any sales tax and value added tax.




Our
      functional currency is Renminbi (“RMB”), which is the currency of the PRC, and
      our reporting currency is United States dollars. Our balance sheet accounts
      are
      translated into United States dollars at the year-end exchange rates prevailing
      during the periods in which these items arise. Translation gains and losses
      are
      deferred and accumulated as a component of other comprehensive income in owners’
equity. Transaction gains and losses that arise from exchange rate fluctuations
      from transactions denominated in a currency other than the functional currency
      are included in the statement of operations as incurred. The translation and
      transaction gains and losses were immaterial in the statement of operations
      as
      incurred. The translation and transaction gains and losses were immaterial
      for
      the years ended December 31, 2005 and 2004 and the three and six months ended
      June 30, 2006 and 2005.




The
      government of the PRC imposes significant exchange restrictions on fund
      transfers out of the PRC that are not related to business operations. These
      restrictions have not had a material impact on our operations because we have
      not previously engaged in any significant transactions that are subject to
      the
      restrictions.




**New
      Accounting Pronouncements**




In
      March
      2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
      Impairment and Its Application to Certain Investments. EITF 03-1 includes new
      guidance for evaluating and recording impairment losses on debt and equity
      investments, as well as new disclosure requirements for investments that are
      deemed to be temporarily impaired. In September 2004, the FASB issued Staff
      Position EITF 03-1-1, which delays the effective date until additional guidance
      is issued for the application of the recognition and measurement provisions
      of
      EITF 03-1 to investments in securities that are impaired; however, the
      disclosure requirements are effective for annual periods ending after June
      15,
      2004. Management does not currently believe adoption will have a material impact
      on our financial position or results of operations.




In
      November 2004, the FASB issued SFAS No. 151, *Inventory
      Costs* ,
      an
      amendment of ARB No. 43, Chapter 4. This
      statement amends the guidance in ARB No. 43, Chapter 4, Inventory
      Pricing, to clarify the accounting for abnormal amounts of idle facility
      expense, freight, handling costs, and wasted material (spoilage).
      Paragraph 5 of ARB No. 43, Chapter 4, previously stated that
“...under some circumstances, items such as idle facility expense, excessive
      spoilage, double freight, and rehandling costs may be so abnormal as to require
      treatment as current period charges...” SFAS No. 151 requires that those items
      be recognized as current-period charges regardless of whether they meet the
      criterion of “so abnormal.” In addition, this requires that allocation of fixed
      production overhead to the costs of conversion be based on the normal capacity
      of the production facilities. The provisions of SFAS 151 shall be applied
      prospectively and are effective for inventory costs incurred during fiscal
      years
      beginning after June 15, 2005, with earlier application permitted for
      inventory costs incurred during fiscal years beginning after the date this
      Statement was issued. Our adoption of SFAS No. 151 is not currently
      expected to have a material impact on our financial position or results of
      operations.




26




In
      December 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based
      Payment,” which amends FASB Statement No. 123 and will be effective for us for
      the year ending December 31, 2006. The revised standard requires, among other
      things, that compensation cost for employee stock options be measured at fair
      value on the grant date and charged to expense over the employee’s requisite
      service period for the option. Due to the absence of observable market prices
      for employee stock options, the standard indicates that the fair value of most
      stock options will be determined using an option-pricing model. As a result
      of
      the reverse acquisition, our adoption of SFAS No. 123(R) will result is
      compensation expense upon the grant of options or other equity-based incentives.
      Prior to the reverse acquisition we did not grant any options or other
      equity-based incentives.




In
      December 2004, the FASB issued SFAS No. 153, *Exchanges
      of Nonmonetary Assets, an amendment of APB Opinion No. 29* .
      The
      guidance in APB Opinion No. 29, *Accounting
      for Nonmonetary Transactions* ,
      is
      based on the principle that exchanges of nonmonetary assets should be measured
      based on the fair value of assets exchanged. The guidance in that Opinion,
      however, included certain exceptions to that principle. This Statement amends
      Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
      productive assets that do not have commercial substance. A nonmonetary exchange
      has commercial substance if the future cash flows of the entity are expected
      to
      change significantly as a result of the exchange. **** SFAS
      No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
      beginning after June 15, 2005. Our adoption of SFAS No. 153 is not
      expected to have a material impact on our financial position or results of
      operations.




In
      March
      2005, the FASB published FASB Interpretation No. 47, “Accounting for
      Conditional Asset Retirement Obligations,” which clarifies that the term,
      conditional asset retirement obligations, as used in SFAS No. 143,
“Accounting for Asset Retirement Obligations,” refers to a legal obligation to
      perform an asset retirement activity in which the timing and (or) method of
      settlement are conditional on a future event that may or may not be within
      the
      control of the entity. The uncertainty about the timing and (or) method of
      settlement of a conditional asset retirement obligation should be factored
      into
      the measurement of the liability when sufficient information exists. The
      interpretation also clarifies when an entity would have sufficient information
      to reasonably estimate the fair value of an asset retirement obligation. This
      interpretation is effective no later than the end of 2006. The adoption of
      this
      Interpretation is not expected to have a material effect on our financial
      position or results of operations.




In
      June
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections” (“SFAS No. 154”). SFAS No. 154 replaces APB No. 20
      (“APB 20”) and SFAS No. 3, “Reporting Accounting Changes in
      Interim Financial Statements,” and applies to all voluntary changes in
      accounting principle, and changes the requirements for accounting for and
      reporting of a change in accounting principle. APB 20 previously required
      that most voluntary changes in accounting principle be recognized by including
      in net income of the period of change a cumulative effect of changing to the
      new
      accounting principle whereas SFAS No. 154 requires retrospective
      application to prior periods’ financial statements of a voluntary change in
      accounting principle, unless it is impracticable. SFAS No. 154 enhances the
      consistency of financial information between periods. SFAS No. 154 will be
      effective beginning with the Company’s first quarter of fiscal year 2006. We do
      not expect that the adoption of SFAS No. 154 will have a material impact on
      our results of operations, financial position or cash flows.




27




In
      June
      2005, the EITF reached a consensus on Issue No. 05-06, “Determining the
      Amortization Period for Leasehold Improvements” (EITF 05-06). EITF 05-06
      provides guidance for determining the amortization period used for leasehold
      improvements acquired in a business combination or purchased after the inception
      of a lease, collectively referred to as subsequently acquired leasehold
      improvements). EITF 05-06 provides that the amortization period used for the
      subsequently acquired leasehold improvements to be the lesser of (a) the
      subsequently acquired leasehold improvements’ useful lives, or (b) a period that
      reflects renewals that are reasonably assured upon the acquisition or the
      purchase. EITF 05-06 is effective on a prospective basis for subsequently
      acquired leasehold improvements purchased or acquired in periods beginning
      after
      the date of the FASB’s ratification, which was on June 29, 2005. The Company
      does not anticipate that EITF 05-06 will have a material impact on its
      consolidated results of operations.




In
      July
      2005, the Financial Accounting Standards Board (FASB) issued an Exposure Draft
      of a proposed Interpretation “Accounting for Uncertain Tax Positions—an
      interpretation of FASB Statement No. 109.” Under the proposed
      Interpretation, a company would recognize in its financial statements its best
      estimate of the benefit of a tax position, only if the tax position is
      considered probable of being sustained on audit based solely on the technical
      merits of the tax position. In evaluating whether the probable recognition
      threshold has been met, the proposed Interpretation would require the
      presumption that the tax position will be evaluated during an audit by taxing
      authorities. The proposed Interpretation would be effective as of the end of
      the
      first fiscal year ending after December 15, 2005, with a cumulative effect
      of a change in accounting principle to be recorded upon the initial adoption.
      The proposed Interpretation would apply to all tax positions and only benefits
      from tax positions that meet the probable recognition threshold at or after
      the
      effective date would be recognized. We are currently analyzing the proposed
      Interpretation and have not determined its potential impact on our Consolidated
      Financial Statements. While we cannot predict with certainty the rules in the
      final Interpretation, there is risk that the final Interpretation could result
      in a cumulative effect charge to earnings upon adoption, increases in future
      effective tax rates, and/or increases in future interperiod effective tax rate
      volatility.




**Results
      of Operations**




**Six
      months ended June 30, 2006 and 2005**




*Net
      Revenue.* Net
      revenue for the six months ended June 30 2006, was approximately $5.8million,
      a
      190% increase over net revenue of approximately $1.5 million for the comparable
      period of 2005. The Company was incorporated on October 29, 2004, and revenue
      in
      the first half of 2005, particularly in the first quarter, was low since the
      Company was in the start-up phase. The revenue in the first six months of 2006
      includes $2.1 million, representing36 % of net revenue for the period, relating
      to a contract pursuant to which we are constructing and equipping 22 CNG
      stations.




*Cost
      of Revenues.* The
      Company’s cost of revenue for the six months ended June 30, 2006 was
      approximately $3.3 million, compared with approximately 1.0 million for the
      comparable period of 2005. The gross margin for the six months ended June 30,
      2006 was 43.6%, a decline from 49.6% for the comparable period of 2005. Since
      the first have of 2005, particularly the first quarter, does not reflect fully
      developed operations, the comparisons between the first six months of 2005
      and
      2006 reflects our ability to scale up our operations and not any indication
      of a
      quarter to quarter change in gross margin.




28




*Operating
      Expenses.* Operating expenses were $882,000 for the six months ended June 30, 2006,
      compared to $217,000 for same period of 2005.The increase was primarily due
      to
      the Company’s efforts to market development for its products and services as
      well as additional expenses resulting from the Company’s status as a public
      corporation following the reverse acquisition in June 2006.




*Income
      from Operations.* Operating profit was approximately $1.7 million for the first six months of
      2006
      compared with approximately $800,000 in the comparable period of 2005. The
      increase was primarily the result of factors described above.




*Income
      Taxes.* The
      income tax increase for the two periods was in line with the operation income’
increase.




**Three
      months ended June 30, 2006 and 2005**




*Net
      Revenue.* Net
      revenue for the three months ended June 30 2006, was approximately $3.3million,
      a 124% increase over net revenue of approximately $1.5 million for the
      comparable period of 2005. In the three months ended June 30, 2005, the
      company was in its organizational period, so revenue was lower.
      The revenue in the three months ended June 30, 2006 includes $1.0 million,
      representing32 % of net revenue for the period, relating to a contract pursuant
      to which we are constructing and equipping 22 CNG
      stations.




*Cost
      of Revenues.* The
      Company’s cost of revenue for the three months ended June 30, 2006 was
      approximately $2.0 million, compared with approximately 1.0 million for the
      comparable period of 2005. The gross margin for the three months ended June
      30,
      2006 was 38.6%, a increase from 37% for the comparable period of 2005. With
      the
      maturity of management and manufacturing process, the manufacturing cost
      decreased, a lot of outsourcing work in year 2005 has been done by the Company,
      all of which increased the GP margin.




*Operating
      Expenses.* Operating expenses were $553,000 for the three months ended June 30, 2006,
      compared to $102,000 for same period of 2005.The increase was primarily due
      to
      the Company’s efforts to market development for its products and services as
      well as additional expenses resulting from the Company’s status as a public
      corporation following the reverse acquisition in June 2006.




*Income
      from Operations.* Operating profit was approximately $797,000 for the three months of 2006
      compared with approximately $444,000 in the comparable period of 2005. The
      increase was primarily the result of factors described above.




*Income
      Taxes.* The
      income tax increase for the two periods was in line with the operation income’
increase.




**Liquidity
      and Capital Resources**




At
      June
      30, 2006, we had cash of approximately $1.2 million, an increase of
      approximately $900,000 from December 31, 2005. At December 31, 2006, we had
      working capital of approximately $8.1 million and stockholders’ equity of
      approximately $11.0 million, compared with working capital of approximately
      $4.4
      million and stockholders’ equity of approximately $7.5 million at December 31,
      2005. However, we used approximately $2.5 million in our operations for the
      six
      months ended June 30, 2006. Factors contributing to our negative cash flow
      from
      operations during the first six months of 2006 included an increase in accounts
      receivable of approximately $3.4 million and an increase in other receivable
      of
      approximately $2.1 million. This following table sets forth the change in our
      receivables from December 31, 2005 to June 30, 2006 (dollars in
      thousands):




29




June
                30, 2006
            
            December
                31, 2005Accounts
                receivable - third parties
            
            $
            6,407
            
            $
            1,780Accounts
                receivable - related party
            
            
            --
            
            
            1,346Other
                receivables - third parties
            
            
            489
            
            
            275Other
                receivables - related party
            
            
            2,556
            
            
            464




The
      June
      30, 2006, includes receivable of approximately $2.1 million and $1.5 million
      relating to two contracts for the construction of CNG stations. We received
      payment of approximately $2.7 million on these receivables subsequent to June
      30, 2006. We lease a portion of our facilities to Kangtai, a related party,
      and
      the other receivable at June 30, 2006, reflects amounts due from Kangtai’s for
      water and power fees. We engaged Kangtai to perform subcontracting services
      in
      connection with the construction of GNG stations, and we have obligations to
      Kangtai for construction work which partially offset Kangtai’s obligations to
      us. Kangtai is continuing to perform subcontracting services for us, and we
      anticipate that our obligation to Kangtai will offset Kangtai’s obligations to
      us.




During
      2005, we purchased from an affiliated company the certificate of property right
      for the property on which our offices and manufacturing facilities are located.
      Since the government of the PRC owns title to the land, it issues a certificate
      of land use which is a transferable right to use the land. The purchase price
      was $11.9 million of which $5.0 million was paid during 2005. The balance is
      due
      at such time as the use of the land is changed from industrial to commercial,
      at
      which time the certificate of property rights will be transferred to us. The
      nature of the zoning does not affect our right to use the land, but we believe
      that it has a higher value if it is zoned commercial. In our agreement with
      the
      investors in the June 2006 private placement, we agreed that we would not pay
      approximately $3.2 million until the rights are sold and we would not pay the
      balance until the property is sold except that we may apply up to 50% of net
      income to make such payments. This restriction terminates after the investors
      have sold all of the shares of common stock issued in the private placement,
      including the shares of common stock issuable upon conversion of the note or
      the
      series A preferred stock or exercise of the warrants.




Our
      financial commitments include the following
      obligations which we incurred subsequent to June 30, 2006.


·
              The
                  balance of $1,125,000 to acquire the remaining 20% minority interest
                  in
                  Yuhan, of which $500,000 is due in September 2006 and $625,000
                  is due in
                  September 2007.
  ·
              A
                  total of $3,375,000 to pay our obligations in connection with the
                  establishment of Wuhan Sinoenergy, which is formed to operate CNG
                  stations.


In
      June
      2006, we completed the private placement of securities pursuant to which we
      raised net proceeds of approximately $3.1 million. We expect that these funds,
      together with anticipated cash flow from our operations, should enable us to
      continue our current operations without additional financing for the next year.
      We intend to construct and operate CNG stations through Wuhan Sinoenergy. The
      construction of CNG stations during 2006 will require additional funding.
      Although we anticipate that we will be able to obtain bank financing from a
      Chinese bank for approximately 50% of the cost, we do not have any agreement
      with respect to this funding. If we are unable to raise the necessary funding
      we
      may not be able to develop our CNG station business.




We
      are
      considering possible acquisitions of Chinese businesses in industries that
      are
      related to our business, including a possible acquisition of a gas pipeline
      company. Any such acquisition would require us to pay a significant cash
      purchase price. If we acquire such a company, we would be required to raise
      significant capital. We cannot give any assurance that we would be able to
      enter
      into an agreement to acquire such a company or, if we do reach an agreement,
      that we would be able to raise the necessary funds to enable us to consummate
      an
      acquisition and have sufficient working capital.




30




**Item
      3. Controls and Procedures**





As
      of the
      end of the period covered by this report, our chief executive officer and chief
      financial officer evaluated the effectiveness of our disclosure controls and
      procedures. Based on their evaluation, the chief executive officer and chief
      financial officer concluded that our disclosure controls and procedures are
      effective in alerting them to material information that is required to be
      included in the reports that we file or submit under the Securities Exchange
      Act
      of 1934 and that information required to be disclosed in the reports that we
      file or submit under the Securities Exchange Act of 1934 is accumulated and
      communicated to our management, including our chief executive officer and chief
      financial officer, to allow timely decisions regarding required disclosure.




There
      were no changes in our internal controls over financial reporting during the
      quarterly period covered by this report that materially affected, or are
      reasonable likely to materially affect, our internal controls over financial
      reporting.




**PART
      II. OTHER INFORMATION**




**Item
      5. Other Information**


During
        2005, we established Qingdao
        Sinogas Yuhan Chemical Equipment Co., Ltd. (“Yuhan”) as a 55% subsidiary, with
        the 45% minority interest held by Qingdao Kangtai Machinery Equipment
        Manufacture Co. Limited (“Kangtai”). On June 6, 2006, we entered into an
        agreement to acquire, for $1,500,000, the remaining 45% interest from Kangtai
        and an individual to whom Kangtai transferred an interest in Yuhan in three
        installments. We paid $375,000 and acquired a 25% interest in August 2006,
        raising our interest in Yuhan to 80% of its equity.
  On
        June 6, 2006, we entered into an
        agreement with Wuhan Fukang Automotive Cleaning Energy Company (“Wuhan Cleaning
        Energy”) and Wuhan Yixiang Industry Trade Company (“Wuhan Yixiang”), to
        establish Wuhan Sinoenergy Gas Company (“Wuhan Sinoenergy”) to operate CNG
        stations. The agreement provides that we will contribute $1,875,000 for a
        90%
        interest in Wuhan Sinoenergy and Wuhan Clean Energy and Wuhan Yixianng will
        each
        contribute $190,000 for a 5% interest. In connection with this agreement,
        our
        subsidiary, Sinogas, appointed Beijing Sanhuan as its deputy to hold a 40%
        interest in Wuhan Sinoenergy. According to the deputy agreement, except to
        the
        extent that it is required to provide information to the applicable government
        agencies, Beijing Sanhuan, does not hold any right and liabilities of a
        shareholder and does not take part in the management of Wuhan Sinoenergy.
        On August 2, 2006, Wuhan Administration Bureau for Industry and Commerce
        issued
        a business license to Wuhan Sinoenergy. The term of this business license
        is
        from August 2, 2006 to August 2, 2026 and the business scope is the manufacture
        and sales of automotive conversion kits and establishing and operating CNG
        stations.
  **Item
        6.**  **Exhibits**




10.1
            Agreement dated June 6,
              2006,
              among Sinoenergy Holding Limited, its wholly-owned subsidiary, Qingdao
              Sinogas General Machinery Limited Corporation, Wuhan
              Fukang Automotive Cleaning Energy Company and Wuhan Yixiang Industry
              Trade
              Company (English translation).10.2
            Agreement
              between Qingdao Sinogas General Machinery Co. Ltd. and Beijing Sanhuan
              Technology Development Co. Ltd. (English Translation)10.3
            Agreement dated July ,
              2006, among
              Sinoenergy Holding Limited, Qingdao
              Kangtai Machinery Equipment Manufacture Co. Limited and Guili Shi (English
              translation).31.1
            Certification
              of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
              Act31.2
            Certification
              of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
              Act32.1
            Certification
              of Chief Executive and Financial Officer pursuant to Section 906 of
              the
              Sarbanes-Oxley Act




31




**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.




FRANKLYN
                RESOURCES
                III, INC.
              (Registrant)Dated:
              August 18, 2006
            
            s/
              Bo
              HuangBo
              Huang, Chief Executive Officer


Dated:
              August 18, 2006
            
            s/
              Qiong
              (Laby) WuQiong
              (Laby) Wu, Chief Financial Officer




32