**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, 2007**





Commission
      File Number 000-30017





Sinoenergy
      Corporation


(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.)





[use
                china address]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 [use China phone
                number]




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 7, 2007, there were 31,183,377 shares
      of
      the common stock, par value $.001 per share, outstanding.





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















**SINOENERGY
      CORPORATION AND SUBSIDIARIES**





PagePart
                I. Financial InformationItem
                1. Consolidated Financial StatementsConsolidated
                balance sheets at June 30, 2007 (unaudited) and December 31,
                2006
            
            2Unaudited
                consolidated statements of operations for the three months ended
                June 30,
                2007 and 2006
            
            3Unaudited
                consolidated statements of operations for the six months ended June
                30,
                2007 and 2006
            
            4Unaudited
                consolidated statement of stockholders’ equity for the six months ended
                June 30, 2007
            
            5Unaudited
                consolidated statements of cash flows for the six months ended June
                30,
                2007 and 2006
            
            6Notes
                to consolidated financial statements
            
            7-35Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            36Item
                3. Controls and Procedures
            
            51Part
                II. Other Information
            
            51Item
                6. Exhibits
            
            53








**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Balance Sheets**


**(In
      thousands of United States dollars)**




June
                30,2007
            
            December
                31,2006Note(s)
            
            Unaudited
            
            Audited**ASSETS**CURRENT
                ASSETSCash
            
            
            
            
            
            4,304
            
            
            588Accounts
                receivable (net)
            
            
            4-Related
                party
            
            
            
            
            
            516
            
            
            594-Third
                party
            
            
            
            
            
            4,577
            
            
            3,777Other
                receivables
            
            
            5-Related
                party
            
            
            
            
            
            912
            
            
            1,220-Third
                party
            
            
            
            
            
            2,681
            
            
            1,176Deposits
                and prepayments-third party
            
            
            6(1
            )
            
            1,466
            
            
            3,187Deferred
                expenses
            
            
            
            
            
            -
            
            
            4Inventories
            
            
            7
            
            
            1,688
            
            
            937TOTAL
                CURRENT ASSETS
            
            
            
            
            
            16,144
            
            
            11,483LONG
                TERM ASSETSLong
                term investment
            
            
            8
            
            
            390Property,
                plant and equipment (net)
            
            
            9
            
            
            6,156
            
            
            3,556Intangible
                assets
            
            
            10
            
            
            12,161
            
            
            12,114Other
                long-term asset
            
            
            6(2
            )
            
            6,815Goodwill
            
            
            11
            
            
            676
            
            
            676Long
                term deferred tax asset
            
            
            
            
            
            4
            
            
            4TOTAL
                ASSETS
            
            
            
            
            
            42,346
            
            
            27,833**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESShort
                term bank loan
            
            
            12
            
            
            4,134
            
            
            3,160Accounts
                payable-
                Related party
            
            
            
            
            
            
            
            
            452-
                Third party
            
            
            
            
            
            1,471
            
            
            211Other
                payables
            
            
            13-
                Related party
            
            
            
            
            
            345
            
            
            4,073-
                Third party
            
            
            
            
            
            1,419
            
            
            2,359Accrued
                expenses
            
            
            
            
            
            163
            
            
            176Warranty
                accrual
            
            
            
            
            
            60
            
            
            40Advances
                from customers
            
            
            14
            
            
            3,162
            
            
            701Income
                taxes payable
            
            
            15
            
            
            135
            
            
            7TOTAL
                CURRENT LIABILITIES
            
            
            
            
            
            10,889
            
            
            11,179Minority
                interests
            
            
            16
            
            
            1,216
            
            
            614Commitments
            
            
            23STOCKHOLDERS’
                EQUITYCommon
                stock- par value$.001 per share;
              Issued
                and Outstanding- 31,183,377 shares at June 30, 2007, 14,636,472 shares
                at
                December 31, 2006
            
            
            20
            
            
            31
            
            
            15Series
                A convertible preferred stock-$0.001 Par Value - 234,688 shares at
                June
                30, 2007, 5,692,307 shares at December 31, 2006
            
            
            20
            
            
            -
            
            
            6Additional
                paid-in capital
            
            
            20
            
            
            21,633
            
            
            9,935Capital
                surplus
            
            
            
            
            
            20
            
            
            20Statutory
                surplus reserve fund
            
            
            18
            
            
            1,140
            
            
            1,140Retained
                earnings
            
            
            
            
            
            6,872
            
            
            4,576Accumulated
                other comprehensive income
            
            
            
            
            
            545
            
            
            348Total
                stockholders’ equity
            
            
            
            
            
            30,241
            
            
            16,040TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            
            
            
            
            42,346
            
            
            27,833




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




2


**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Statements of Operations (Unaudited)**


**** **(In
      thousands of United States dollars except per share
      information)**




Three
                Months Ended June 30,Note(s)
            
            2007
            
            2006(restated)NET
                REVENUE
            
            
            
            
            
            6,181
            
            
            3,383COST
                OF REVENUE
            
            
            
            
            
            (2,972
            )
            
            (2,184
            )GROSS
                PROFIT
            
            
            
            
            
            3,209
            
            
            1,199OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            65
            
            
            58General
                and administrative expenses
            
            
            
            
            
            928
            
            
            557TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            993
            
            
            615INCOME(LOSS)
                FROM OPERATIONS
            
            
            
            
            
            2,216
            
            
            584OTHER
                INCOME(EXPENSES)Other
                non-operating income
            
            
            
            
            
            4
            
            
            7Interest
                expense
            
            
            
            
            
            (123
            )
            
            (203
            )Other
                expenses
            
            
            
            
            
            (4
            )
            
            -OTHER
                INCOME (LOSS) NET
            
            
            
            
            
            (123
            )
            
            (196
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            
            
            
            2,093
            
            
            388Income
                tax
            
            
            
            
            
            (44
            )
            
            (240
            )INCOME
                BEFORE MINORITY INTEREST
            
            
            
            
            
            2,049
            
            
            148Minority
                interest
            
            
            
            
            
            (103
            )
            
            (11
            )NET
                INCOME
            
            
            
            
            
            1,946
            
            
            137Other
                comprehensive incomeForeign
                currency translation adjustments
            
            
            
            
            
            177
            
            
            192COMPREHENSIVE
                INCOME
            
            
            
            
            
            2,123
            
            
            329Earnings
                Per Share -Basic
            
            
            21
            
            
            0.07
            
            
            0.01Weighted
                Average Shares Outstanding- Basic
            
            
            
            
            
            27,780,340
            
            
            14,366,411Earnings
                Per Share-Diluted
            
            
            
            
            
            0.07
            
            
            0.01Weighted
                Average Shares Outstanding- Diluted
            
            
            
            
            
            29,158,368
            
            
            14,366,411




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




3


**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Statements of Operations (Unaudited)**


**(In
      thousands of United States dollars except per share
      information)**




Six
                Months Ended June 30,Note(s)
            
            2007
            
            2006(restated)NET
                REVENUE
            
            
            
            
            
            8,807
            
            
            5,883COST
                OF REVENUE
            
            
            
            
            
            (4,563
            )
            
            (3,580
            )GROSS
                PROFIT
            
            
            
            
            
            4,244
            
            
            2,303OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            105
            
            
            122General
                and administrative expenses
            
            
            
            
            
            1,510
            
            
            883TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            1,615
            
            
            1,005INCOME(LOSS)
                FROM OPERATIONS
            
            
            
            
            
            2,629
            
            
            1,298OTHER
                INCOME(EXPENSES)Other
                non-operating income
            
            
            
            
            
            5
            
            
            9Interest
                expense
            
            
            
            
            
            (178
            )
            
            (245
            )Other
                expenses
            
            
            
            
            
            (8
            )
            
            (3
            )OTHER
                INCOME (LOSS) NET
            
            
            
            
            
            (181
            )
            
            (239
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            
            
            
            2,448
            
            
            1,059Income
                tax
            
            
            
            
            
            (44
            )
            
            (553
            )INCOME
                BEFORE MINORITY INTEREST
            
            
            
            
            
            2,404
            
            
            506Minority
                interest
            
            
            
            
            
            (108
            )
            
            (33
            )NET
                INCOME
            
            
            
            
            
            2,296
            
            
            473Other
                comprehensive incomeForeign
                currency translation adjustments
            
            
            
            
            
            197
            
            
            192COMPREHENSIVE
                INCOME
            
            
            
            
            
            2,493
            
            
            665Earnings
                Per Share -Basic
            
            
            21
            
            
            0.10
            
            
            0.03Weighted
                Average Shares Outstanding- Basic
            
            
            
            
            
            22,670,835
            
            
            14,306,730Earnings
                Per Share-Diluted
            
            
            
            
            
            0.10
            
            
            0.03Weighted
                Average Shares Outstanding- Diluted
            
            
            
            
            
            23,917,039
            
            
            14,306,730




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




4


**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Statements of Changes in Stockholders’ Equity**


**(In
      thousands of United States dollars)**





Number
                of Common Shares Issued
            
            Par
                Value Common Stock
            
            Par
                Value Series A Preferred
              Stock
            
            Additional
                Paid in Capital
            
            Statutory
                Surplus Reserve Fund
            
            Accumulated
                Other Comprehensive Income
            
            Retained
                Earning
            
            Capital
                Surplus
            
            Total
                Stock-
              holder’s
                equity**Balance,
                December 31, 2006**
            
            
            14,636,472
            
            
            15
            
            
            6
            
            
            9,935
            
            
            1,140
            
            
            348
            
            
            4,576
            
            
            20
            
            
            16,040Issuance
                of common stock on conversion of series A preferred stock
            
            
            5,457,619
            
            
            6
            
            
            (6
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Issuance
                of common stock on exercise of warrants
            
            
            11,089,286
            
            
            10
            
            
            
            
            
            11,316
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11,326Issuance
                of warrants
            
            
            
            
            
            
            
            
            
            
            
            37
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37Grant
                of stock options
            
            
            
            
            
            
            
            
            
            
            
            345
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            345Net
                income for the period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,296
            
            
            
            
            
            2,296Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            197
            
            
            
            
            
            
            
            
            197**Balance,
                June 30, 2007**
            
            
            31,183,377
            
            
            31
            
            
            -
            
            
            21,633
            
            
            1,140
            
            
            545
            
            
            6,872
            
            
            20
            
            
            30,241





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




5


**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Statements of Cash Flows (Unaudited)**


**(In
      thousands of United States dollars)**




Six
                Months ended June 30, 2007
            
            Six
                Months Ended June 30, 2006 (restated)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            
            2,296
            
            
            473Issuance
                of warrants
            
            
            37
            
            
            160Grant
                of stock options
            
            
            345Minority
                interest
            
            
            108
            
            
            33Depreciation
            
            
            246
            
            
            145Amortization
                of intangible assets
            
            
            139
            
            
            93Provision
                for doubtful accounts
            
            
            (11
            )
            
            4Changes
                in operating assets and liabilities:Decrease
                in accounts receivable
            
            
            (696
            )
            
            (3,359
            )(Increase)
                in other receivables, deposits and prepayments
            
            
            (3,899
            )
            
            (1,924
            )(Increase)/decrease
                in inventories
            
            
            (751
            )
            
            29Increase
                in accounts payable
            
            
            808
            
            
            853Increase/(decrease)
                in accrued expenses
            
            
            6
            
            
            20Increase/(decrease)
                in advances from customers
            
            
            2,460
            
            
            (408
            )(Decrease)/increase
                in other payables
            
            
            (1,486
            )
            
            1,134Increase
                in income tax payable
            
            
            129
            
            
            591Net
                cash (used in ) operating activities
            
            
            (269
            )
            
            (2,158
            )CASH
                FLOWS FROM INVESTING ACTIVITESPayment
                for purchase of property, plant and equipment
            
            
            (3,032
            )
            
            (65
            )Payment
                for purchase of land use right
            
            
            (2,659
            )
            
            -Purchase
                of minority interest in subsidiaries
            
            
            (2,818
            )Net
                cash used in investing activities
            
            
            (8,509
            )
            
            (65
            )CASH
                FLOWS FROM FINANCING ACTIVITESCash
                received from bank loan
            
            
            971
            
            
            -Cash
                received from capital contribution
            
            
            -
            
            
            3,101Cash
                received from warrants exercise
            
            
            11,326
            
            
            -Net
                cash provided in financing activities
            
            
            12,297
            
            
            3,101Effect
                of changes in exchange rate
            
            
            197
            
            
            -Net
                increase in cash
            
            
            3,716
            
            
            878Cash
                at beginning of the year
            
            
            588
            
            
            334Cash
                at end of the year
            
            
            4,304
            
            
            1,212Supplementary
                Cash flow disclosure:Interest
                Paid
            
            
            178
            
            
            86




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





6





Notes
      to
      Consolidated Financial Statements





**1.**
            **Management’s
                Responsibility for Interim Financial
                Statements**




Management
      acknowledges its responsibility for the preparation of the accompanying interim
      consolidated financial statements which reflect all adjustments, consisting
      of
      normal recurring adjustments, considered necessary in its opinion for a fair
      statement of its consolidated financial position and the results of its
      operations for the interim period presented. These consolidated financial
      statements should be read in conjunction with the summary of significant
      accounting policies and notes to consolidated financial statements included
      in
      the Company’s Form 10-KSB annual report for the year ended December 31, 2006.
      Results for the first six months of 2007 are not necessarily indicative of
      results for the year.




**2.**
            **The
                Company**




**(a)
      Recapitalization Transaction** ****




Sinoenergy
      Corporation (“Sinoenergy” or the “Company”) was incorporated in Nevada on March
      2, 1999 under the name Franklyn Resources III, Inc.. The Company’s corporate
      name was changed to Sinoenergy Corporation on September 28, 2006.




On
      June
      2, 2006, Sinoenergy acquired all of the issued and outstanding capital stock
      of
      Sinoenergy Holding Limited (“Sinoenergy Holding”) in exchange for 14,215,385
      shares of common stock. Sinoenergy Holding 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 Holding had no business other than its
      ownership of Sinogas. As a result of this transaction, Sinoenergy Holding and
      its subsidiary, Sinogas, became subsidiaries of Sinoenergy and the business
      of
      Sinogas became the business of Sinoenergy. In connection with this acquisition,
      the Company purchased 3,305,000 shares of common stock from former stockholders
      for $213,525. The 14,215,385 shares of common stock issued to the stockholders
      of Sinoenergy Holding represented a controlling interest in the equity of the
      Company. Although the legal acquiring party is the Company (then known as
      Franklyn), the accounting acquiring party is Sinogas. Under generally accepted
      accounting principles, the acquisition of Sinogas by Sinoenergy Holding and
      by
      the Company of Sinoenergy Holding are considered to be capital transactions
      in
      substance, rather than business combinations. That is, the acquisitions are
      equivalent, in the acquisition of Sinoenergy Holding and Sinogas, to the
      issuance of stock by Sinogas for the net monetary assets of Sinoenergy Holding,
      and in the Sinoenergy Holding acquisition, the issuance of stock by
      Sinoenergy Holding for the net monetary assets of Sinoenergy. 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 are the financial statements of Sinogas, as the accounting
      acquirer. The accompanying financial statements reflect the recapitalization
      of
      the stockholders’ equity as if the transactions occurred as of the beginning of
      the first period presented.




7





**(b)
      Financing Transaction**





In
      connection with the acquisition of Sinoenergy Holding, the Company entered
      into
      a securities purchase agreement  pursuant
      to which the Company issued, for $3,700,000, its 6% convertible notes in the
      principal amount of $3,700,000, 390,087 shares of common stock, and warrants
      to
      purchase 6,342,858 shares of common stock at $.85 per share, 6,342,858 shares
      of
      common stock at $1.20 per share and 6,342,858 shares of common stock at $1.75
      per share. The $1.75 warrants expired unexercised on December 31, 2006. The
      convertible notes were automatically converted into 5,692,307 shares of series
      A
      preferred stock on September 28, 2006 when the Company amended its articles
      of
      incorporation and filed a certificate of designation for the series A preferred
      stock. Each share of series A preferred stock is convertible into one share
      of
      common stock, subject to adjustment. For
      the
      six months ended June 30, 2007, a total of 5,457,619 shares of series A
      preferred stock were converted into common stock.




**(c)
      Amendment to Articles of Incorporation**





On
      September 28, 2006, the Company’s articles of incorporation were amended and
      restated. The restated articles of incorporation changed the Company’s name to
      Sinoenergy Corporation and created a class of 10,000,000 shares of preferred
      stock, par value $0.001 per share, with the directors having broad powers to
      set
      the rights, preferences, privileges and limitations of one of more series of
      preferred stock, and increased the authorized common stock to 100,000,000 shares
      of common stock, par value $0.001 per share. On September 28, 2006, the Company
      also filed a certificate of designation setting forth the rights, preferences,
      privileges and limitations of the series A convertible preferred stock. As
      a
      result of the filing of the restated articles of incorporation and the
      certificate of designation for the series A preferred stock, the 6% convertible
      notes were automatically converted into an aggregate of 5,692,307 shares of
      series A preferred stock, of which 5,457,619 shares of series A preferred stock
      were convered into common stock by June 30, 2007.




**(d)
      History of Sinogas**




Qingdao
      Sinogas General Machinery Limited Corporation (“Sinogas”) was registered in
      Qingdao, China in October 29, 2004, as a limited liability company under the
      laws of the PRC, and the registered capital was $7.5 million, which was paid
      in
      full.




On
      November 29, 2005, Qingdao Foreign Trade and Economic Cooperation Bureau
      approved the purchase by Sinoenergy Holding (a company registered in British
      Virgin Islands) of all the shares from the former shareholders of Sinogas and
      Sinogas changed from the domestic investment limited liability company into
      the
      wholly-owned foreign investment enterprise.




8




**(e)
      The business of Sinogas**




In
      accordance with provisions of Articles of Association and Business License,
      the
      business term of Sinogas is fifteen years, from October 29, 2004 to October
      29,
      2019.




Sinogas
      manufactures pressure containers of class 1, 2, 3 petroleum refinery equipment,
      designs and installs compressed natural gas station equipment, and compressed
      natural gas storage and transportation equipment.




**(f)
      Subsidiaries of the Company**




Sinoenergy
      Holding is a wholly-owned subsidiary of Sinoenergy, and Sinogas is a
      wholly-owned subsidiary of Sinoenergy Holding.




Sinogas
      and Qingdao Kangtai Machinery Equipment Manufacture Co. Limited (“Kangtai”), a
      non-affiliated party, established Qingdao Sinogas Yuhan Chemical Equipment
      Co.,
      Ltd. (“Yuhan”), which, at December 31, 2006 and June 30, 2007, was 90% owned by
      Sinogas and 10% owned by Kangtai. When Yuhan was organized, the Company owned
      55% of Yuhan. The Company has entered into an agreement to purchase 35% of
      Yuhan
      for approximately $1,500,000. As
      of
      June 30, 2007, the Company had paid a total of $1.2 million and owed $300,000
      to
      Kangtai, and held 90% equity of Yuhan. The agreement, as amended, gives the
      Company the
      right
      to buy the remaining 10% interest in Yuhan during the first six months of 2008
      for approximately $640,000.




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 equipment (not including
      dangerous equipments).





In
      June
      2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its trustee), Wuhan Fukang
      Automotive Cleaning Energy Company (“Wuhan Cleaning Energy”) and Wuhan Yixiang
      Industry Trade Company (“Wuhan Yixiang”), signed a cooperation agreement to
      establish Wuhan Sinoenergy Gas Company (“Wuhan Sinoenergy”) to operate CNG
      stations. Based on the agreement, the Company, through Sinoenergy and Sinogas,
      contributed $3,375,000 for a 90% interest, and each of Wuhan Clean Energy and
      Wuhan Yixiang contributed $190,000 for a 5% interest each. On August 2, 2006,
      Wuhan Administration Bureau for Industry and Commerce issued a business license
      to Wuhan Sinoenergy. The term of the business of Wuhan Sinoenergy is from August
      2, 2006 to August 2, 2026.





In
      November 2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its trustee)
      Pingdingshan Jinlongma Vehicle Company (“Jinglongma”), signed a cooperation
      agreement to establish Pingdingshan Sinoenergy Gas Company (“Pingdingshan
      Sinoenergy”) to operate CNG stations. The Company, through Sinoenergy and
      Sinogas, is to contribute capital of $1,921,000, of which it had contributed
      $ 875,000
      through June 30, 2007, for which it received a 90% interest. For a 10% interest,
      Jinglongma agreed to contribute capital of $192,000, of which it contributed
      $29,074 through June 30, 2007. On
      December 4, 2006, Pingdingshan Administration Bureau for Industry and Commerce
      issued a business license to Pingdingshan Sinoenergy. The term of the business
      of Pingdingshan Sinoenergy is from December 4, 2006 to December 3,
      2026.




9




In
      connection with the Wuhan Sinoenergy and Pingdingshan Sinoenergy agreement,
      Sinogas and Beijing Sanhuan signed trust agreement, pursuant to which Sinogas
      has appointed Beijing Sanhuan as its trustee to hold a portion of its shares
      of
      Wuhan Sinoenergy and Pingdingshan Sinoenergy, respectively. According to the
      trust agreement, except for providing any required information for the entity’s
      registration, Beijing Sanhuan, as a trustee of Sinogas, does not have any right
      and liabilities of a stockholder and does not take part in management of the
      entity.





On
      February 1, 2007, the Company and Hong Kong China New Energy Development
      Investment Co. Ltd (“New Energy”), signed a cooperation agreement relating to an
      investment in the construction and operation of CNG stations with the Huangmei
      County government. Pursuant to the agreement, New Energy and the Company will
      form a natural gas company named Hubei Gather Eenergy Gas Co., Ltd (“Hubei
      Gather”) in Huangmei to construct and operate a super-large CNG mother station
      with expected annual processing capacity of 100-300 million cubic meters in
      the
      Huangmei region. The registered capital is $5 million of which Sinoenergy
      Holding Ltd will contribute $2,750,000 and New Energy will contribute
      $2,250,000. On March 23, 2007, Hubei Gather received a business license. The
      term of the business of Hubei Gather is from March 23, 2007 to March 22, 2027.
      As of June 30 ,
      2007,
      $752,474 has been invested in Hubei Gather by the Company and New Energy.




On
      April
      20, 2007, the Company and Green Fuel signed equity purchase agreement, pursuant
      to which the Company will purchase the 45% equity of Anhui Gather owned by
      Green
      Fuel for the price of $2,750,000 including $344,330 register capital paid by
      Green Fuel and $500,000 for the cost to obtain 200 million cubic meters natural
      gas quota from Sinopec. As of June 30, 2007, the Company had paid $844,330
      to
      Green Fuel. The Company is to pay the remaining $1,905,670 to Anhui Gagher
      according to requirement of PRC government. On July 4, 2007, Anhui Gather
      received PRC government approval for the transfer of the stock interest and
      its
      business license was updated accordingly.





Anhui
      Gather was incorporated on March 23, 2007, with Hong
      Kong
      China New Energy Development Investment Co. Ltd owning 55% equity and Green
      Fuel
      owning 45% equity. The business scope was to construct and operate a super-large
      CNG mother station with expected annual processing capacity of 100-300 million
      cubic meters. As of August 10, 2007, Anhui Gather is in development stage and
      has not yet commenced operations.




10




In
      March
      2007, the Company purchased a 60% interest in Jiaxing
      Lixun Automotive Electronic Co, Ltd (“Lixun”) from its shareholders for
      approximately $390,000, which has been paid. Lixun designs and manufactures
      electric control devices for alternative
      fuel, such as compressed natural gas and liquefied petroleum gas vehicles,
      as
      well as a full range of electric devices, such as computer controllers,
      conversion switches, spark advancers, tolerance sensors and emulators for use
      in
      multi-powered vehicles. In
      connection with the transfer of the shares, Lixun received a new business
      license. Lixun’s operation has been consolidated with the Company’s financial
      statements since April 1, 2007.




On
      March
      18, 2007, Sinogas and Shanghai CNPC Enterprise Group signed a cooperation
      agreement to establish Xuancheng Sinoenergy Vechcle Gas Company (“Xuancheng
      Sinoenergy”) to operate CNG stations. Shanghai CNPC Enterprise has contributed
      $905,000 for 70% interest
      and Sinogas has contributed $388,000 for a 30% interest. On
      March
      26, 2007, Xuancheng Administration Bureau for Industry and Commerce issued
      a
      business license to Xuancheng Sinoenergy. Since
      the
      Company has a minority interest in Xuancheng
      Sinoenergy, it records
      this investment under equity method.




On
      April
      20, 2007, the Company and Shanghai CNPC Enterprise Group (CNPC Enterprise)
      signed equity purchase agreement, pursuant to which the Company will purchase
      the 70% of Xuancheng Sinoenergy Gas owned by CNPC Enterprises for the price
      of
      $1,772,700. Xuancheng Sinoenergy Gas was incorporated o n
      March
      26, 2007. The Company owns 30% and CNPC Enterprise owns 70% of the equity in
      this enterprise. Xuancheng Sinoenergy is in the development stage and has not
      yet commenced operation.


As
      of the date
      of this report, the transaction has not closed and the Company has paid $722,211
      to CNPC Enterprise.




**3.
      Summary of Significant Accounting Policies**





Basis
      of Presentation





The
      accompanying financial statements of the Company and its subsidiaries were
      prepared in accordance with the accounting principles generally accepted in
      the
      United States of America (“GAAP”).





Certain
      information and footnote disclosures normally included in financial statements
      that have been prepared in accordance with generally accepted accounting
      principles have been condensed or omitted pursuant to the rules and regulations
      of the Securities and Exchange Commission. The Company’s management believes
      that the disclosures contained in these financial statements are adequate to
      make the information presented therein not misleading. Results of operations
      for
      the interim periods are not necessarily indicative of results for the entire
      year.




11




Use
      of
      Estimates





In
      preparing financial statements in conformity with GAAP, 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 and other receivables, the valuation and costing of inventory,
      depreciation of property, plant and equipment, impairment of long-lived assets,
      income taxes and contingencies. Actual results could differ from those
      estimates.





Goodwill





Goodwill
      represents the excess of purchase price of business combinations over the fair
      value of the net assets acquired and is tested for impairment at least annually
      unless business events indicate an impairment test is required. The impairment
      test requires allocating goodwill and all other assets and liabilities to
      assigned reporting units. The fair value of each reporting unit is estimated
      and
      compared to the net book value of the reporting unit. If the estimated fair
      value of the reporting unit is less than the net book value, including goodwill,
      then the goodwill is written down to the implied fair value of the goodwill
      through a charge to expense. The goodwill on the Company’s financial statements
      was a result of the Yuhan acquisition, and relates entirely to the pressure
      container reporting segment.





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, 2007 and 2006, the Company did not have any cash equivalents.





Allowance
      for Doubtful Accounts





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.





Inventories





Inventories
      comprise of raw materials, work in process, finished goods and low value
      consumable articles and are stated at the lower of cost and 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.




12





Long-term
      investments




Investments
      in entities in which the Company owns more than 20% and not more than 50% of
      the
      equity and voting rights and does not have a control position are accounted
      for
      on the equity method. Investments in entities in which the Company owns less
      than 20% of the equity and voting rights are stated at cost, and are reviewed
      periodically to determine whether there is an impairment in the value of the
      investments.





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:


Buildings
                  and facilities
              
              
              20
                  yearsMachinery
                  and equipment
              
              
              8
                  yearsMotor
                  vehicles
              
              
              10
                  yearsOffice
                  equipment and others
              
              
              5
                  to 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.





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 was acquired at the end of 2004 is valued and
      amortized according to relevant industry standard. The patent was acquired
      in
      May 2005, and is amortized over the 10-year
      life of the patent.





There
      is
      no private ownership of land in the PRC. All land is owned by the government
      and
      the government grants what is known as a land use right, which is a transferable
      right to use the land. The land use right for the land on which Sinogas’
facilities are recorded as an intangible asset.




13





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.





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.
      CNG construction and building technical consulting service revenue is recognized
      on the percentage of completion basis. The revenue is measured by reference
      to
      the proportion of construction work completed to the total estimated work
      according to the report provided by technical department of the Company, and
      the
      cost is recognized based on total contracted cost and the percentage of
      completion basis. Receivables and payables are recorded accordingly. Revenue
      is
      presented net of any sales tax and value added tax.





Value
      Added and Business Taxes - The Company is subject to value added tax (“VAT”) for
      manufacturing products and business tax for services provided. The applicable
      VAT tax rate is 17% for products sold in the PRC, and the business tax rate
      is
      5% for services provided in PRC. The amount of VAT liability is determined
      by
      applying the applicable tax rate to the invoiced amount of goods sold (output
      VAT) less VAT paid on purchases made with the relevant supporting invoices
      (input VAT). 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.





We
      pay **** VAT
      and
      business tax based on tax invoices issued. The tax invoices may be issued
      subsequent to the date on which revenue is recognized, and there may be a
      considerable delay between the date on which the revenue is recognized and
      the
      date on which the tax invoice is issued. In the event that the PRC tax
      authorities dispute the date of which revenue is recognized for tax purposes,
      the PRC tax office has the right to assess a penalty, which can range from
      zero
      to five times the amount of the taxes which are determined to be late or
      deficient. According to the PRC tax laws, any potential tax penalty payable
      on
      late or deficient payments of this tax could be up to five times the amount
      of
      the late or deficient tax payable, and will be expenses as a period expense
      if
      and when a determination has been made by the taxing authorities that a penalty
      is due.




14





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.  Based on its experience and industry
      practice, the Company determined that the warranty rate was is 0.2 % of gross
      sales.





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. Temporary differences, resulting in deferred
      tax assets or liabilities have been recognized in the financial
      statement.





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 accumulated other comprehensive income in stockholders’ 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.





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.




15





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.





Minority
      Interest





The
      minority interest refers to the percentage of a subsidiary which is not owned
      by
      the Company. The Company eliminates the minority interest portion of any related
      profits and losses in consolidation.





Stock-Based
      Compensation





The
      Company may issue stock options to employees and stock options or warrants
      to
      non-employees in non-capital raising transactions for services and for financing
      costs. The Company has adopted Statement of Financial Accounting Standards
      (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation,” which establishes
      a fair value method of accounting for stock-based compensation plans. In
      accordance with SFAS No. 123R, the cost of stock options and warrants issued
      to
      employees and non-employees is measured at the grant date based on the fair
      value. The fair value is determined using the Black-Scholes option pricing
      model. The resulting amount is charged to expense on the straight-line basis
      over the period in which the Company expects to receive benefit, which is
      generally the vesting period.





Earnings
      Per Share





Basic
      earnings per share is computed by dividing the earnings for the year by the
      weighted average number of shares of common stock outstanding for the year.
      Diluted earnings per share reflects the potential dilution of securities by
      including shares of common stock issuable upon exercise or conversion of series
      A preferred stock, stock options granted and warrants, in the weighted average
      number of common shares outstanding for a period, if dilutive.





Comprehensive
      Income and Loss





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 (loss) 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.




16





The
      Company’s only component of other comprehensive income (loss) is foreign
      currency translation gain of $176,000 and $195,000 for the three months and
      six
      months ended June 30, 2007 respectively. This foreign currency translation
      gain
      has been recorded as a separate component of stockholders’ equity.





**4.
      Account Receivables and Allowance for Doubtful Receivables**





Details
      of allowance for doubtful receivables deducted from accounts receivable are
      as
      follows (dollars in thousands):





June
                30,2007
            
            December
                31 ,2006(unaudited)Accounts
                receivable
            
            $
            5,165
            
            $
            4,468Less:
                allowance for doubtful accounts
            
            
            72
            
            
            97Balance
            
            $
            5,093
            
            $
            4,371





(a)
      Accounts receivable from related parties




Accounts
      receivable at June 30, 2007 include the following related party receivables:
      $515,968 due from Kangtai, the minority stockholder of Yuhan, for sales made
      by
      Kangtai on behalf of Yuhan.





Accounts
      receivable at December 31, 2006 include a $593,821 receivable from Kangtai
      for
      sales made by Kangtai on behalf of Sinogas and Yuhan.




(b)  Accounts
      receivable from third parties




Accounts
      receivable at June 30, 2007 include the following accounts receivable from
      third
      parties: $1,196,449 for CNG deposit and transportation equipment sales, $939,593
      for pressure container sales; $1,910,577 due from Wuhan Fukang Automotive
      Cleaning Energy Company, the 5% minority stockholder of Wuhan Sinoenergy, for
      sales of conversion kits.




Accounts
      receivable at December 31, 2006 include the following significant accounts
      receivable from third parties: $1,125,238 representing the balance of a $1.9
      million CNG deposit and transportation equipment sales to a petrochemical
      company in Shanghai; $909,242 representing the balance for CNG station technical
      supporting and construction consulting service provided to a Shanghai company
      with the total sales amount of $1.28 million.




17





**5.
      Other Receivables**





(a)
      Other
      Receivable from Related Parties





Other
      receivables from related parties include s
      $335,237 receivables from Beijing Sanhuan for advances made in connection with
      the purchase of the land use right from Bejing Sanhuan; $136,314 for rental
      fee
      as well as water and power charge to Kangtai, and $177,302 from an unsecured
      loan due from Kangtai. The balance also includes $262,622 unsecured loan to
      Xuancheng Sinoenergy Gas Co., of which the Company owns a 30% equity interest.





The
      related party balance as at December 31, 2006 was the receivable balance from
      Kangtai for rental fee, water and power fee as well as unsecured loan.





(b)
      Other
      Receivable from Third Party





Other
      receivables from third parties at June 30, 2007 represents primarily $656,555
      due from Zhongyuanhang for unsecured loan, $636,622 due from Jiangsu
      Dongfanghong Fertilizer Co. for unsecured loan; $315,146 for unsecured loan
      to
      Qingdao Mechanism Development Co.; $272,702 unsecured loan to China New Energy,
      which has been repaid in July 2007.





Other
      receivables from third party at December 31, 2006 mainly represent $502,484
      due
      from Shanghai Zhongyou Group, which in the third quarter of 2006 assumed the
      debt owned by Xuancheng City Gas (subsidiary of Shanghai Zhongyou Group) to
      the
      Company for equipment.





**6(1).
      Deposits and Prepayments**





The
      balance at June 30, 2007 mainly represents $423,269 prepayment to a supplier,
      Tianjing Green Fuel Co., for components parts of conversion kits purchased
      by
      the Company for installing conversion kits as well as several prepayments to
      other suppliers for routine operating business.





The
      prepayment balance at December 31, 2006 of $3,187,000 represents deposits to
      overseas suppliers for CNG station equipment purchase by the Company for use
      in
      the construction of CNG filling stations.





**6(2).
      Other long-term assets**





The
      balance at June 30, 2007 represents some prepayments for long-lived assets
      as
      well as prepayments for long-term equity investment and prepayments for land
      use
      right title deed, payment for a 45% equity interest in Anhui Gather and for
      a
      70% equity interest in Xuancheng Sionenergy.




18





The
      detailed background information about the prepayment is as following:




(a)
            $2,100,978
                temporary unsecured loan to Beijing Sanhuan: On May 8, 2007, in order
                to
                acknowledge and compensate Beijing Sanhuan for the increase in the
                value
                of land use right and the additional expenses incurred, the Company
                and
                Beijing Sanhuan signed loan agreement, pursuant to which Sinogas
                agreed to
                lend $2,100,978 to Beijing Sanhuan, and Beijing Sanhuan pledged to
                complete the transfer of title to the land use right to Sinogas before
                the
                end of June 2007,. The loan to Beijing Sanhuan is to be offset against
                the
                increase in the purchase price for the land use right. On May 14,
                2007,
                the Company received the land use right title deed.





(b)
            $722,211
                prepayment to Shanghai CNPC Enterprises (CNPC Enterprises): On April
                20,
                2007, the Company and CNPC Enterprises signed equity purchase agreement,
                pursuant to which the Company will purchase 70% of Xuancheng Sinoenergy
                Gas owned by CNPC Enterprises at the price of $1,772,700. As of June
                30,
                2007 the transaction has not closed, so the Company recorded the
                initial
                payment as prepayment.





(c)
            $844,330
                prepayment to Tianjin Green Fuel Company (Green Fuel): On April 20,
                2007,
                the Company and Green Fuel signed equity purchase agreement, pursuant
                to
                which the Company will purchase the 45% equity of Anhui Gather owned
                by
                Green Fuel at the price of $2,750,000. As of June 30, 2007, the
                transaction has not closed, so the Company recorded the down-payment
                as
                prepayment;





(d)
            The
                balance also includes $2,232,000 prepayments for CNG station equipment
                from overseas. This equipment will be used to construct CNG filling
                stations as long-term fixed assets.





**7.
      Inventories**




Inventories
      at June 30, 2007 and December 31, 2006 are summarized as follows (in thousand
      US
      dollars):




June
                30,
              2007
            
            December
                31,
              2006Raw
                materials
            
            $
            888
            
            $
            339Work
                in progress
            
            
            333
            
            
            483Finished
                goods
            
            
            467
            
            
            115Total
            
            $
            1,688
            
            $
            937





19


The
      Company seeks to keep inventory at a minimum level needed for efficient
      production.





**8.
      Long-term investment**





On
      March
      18, 2007, Sinogas and Shanghai CNPC Enterprise Group signed an agreement to
      establish Xuancheng to operate CNG stations. Shanghai CNPC Enterprise
      contributed $905,000 for 70% equity and Sinogas contributed $390,000 for a
      30%
      interest. The Company accounts for this investment under the equity
      method.





**9.
      Property, Plant and Equipment**





As
      of
      June 30, 2007 and December 31, 2006, property, plant and equipment consist
      of
      following (in thousand US dollars):





June
                30,
              2007
            
            December
                31,
              2006**Cost**Buildings
                and facility
            
            $
            4,949
            
            $
            2,736Machinery
                equipment
            
            
            1,583
            
            
            2,137Motor
                vehicles
            
            
            320
            
            
            153Office
                equipment and others
            
            
            162
            
            
            70$
            7,014
            
            $
            5,096**Accumulated
                depreciation**Buildings
                and facility
            
            $
            435
            
            $
            379Machinery
                equipment
            
            
            372
            
            
            1,139Motor
                vehicles
            
            
            27
            
            
            8Office
                equipment and others
            
            
            24
            
            
            14$
            858
            
            $
            1,540**Carrying
                value**Buildings
                and facility
            
            $
            4,514
            
            $
            2,357Machinery
                equipment
            
            
            1,211
            
            
            998Motor
                vehicles
            
            
            293
            
            
            145Office
                equipment and others
            
            
            138
            
            
            56$
            6,156
            
            $
            3,556





Included
      in the cost of buildings and facility is $1,833,417, representing
      construction-in-process relating to the construction of CNG stations by Wuhan
      Sinoenergy and Pingdingshan Sinoenergy and Hubei Gather, which commenced in
      August 2006, December 2006 and March 2007, respectively.





**10.
      Intangible Assets**





June
                30,
              2007
            
            December
                31,
              2006**Cost**Patent,
                technology know-how
            
            $
            294
            
            $
            290Land
                use right
            
            
            12,475
            
            
            12,294Total
            
            $
            12,769
            
            $
            12,584Accumulated
                amortization
            
            
            (608
            )
            
            (470
            )Carrying
                value
            
            $
            12,161
            
            $
            12,114




20




Patents
      and technology know how are amortized over 10 years up to September, 2014 Included
      in the cost of patent and know-how, $91,000 is the technical know how purchased
      and $226,000 is paid in capital from Kangtai (minority shareholder) when the
      Yuhan was incorporated.





The
      land
      use right is the land use right which was purchased by the Company from Beijing
      Sanhuan. The Company has an agreement with Beijing Sanhuan, a related party,
      pursuant to which Beijing Sanhuan is to transfer to Sinogas the land use right
      relating to the land on which Sinogas’ facilities are located. The purchase
      price for the land use right was initially approximately $12.3 million. The
      purchase price for the land use right was increased to $18.6 million pursuant
      to
      an amendment to the sales agreement, as a result of increased costs and an
      increase in the value of the land use right. Pursuant to the amendment, the
      increase was conditioned upon Beijing Sanhuan providing the Company with a
      special purpose audit report to support the increased cost, and the management
      is to engage third party independent professionals to provide a report for
      the
      land use right valuation. As of the date of this report, the land use right
      valuation is under process and Beijing Sanhuan has not provided the Company
      with
      the special purpose audit report.





In
      May
      14, 2007, the Company received the land use right title deed, and the land
      use
      right have a term of 50 years from the date of approval. As of June 30, 2007,
      Sinogas has paid $12.3 million to Beijing Sanhuan and advanced Beijing Sanhuan
      $2.1 million, which will be used to offset the increase in the purchase price
      of
      the land use right.





**11.
      Goodwill**





On
      May
      25, 2006, the Company and Kangtai formed Yuhan, in which the Company then held
      a
      55% interest and Kangtai held a 45% interest. In August 2006, the Company
      entered into an agreement to acquire the remaining 45% interest for a purchase
      price of approximately $1.5 million, which was payable in installments. At
      June
      30, 2007, the Company’s financial statements reflect a 90% ownership of Yuhan,
      based on having received government approval for the Company’s ownership of a
      90% interest in Yuhan. As of June 30, 2007, the Company had paid a total of
      $503,000 and owed $997,000 with respect to the purchase of a 35% interest in
      Yuhan, which brought the Company’s interest in Yuhan to 90% **.** The
      agreement, as amended, gives the Company the
      right
      to buy the remaining 10% interest in Yuhan during the first six months of 2008
      for approximately $640,000. The consolidated balance sheet reflects goodwill
      of
      $676,000, which represents the excess of the purchase price for 35% of Yuhan’s
      equity over 35% of Yuhan’s fair value of net asset at date of acquisition. There
      was no impairment of the goodwill in the six months ended June 30,
      2007.




21





**12.
      Short Term Loan**





The
      Company has a $1.2 million short term loan from Shenzhen Development Bank,
      Qingdao Branch (“Shenzhen Development Bank”). On November 27, 2006, the Company
      received a short term loan from Shenzhen Development Bank secured by an account
      receivable of Sinogas of $1,949,546. The loan bears interest at 5.58% per annum
      plus 1% service fee and is due on November 26, 2007.





In
      March
      2007, the Company received a $646,479 short term loan from China CITIC Bank
      Qingdao Branch (CITIC Qingdao). The loan bears interest at 7.02% and is due
      on
      March 30, 2008. China Yuanhang Gas Company (Yuanhang Gas), an import agent
      of
      the Company signed a ceiling guarantee contract, pursuant to which Yuanhang
      Gas
      guarantees the ceiling amount of $2.5 million loan obligations to CITIC Qingdao.
      There was no guarantee cost incurred for the guarantee contract.





On
      April
      30, 2007, the Company borrowed approximately $2,585,000 from Bank of
      Communication Qingdao 1st Branch (Qingdao Communication Bank). The loan, which
      is due on April 30, 2008, bears interest at 6.39% per annum, and is subject
      to
      adjustment based on changes in the interest rate charged by China People Bank.





**1** **3.
      Other Payables**





(a)
      Other
      Payables to Related Parties:





$306,392
      payable to Kangtai for the unpaid part of the 35% acquisition of the equity
      of
      Yuhan by the Company, $1,293 to Mr. Guiqiang Shi who is a stockholder of
      Kangtai; and $37,818 payables to Mr. Tanzhou Deng, the chairman of the Company,
      which are carried forward from the balance of December 31, 2006.





(b)
      Other
      Payables to Third Parties





The
      balance to third party as of June 30, 2007 mainly represents $836,671 value
      added tax, business tax and other taxes payables and $40,000 payable to auditor
      for 1 st and
      2 nd quarter
      review;




22





**14.
      Advances from Customers**





Advances
      from customers at June 30, 2007 and December 31, 2006 were primarily the
      advances received for sales according to the Company’s sales contracts.





**15.
      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 foreign owned manufacturing enterprise, Sinogas and Yuhan, Wuhan
      Sinoenergy were granted a corporate income tax holiday, with a 100% corporate
      tax exemption for the first two years (2006 and 2007) and a 50% corporate tax
      exemption for the following three years (2008-2010).





No
      provision for American tax and for British tax is made as Sinoenergy Holding
      and
      Sinoenergy are all investment holding companies, and has no assessable income
      either in the United State or the British Virgin Islands.





**16.
      Minority Interests’ Equity**





The
      activities of the minority interests’ equity during the three months ended June
      30, 2007 are summarized as follows:





Beginning
                balance (December 31, 2006)
            
            
            614Minority
                interests in income
            
            
            108Contributions
                from minority stockholders
            
            
            494Balance,
                June 30, 2007
            
            $
            1,216





**17.**  **Related
      Party Relationships and Transactions**





The
      principal related companies and related parties with which the Company had
      transactions in the three months ended June 30, 2007 and 2006, are as
      follows:





Name
                of related party
            
            RelationshipBeijing
                Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)
            
            Parent
                company of a subsidiary before November 8, 2005. Legal representative
                of
                Beijang Sanhuan is the Company’s CEO .****Qingdao
                Kangtai Machinery Equipment Manufacture Co. Limited (Kangtai)
              
              Xuancheng
                Sinoenergy Gas (Xuancheng)
              
              Name
                of Related Party
              Mr.
                Guili Shi
              Mr.
                GuiQiang Shi
              Mr.
                Tanzhou Deng
            
            Minority
                shareholder of a subsidiary (Yuhan) from May 2005
              
              Significant
                effect (the Company is 30% equity owner of it)
              
              Shareholder
                of Kangtai
              Shareholder
                of Kangtai
              Chairman
                of the Company




23




Significant
      transactions between the Company and its related parties during the three and
      six months ended June 30, 2007 and 2006 are as follows:





(1)
            Sales
                and purchase transactions with related
                parties




For
                the three months ended June 30,
            
            For
                the six months ended June 30,Name
                of the Company
            
            2007
            
            2006
            
            2007
            
            2006Kangtai
            
            --
            
            Sales
                with amount of $672,945
            
            --
            
            Sales
                with amount of $1,481,503





Kangtai
      is the predecessor company of Yuhan. Kangtai purchases products from Yuhan
      to
      fill open purchase orders. Yuhan completed those contracts that were made by
      Kantai prior the separation.




The
      sales
      and purchases to and from related parties were made according to a price
      mutually agreed after taking into consolidation of prevailing market
      prices.





(2)
            Related-company
                receivables





Name
                of the Company
            
            June
                30, 2007 (unaudited)
            
            December
                31, 2006Beijing
                Sanhuan
            
            -$2,436,215
                short-term borrowingXuancheng
                Sionenergy
            
            -$262,622
                inter-company loanKangtai
            
            -$136,314
                receivables for water and power and fee charge;
              
              -$177,302
                inter-company loan
              
              -
                $515,968 sales received on behalf of the Company
            
            -
                $837,916 inter-company receivables for rental fee;
              
              -
                $236,313 receivables for water and power fee charge and unsecured
                loan;
              
              -
                $593,821 sales received on behalf of the
                Company





(3)
            Related-company
                and related party payables




24




Name
                of the Company
            
            June
                30, 2007 (unaudited)
            
            December
                31, 2006Beijing
                Sanhuan
            
            
            
            -
                $3,112,071 payables for land use right;
              
              -
                $451,734 for know-how using of CNG station system
                integrationKangtai
            
            -
                $306,392 unpaid part for 35% equity purchase of Yuhan
            
            -
                $811,061 payable for 35% equity purchase of Yuhan;Mr.Tianzhou
                Deng
            
            -
                $37,818
            
            -
                $129,073Mr.
                Guili Shi
            
            
            
            -
                $18,996Mr.
                GuiQiang Shi
            
            -
                $1,293
            
            -
                $1,264





The
      amounts due from and to related parties are interest free, are unsecured and
      are
      with no fixed terms.





**18.
      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.





**19.
      Segment Information**





Operating
      segments are defined by SFAS No.131, “Disclosure about Segments of an Enterprise
      and Related Information,” as components of an enterprise about which separate
      financial information is available that is evaluated regularly by the Company
      in
      deciding how to allocate resources and in assessing performance. At June 30,
      2007, the Company has four operating segments, which are (i) non-standard
      pressure containers, (ii) CNG station construction and CNG station service
      and
      (iii) CNG operation business, which is in the development stage (iv) CNG vehicle
      conversion kits, and at June 30, 2006, it has the two segments listed in (i)
      and
      (ii).




25




As
      all
      businesses of the Company are carried out in the PRC, the Company is deemed
      to
      operate in one geographical area.




The
      following tables set forth information relating to our business segments for
      the
      three and six months ended June 30, 2007 (dollars in thousands).





Three
                months ended June 30, 2007
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            Vehicle
                conversion kits
            
            TotalNet
                revenue
            
            $
            1,236
            
            $
            2,345
            
            
            -
            
            $
            2,600
            
            $
            6,181Cost
                of revenues
            
            
            615
            
            
            672
            
            
            -
            
            
            1,685
            
            
            2,972Gross
                profit
            
            
            621
            
            
            1,673
            
            
            -
            
            
            915
            
            
            3,209Gross
                margin
            
            
            50
            %
            
            71
            %
            
            
            
            
            35
            %
            
            52
            %Operating
                expenses:Selling
                expenses
            
            $
            22
            
            $
            10
            
            $
            7
            
            $
            26
            
            $
            65General
                and administrative expenses
            
            
            214
            
            
            327
            
            
            209
            
            
            178
            
            
            928Total
                operating expense
            
            
            236
            
            
            337
            
            
            216
            
            
            204
            
            
            993Income
                (loss) from operations
            
            $
            385
            
            $
            1,336
            
            
            ($
                216
            )
            $
            711
            
            $
            2,216





Three
                months ended June 30, 2006
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            TotalNet
                revenue
            
            $
            1,997
            
            $
            1,386
            
            
            -
            
            $
            3,383Cost
                of revenues
            
            
            1,657
            
            
            527
            
            
            -
            
            
            2,184Gross
                profit
            
            
            340
            
            
            859
            
            
            -
            
            
            1,199Gross
                margin
            
            
            17
            %
            
            62
            %
            
            
            
            
            35
            %Operating
                expenses:Selling
                expenses
            
            $
            54
            
            $
            4
            
            
            -
            
            $
            58General
                and administrative expenses
            
            
            185
            
            
            372
            
            
            -
            
            
            557Total
                operating expense
            
            
            239
            
            
            376
            
            
            -
            
            
            615Income
                (loss) from operations
            
            $
            101
            
            $
            483
            
            
            -
            
            $
            584




Six
                months ended June 30, 2007
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            Vehicle
                conversion kits
            
            TotalNet
                revenue
            
            $
            2,019
            
            $
            4,188
            
            
            -
            
            $
            2,600
            
            $
            8,807Cost
                of revenues
            
            
            1,229
            
            
            1,649
            
            
            -
            
            
            1,685
            
            
            4,563Gross
                profit
            
            
            790
            
            
            2,539
            
            
            -
            
            
            915
            
            
            4,244Gross
                margin
            
            
            39
            %
            
            61
            %
            
            
            
            
            35
            %
            
            48
            %Operating
                expenses:Selling
                expenses
            
            $
            27
            
            $
            45
            
            $
            7
            
            $
            26
            
            $
            105General
                and administrative expenses
            
            
            294
            
            
            563
            
            
            475
            
            
            178
            
            
            1,510Total
                operating expense
            
            
            321
            
            
            608
            
            
            482
            
            
            204
            
            
            1,615Income
                (loss) from operations
            
            $
            469
            
            $
            1,931
            
            
            ($482
            )
            $
            711
            
            $
            2,629




26




Six
                months ended June 30, 2006
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            TotalNet
                revenue
            
            $
            3,165
            
            $
            2,718
            
            
            -
            
            $
            5,883Cost
                of revenues
            
            
            2,586
            
            
            994
            
            
            -
            
            
            3,580Gross
                profit
            
            
            579
            
            
            1,724
            
            
            -
            
            
            2,303Gross
                margin
            
            
            18
            %
            
            63
            %
            
            
            
            
            39
            %Operating
                expenses:Selling
                expenses
            
            $
            94
            
            $
            28
            
            
            -
            
            $
            122General
                and administrative expenses
            
            
            305
            
            
            578
            
            
            -
            
            
            883Total
                operating expense
            
            
            399
            
            
            606
            
            
            -
            
            
            1,005Income
                (loss) from operations
            
            $
            180
            
            $
            1,118
            
            
            -
            
            $
            1,298




**20.
      Capital Stock**





(a)
      Common stock issued on conversion of series A preferred stock and exercise
      of
      warrants





As
      part
      of the June 2006 private placement, the Company issued (i) notes in the
      aggregate principal amount of $3,700,000, which were automatically converted
      into 5,692,307 shares of series A preferred stock in September 2006, (ii)
      390,087 shares of common stock and (iii) warrants to purchase 6,342,858 shares
      of common stock at $0.85 per share, 6,342,858 shares of common stock at $1.20
      per share, and 6,342,858 shares of common stock at $1.75 per share. The $1.75
      warrants expired unexercised on December 31, 2006. The $0.85 warrants and the
      $1.20 warrants expire in June 2011.





At
      December 31, 2006, all of the shares of series A preferred stock and all of
      the
      $0.85 warrants and $1.20 warrants were outstanding.




During
      the six months ended June 30, 2007, 5,457,619 shares of common stock were issued
      upon conversion of series A preferred stock. At June 30, 2007, 234,688 series
      A
      preferred stock left.




27




(b)
      Warrants




Number
                  of shares issuable on exercise of warrants$0.85
                  Warrants
              
              $1.20
                  Warrants
              
              $1.75
                  Warrants
              
              $2.10
                  WarrantsBalance
                  at December 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issued
                  during the year
              
              
              6,342,858
              
              
              6,342,858
              
              
              6,342,858
              
              
              -Exercised
                  in the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
                  in the year
              
              
              -
              
              
              -
              
              
              -6,342,858
              
              
              -Balance
                  at December 31, 2006
              
              
              6,342,858
              
              
              6,342,858
              
              
              -
              
              
              -Issued
                  during the six months
              
              
              
              
              
              
              
              
              
              
              
              150,000Exercised
                  in the six months
              
              
              5,657,143
              
              
              5,432,143
              
              
              -
              
              
              -Balance
                  at June 30, 2007
              
              
              685,715
              
              
              910,715
              
              
              -
              
              
              150,000Proceeds
                  from warrant exercise
              
              $
              4,808,571
              
              $
              6,518,572
              
              
              -
              
              
              -


During
      the six months ended June 30, 2007, 5,657,143 shares of common stock were issued
      upon exercise of $0.85 warrants, from which the Company received $4,808,571;
      5,432,143 shares of common stock were issued upon exercise of $1.20 warrants,
      from which the Company received $6,518,572, bringing the total received from
      warrant exercises to $11,327,143.




28




**(** **c)
      Stock option**





Pursuant
      to the 2006 long-term incentive plan, each newly-elected independent director
      receives, at the time of his or her election, a five-year option to purchase
      30,000 shares of common stock at the fair market value on the date of his or
      her
      election. The plan provides for the annual grant to each independent director
      of
      an option to purchase 5,000 shares of common stock on first trading day in
      April
      of each calendar year, at market price, subject to stockholder approval of
      the
      plan, commencing in 2007. Pursuant to the automatic grant provisions of the
      plan, in June 2006, the Company issued to its independent directors, options
      to
      purchase an aggregate of 120,000 shares of common stock at $0.65 per share,
      being the fair market value on the date of grant.





According
      to 2006 long-term incentive plan, each independent director would be granted
      stock option to acquire 5,000 shares of common stock on first trading day in
      April of each calendar year at market price. On April 1, 2007, the four
      independent directors were granted 20,000 stock options.





On
      April
      9, 2007, according to 2006 long-term inventive plan, the Company granted five
      year options to its senior managers and key management to acquire 1,180,000
      shares of common stock at $2.00 per share, being the fair market value on
      the date of grant. These options vest as to 50% of the underlying shares of
      common stock on August 3, 2007 and as to the remaining 50% on August 3,
      2008.





Option
                Number
            
            Weighted
                average exercise price
            
            Remaining
                contractual lifeOptions
                outstanding at December 31, 2006
            
            
            120,000
            
            $
            0.65
            
            
            4.5
                yearsOptions
                granted during the period
            
            
            20,000
            
            $
            2.03
            
            
            4.75
                yearsOptions
                granted during the period
            
            
            1,180,000
            
            $
            2.00
            
            
            4.75
                yearsOptions
                outstanding at June 30, 2007
            
            
            1,320,000
            
            $
            1.88
            
            
            4.73
                yearsOptions
                exercisable at June 30, 2007
            
            
            60,000
            
            $
            0.65
            
            
            3.75
                years





The
      fair
      value of options grant used for purposes of estimating the expense of the option
      grants is based on the the Black-Scholes option price model.





**21.
      Basic and Diluted Earnings Per Share**





Earnings
      per share is calculated in accordance with the Statement of Financial Accounting
      Standards No. 128 (“SFAS No. 128”), “Earnings per share.” SFAS No. 128
      superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning
      per
      share for all periods presented has been restated to reflect the adoption of
      SFAS No. 128. Basic earnings per share is based upon the weighted average number
      of shares of common stock outstanding during the period. Diluted earnings per
      share is based on the assumption that all dilutive convertible shares and stock
      options were converted or exercised. The number of shares included in
      determining diluted earnings per share is computed by applying the treasury
      stock method. Under this method, options and warrants are assumed to be
      exercised at the beginning of the period (or at the time of issuance, if later),
      with the funds obtained thereby being used to purchase common stock at the
      average market price during the period.





29


The
      breakdown for the fully diluted outstanding shares for the three and six months
      ended June 30, 2007 is as follows:





Three
                months ended June 30, 2007
            
            Six
                months ended June 30, 2007Weighted
                average common stock outstanding during period
            
            
            27,780,340
            
            
            22,670,835Common
                stock issuable upon conversion of series A preferred stock
            
            
            234,688
            
            
            234,688Common
                stock issuable pursuant to $.85 warrants
            
            
            436,901
            
            
            427,813Common
                stock issuable pursuant to $1.20 warrants
            
            
            444,188
            
            
            427,150Common
                stock issuable pursuant to $2.10 warrants
            
            
            15,531
            
            
            7,803Common
                stock issuable upon exercise of options outstanding during the
                period
            
            
            246,720
            
            
            148,750Total
                diluted outstanding shares
            
            
            29,158,368
            
            
            23,917,039





**22.
      Restatement for the comparative figure of three and six months ended June 30,
      2006**





The
      statement of operations for the three months ended June 30, 2006 did not include
      an accrual for (i) the amortization of the land use rights of $61,000, which
      is
      included in general and administrative expenses, or (ii) a know-how fee of
      $151,000 to an affiliated party, which is included in cost of revenue. Also
      the
      statement of operations’ accrual for the cost of convertible note was $159,380
      less than it should be according to EITF0027.


The
      following table summarized the result before and after restatement (in thousand
      of US dollars)




30





Three
                months ended June 30, 2006As
                previously reported
            
            RestatedNet
                revenue
            
            
            3,383
            
            
            3,383Cost
                of revenue
            
            
            (2,033
            )
            
            (2,184
            )Gross
                profit
            
            
            1,350
            
            
            1,199Operating
                expensesSelling
                expenses
            
            
            58
            
            
            58General
                and administrative expenses
            
            
            495
            
            
            557Total
                operating expenses
            
            
            553
            
            
            615Income
                from operations
            
            
            797
            
            
            584Other
                income (expenses)Other
                non-operating income
            
            
            7
            
            
            7Interest
                expense
            
            
            (356
            )
            
            (203
            )Other
                expenses
            
            
            -
            
            
            -Other
                income (Loss)
            
            
            (349
            )
            
            (196
            )Income
                (loss) before income taxes
            
            
            448
            
            
            388Income
                tax
            
            
            (240
            )
            
            (240
            )Income
                (loss) before minority interest
            
            
            208
            
            
            148Minority
                interest
            
            
            (11
            )
            
            (11
            )Net
                income
            
            
            197
            
            
            137Earnings
                per share -basic and diluted
            
            
            0.01
            
            
            0.01Weighted
                average shares outstanding- basic
            
            
            14,366,411
            
            
            14,366,411




31





Six
                months ended June 30, 2006As
                previously reported
            
            RestatedNet
                revenue
            
            
            5,883
            
            
            5,883Cost
                of revenue
            
            
            (3,278
            )
            
            (3,580
            )Gross
                profit
            
            
            2,605
            
            
            2,303Operating
                expensesSelling
                expenses
            
            
            122
            
            
            122General
                and administrative expenses
            
            
            760
            
            
            883Total
                operating expenses
            
            
            882
            
            
            1,005Income
                from operations
            
            
            1,723
            
            
            1,298Other
                income (expenses)Other
                non-operating income
            
            
            9
            
            
            9Interest
                expense
            
            
            (398
            )
            
            (245
            )Other
                expenses
            
            
            (3
            )
            
            (3
            )Other
                income (loss) net
            
            
            (392
            )
            
            (239
            )Income
                (loss) before income taxes
            
            
            1,331
            
            
            1,059Income
                tax
            
            
            (553
            )
            
            (553
            )Income
                (loss) before minority interest
            
            
            778
            
            
            506Minority
                interest
            
            
            (33
            )
            
            (33
            )Net
                income
            
            
            745
            
            
            473Earnings
                per share -basic and diluted
            
            
            0.05
            
            
            0.03Weighted
                average shares outstanding- basic
            
            
            14,306,730
            
            
            14,306,730





**23.
      Commitments and Contingencies**




(1)
      Legal
      Proceedings - The Company is not currently a party to any material threatened
      or
      pending legal proceedings.




(2)
      Commitments - The Company has the following material contractual obligations
      and
      capital expenditure commitments:




(a)
      The
      Company has a purchase order with Fornovo Gas S.r.l of Italy for the purchase
      of
      36 compressor units and 60 high capacity dispensers for a total purchase price
      of $9.6 million.





32


(b)
      The
      Company has a purchase order with LOVATO for the purchase of fittings of
      conversion kits with the total price of $476,000.





(c)
      The
      Company has a purchase order with NK Co., Ltd (a Korea company) for the purchase
      of steel bottles with total price of $1.14million.





At
      June
      30, 2007, the Company has paid a total of $3,878,802 for the purchase, and
      $1,551,529 goods have been delivered to the Company for the above mentioned
      purchase orders in paragraphs (a), (b) and (c) .




(d)
      During the 2 nd quarter,
      Wuhan Sinoenergy, the subsidiary of the Company, has leased four lands in Wuhan
      City for its CNG station. The lease terms are from 10 year to 20 years with
      annual rental fee of a total of $100,000. Wuhan Sinoenergy has purchased a
      land
      use right for land located in Wuhan City for its CNG station at a price of
      $106,000. As of reporting date, $36,842 has been paid.




**24.
      Retirement Benefits**





The
      full-time employees of the Company are entitled to welfare benefits, including
      medical care, labor injury insurance 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 $24,164 and $22,370 for the three months ended June 30, 2007 and
      2006, 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.




**25.
      Subsequent Events**




On
      April
      20, 2007, the Company and Green Fuel signed equity purchase agreement, pursuant
      to which the Company will purchase the 45% equity of Anhui Gather owned by
      Green
      Fuel for the price of $2,750,000 including $344,330 register capital paid by
      Green Fuel and $500,000 for the cost to obtain 200 million cubic meters natural
      gas quota from Sinopec. As of June 30, 2007, the Company had paid $844,330
      to
      Green Fuel. The Company is to pay the remaining $1,905,670 to Anhui Gagher
      according to requirement of PRC government. On July 4, 2007, Anhui Gather
      received PRC government approval for the transfer of the stock interest and
      its
      business license was updated accordingly.





Anhui
      Gather was incorporated on March 23, 2007, with Hong Kong China New Energy
      Development Investment Co. Ltd owning 55% equity and Green Fuel owning 45%
      equity. The business scope was to construct and operate a super-large CNG mother
      station with expected annual processing capacity of 100-300 million cubic
      meters. As of August 10, 2007, Anhui Gather is in development stage and has
      not
      yet commenced operations.




33




Item
      2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operation





*The
      following discussion of the results of our operations and financial condition
      should be read in conjunction with our financial statements and the related
      notes, which appear elsewhere in this quarterly report. The following discussion
      includes forward-looking statements. For a discussion of important factors
      that
      could cause actual results to differ from results discussed in the
      forward-looking statements, see “Forward Looking Statements.”*




**Forward-Looking
      Statements**





Statements
      in this 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 annual
      report, including the risks described under “Risk Factors,” and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” in our
      annual report on Form 10-KSB and in other filings we make with the SEC. 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 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
      construction 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.




34


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, in year 2006, we derived $2.8 million, or 23% of our revenue, from
      CNG
      station construction technical consulting service to one customer, Sino-petrol
      Xinxing Company. In of the first six months of 2007 we did not generate any
      revenue from CNG station construction consulting services.




Commencing
      in 2006, we began to construct CNG stations and we intend to operate CNG
      stations. This aspect of our business is different from our other business
      since
      we will be operating CNG filling stations. The business of operating CNG
      stations requires 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 by central government and municipal
      government. The operation of CNG stations is reported as a separate
      segment.





During
      2007, we have entered into two agreements to form joint ventures for the
      operation natural gas process plants. We have a majority interest in one of
      these two ventures and a minority interest in another. At June 30, 2007, our
      total commitments under these agreements was approximately $5.0 million, of
      which we had paid a total of $750,000. None of these CNG stations are presently
      operating. These two companies are in the early construction stage. We also
      have
      contracted for the purchase of natural gas which is to be delivered through
      a
      pipeline which is presently under construction and which is expected to be
      completed in or about 2009. These contracts do not have specific delivery
      quantities or prices, all of which are to be determined at a later
      date.




In
      the
      beginning of 2007, we develop the business of installing and sales of CNG
      vehicle conversion kits to OEM and after market vehicle maintenance plants.
      That
      business begans to generate revenue in the second quarter of 2007. In
      March
      2007, we purchased a 60% interest in Jiaxing
      Lixun Automotive Electronic Co, Ltd (“Lixun”) from its stockholders for
      $390,000. Lixun designs and manufactures electric control devices for alternative
      fuel, such as compressed natural gas and liquefied petroleum gas vehicles,
      as
      well as a full range of electric devices, such as computer controllers,
      conversion switches, spark advancers, tolerance sensors and emulators for use
      in
      multi-powered vehicles. The
      business of manufacturing of electronic part of vehicle conversion kits as
      well
      as produce conversion kit is reported as a separate segment in the second
      quarter of 2007.




35


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




·
            the
                design of CNG station and construction plans, construction of CNG
                stations
                and installation of CNG station equipment and related systems;
                and





·
            CNG
                vehicle and gas station equipment manufacture;




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





The
      gross
      margin for CNG gas stations technical consulting service was high, as a result
      of our know-how in CNG system design and the absence of significant competition.
      Because our company’s emergency into CNG filling station business, we did not
      receive any CNG station construction service order in the six months ended
      June
      30, 2007.





The
      pressure container, CNG vehicle and gas station equipment manufacture business,
      a major raw material for our manufacturing is steel and steel tube supply.
      We
      purchase steel plate from a Chinese domestic manufacturer, and we believe that
      alternative suppliers are available. We had purchased steel bottles, a key
      raw
      material for CNG truck trailers, from an Italian supplier, so any interruption
      in our supply of bottles can materially affect our ability to operate
      profitably. Accordingly from May 2007, we also began trying to purchase steel
      tubes from PRC domestic market and consigned the bottles processing to a Korea
      company.




Our
      functional currency is Renminbi (“RMB”), which is the currency of the PRC, and
      our reporting currency is United States dollars. In addition, our purchases
      from
      our Italian supplier are in Euros. When
      we
      discuss the amount of our future obligations, we convert RMB or Euros to dollars
      at the current exchange rate. However, since the payment will be made in the
      future, the amount paid in United States dollars may be different from the
      amount set forth in this report as a result of fluctuations in the currency
      rates.





**Results
      of Operations**




In
      the
      second quarter of 2007, we had four business segments, and in the same period
      of
      2006, we had two business segments. The third segment -- the construction of
      CNG
      stations to be operated by us and the operation of those CNG stations -- is
      in
      the development stage. The fourth segment -- CNG conversion kits began to
      generate revenue in the second quarter.




36


**(i)
      Non-standard pressure container business:**





Non-standard
      equipment and pressure container business has been carried over from the
      predecessor since Sinogas was set up. 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.




·
            in
                the metallurgy and electricity generation
                industries.




·
            in
                the food and brewery
                industries




·
            various
                types of non-standard containers





**(ii)
      CNG storage, transportation products and CNG station service construction (“CNG
      Station Facilities and Construction”)**





CNG
      station construction business represents:




(1)
      CNG
      vehicle and gas station equipment manufacture and installation, which include
      the following products:





·
            CNG
                trailer




·
            CNG
                deposited system for gas station usage




·
            CNG
                compressor skid




·
            CNG
                dispenser (retail measurement
                system)




These
      services were provided by us for other companies that operate CNG
      stations.





(2)
      CNG
      station construction service business




It
      includes the design of CNG station 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 China, by utilizing
      its know how and specialty engineering team in this area and early entering
      into
      the market, the Company enjoys a very high profit margin in this segment.




**(iii)
      CNG station operation**




In
      2006,
      we entered the CNG station business, which involves the design, construction
      and
      equipping of CNG stations and the operation of those stations.




37


**(iv)
      Vehicle fuel conversion equipment**




·
            CNG
                vehicle conversion kits manufacturing and sale; and electric
                control devices foralternative
                fuel manufacturing





**Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006**





Three
                months ended June 30, 2007
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            Vehicle
                conversion kits
            
            TotalNet
                revenue
            
            $
            1,236
            
            $
            2,345
            
            
            -
            
            $
            2,600
            
            $
            6,181Cost
                of revenues
            
            
            615
            
            
            672
            
            
            -
            
            
            1,685
            
            
            2,972Gross
                profit
            
            
            621
            
            
            1,673
            
            
            -
            
            
            915
            
            
            3,209Gross
                margin
            
            
            50
            %
            
            71
            %
            
            
            
            
            35
            %
            
            52
            %Operating
                expenses:Selling
                expenses
            
            $
            22
            
            $
            10
            
            $
            7
            
            $
            26
            
            $
            65General
                and administrative expenses
            
            
            214
            
            
            327
            
            
            209
            
            
            178
            
            
            928Total
                operating expense
            
            
            236
            
            
            337
            
            
            216
            
            
            204
            
            
            993Income
                (loss) from operations
            
            $
            385
            
            $
            1,336
            
            
            ($
                216
            )
            $
            711
            
            $
            2,216




Three
                months ended June 30, 2006
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            TotalNet
                revenue
            
            $
            1,997
            
            $
            1,386
            
            $
            3,383Cost
                of revenues
            
            
            1,657
            
            
            527
            
            
            2,184Gross
                profit
            
            
            340
            
            
            859
            
            
            1,199Gross
                margin
            
            
            17
            %
            
            62
            %
            
            35
            %Operating
                expenses:Selling
                expenses
            
            $
            54
            
            $
            4
            
            $
            58General
                and administrative expenses
            
            
            185
            
            
            372
            
            
            557Total
                operating expense
            
            
            239
            
            
            376
            
            
            615Income
                (loss) from operations
            
            $
            101
            
            $
            483
            
            $
            584





*Net
      Revenue.* Net
      revenue for three months ended June 30, 2007 (the “June 2007 quarter”) was
      approximately $6.2 million, a 82% increase from the net revenue of approximately
      $3.4 million for the three months ended June 30, 2006 (the “June 2006 quarter”).
      This increase results from our new developed vehicle conversion kit business,
      which generated revenue of $2.6 million, or 42% of sales of June 2007 quarter,
      and an increase of $959,000, or 69%, in sales from CNG station facilities and
      construction also increased, which were offset by a decline of $761,000, or
      38%,
      from pressure container sales. The decrease of pressure containers is due to
      product kind adjustment begin in the first quarter of 2007, during which some
      high value products were manufactured with on relatively longer production
      cycle, resulting in lower sales during the quarter. The increase in our revenue
      from CNG station facilities and construction reflected the effects of our
      efforts to develop this business with the additional funds that were available
      from our June 2006 private placement.




38


*Cost
      of Revenue.* The cost
      of revenue for June 2007 quarter was approximately $3 million compared with
      the
      $2.1 million in the June 2006 quarter, a 34% increase. The cost increase trend
      is lower than the net revenue increase, which results a gross margin of total
      business increased from the 35% of June 2006 quarter to 52% of June 2007
      quarter. The overall gross margin increase is the result of each segment’s
      margin increase




·
            In
                the beginning of year 2007, we began and completed the restructuring
                for
                the product line of pressure containers which make our manufacturing
                more
                cost saving, and then together with some other ordinary orders, we
                obtained two new kind orders with higher margin. One of the new kind
                orders is for a bio-diesel facilities manufacturing which we recorded
                revenue and cost according to completion percentage due to not fulfilled
                as of June 30, 3007, and another for pressure container equipment
                installation service to a third party’s under-constructed plant, which has
                been completed ; and





·
            The
                CNG station facilities and construction business:  The key raw
                material of the segment is steel bottle. We provide our CNG facilities
                manufacturing business either under the way of directly purchasing
                that
                key material by ourselves, or under the way of providing machining,
                installation and relative service to customers who provide that key
                material to us.  During the June 2007 quarter, we fulfilled all the
                orders of CNG facilities manufacturing by  providing machining,
                installation and relative service to customers who provided that
                key raw
                material, which generated a higher gross margin.  While in June 2006
                quarter, our manufacturing were under the above mentioned two ways. 
                As a result, our gross margin increased from 62% in the June 2006
                quarter
                to 71% in the June 2007 quarter.





·
            The
                gross margin for the new developed vehicle conversion kits business
                is 35%
                which is lower than the gross margins for the other
                divisions.




*Operating
      Expenses.* Operating expenses were approximately $981,000, an increase of $367,000, or
      59.7%, from the June 2006 quarter to the June 2007 quarter. The increase was
      mainly from the $330,000 cost relating to the grant to stock options to purchase
      1,380,000 shares of common stock, which is included in general and
      administrative expenses. Exclusive of this expenses, the operating expenses
      of
      June 2007 quarter keeps were consistent with June 2006 quarter, which is the
      result of cost reduction strategies we put in place.




39


*Income
      from Operations.* Income
      from operations was approximately $2.2 million for the June 2007 quarter,
      compared with approximately $585,000 in June 2006 quarter resulted from the
      above mentioned reasons.





*Interest
      Expense* .
      In the
      June 2006 quarter, the interest expenses was about $203,000, of which includes
      $159,000 non-monetary GAAP accrual for convertible notes issued in June 2006..
      So the actual interest expense from loan or borrowing is about $44,000 which
      is
      $79,000 less than the interest expense of $123,000 in June 2007 quarter The
      increase was the result of $1 million more short term bank loan incurred in
      June
      2007 quarter connection with the expansion of our business, particularly the
      development of the CNG service station business as well as the interest rate
      increase.




*Income
      Taxes.* As
      Sinogas, Yuhan, and Wuhan Sinoenergy have received an exemption from corporate
      income tax separately in Septemter of 2006 and in the beginning of 2007, so
      there is no any income tax in 2007. The income tax expenses for current quarter
      mainly represent income tax accrued by the newly acquired Lixun.





*Net
      income* .
      As a
      result of the foregoing, we had net income of $1.9 million, or $0.07 per share
      (basic and diluted), for the June 2007 quarter as compared with net income
      of
      $137,000, or $0.01 per share (basic and diluted) for the June 2006 quarter.





**Six
      months ended June 30, 2007 compared to six months ended June 30,
      2006**


Six
                months ended June 30, 2007
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            Vehicle
                conversion kits
            
            TotalNet
                revenue
            
            $
            2,019
            
            $
            4,188
            
            
            -
            
            $
            2,600
            
            $
            8,807Cost
                of revenues
            
            
            1,229
            
            
            1,649
            
            
            -
            
            
            1,685
            
            
            4,563Gross
                profit
            
            
            790
            
            
            2,539
            
            
            -
            
            
            915
            
            
            4,244Gross
                margin
            
            
            39
            %
            
            61
            %
            
            
            
            
            35
            %
            
            48
            %Operating
                expenses:Selling
                expenses
            
            $
            27
            
            $
            45
            
            $
            7
            
            $
            26
            
            $
            105General
                and administrative expenses
            
            
            294
            
            
            563
            
            
            475
            
            
            178
            
            
            1,510Total
                operating expense
            
            
            321
            
            
            608
            
            
            482
            
            
            204
            
            
            1,615Income
                (loss) from operations
            
            $
            469
            
            $
            1,931
            
            
            ($482
            )
            $
            711
            
            $
            2,629




40


Six
                months ended June 30, 2006
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            TotalNet
                revenue
            
            $
            3,165
            
            $
            2,718
            
            
            -
            
            $
            5,883Cost
                of revenues
            
            
            2,586
            
            
            994
            
            
            -
            
            
            3,580Gross
                profit
            
            
            579
            
            
            1,724
            
            
            -
            
            
            2,303Gross
                margin
            
            
            18
            %
            
            63
            %
            
            
            
            
            39
            %Operating
                expenses:Selling
                expenses
            
            $
            94
            
            $
            28
            
            
            -
            
            $
            122General
                and administrative expenses
            
            
            305
            
            
            578
            
            
            -
            
            
            883Total
                operating expense
            
            
            399
            
            
            606
            
            
            -
            
            
            1,005Income
                (loss) from operations
            
            $
            180
            
            $
            1,118
            
            
            -
            
            $
            1,298





*Net
      Revenue.* Net
      revenue for six months ended June 30, 2007 (“the first half year of 2007”) was
      approximately $8.8 million, a 50% increase from the net revenue of approximately
      $5.9 million for the six months ended June 30, 2006 (“the first half year of
      2006”). This increase results from our new developed vehicle conversion kit
      business, which generated revenue of $2.6 million, or 29.5 % of sales in the
      first half of 2007, and an increase of $1,5 million, or 54 %, in sales from
      CNG
      station facilities and construction also increased, which were offset by a
      decline of $1.1 million or 36.2%, from pressure container sales. The decrease
      is
      sales of pressure containers results from a reconstruction of our pressure
      container product line in the first quarter of 2007, when our sales from this
      segment were less than $800,000.




*Cost
      of Revenue.* The cost
      of revenue for the first half year of 2007 was approximately $4.7 million
      compared with the $3.6 million in the same period of 2006, a 30% increase.
      The
      cost increase trend is lower than the net revenue increase, which results a
      gross margin of total business increased from the 39% of the first half of
      2006
      to 48% of the same period of 2007. The overall gross margin increase is the
      result of the following reasons




·
            The
                Non-standard pressure containers business: In the first half year
                of 2007,
                we began and completed the restructuring for the product line of
                pressure
                containers which make our manufacturing more cost saving, and then
                together with some other ordinary orders, we obtained two new kind
                orders
                with higher margin. One of the new kind orders is for a bio-diesel
                facilities manufacturing which we recorded revenue and cost according
                to
                completion percentage due to not fulfilled as of June 30, 3007, and
                another for pressure container equipment installation service to
                a third
                party’s under-constructed plant, which has been completed. So the gross
                margin increased from 18% of the first half year of 2006 to 39% in
                the
                same period of 2007; and





·
            The
                CNG station facilities and construction business: In the first half
                year
                of 2006, the CNG station building consulting service generated $2.1
                million revenue with profit margin of 74%, which was net of by
                the 30% margin of CNG facilities manufacturing business. In the first
                half year of 2007, we did not obtain consulting service contacts
                since we
                were entering the CNG filing station business. However, the
                gross margin for CNG station facilities increased from 30% in
                the first half of 2006 to 61% in the first half of 2007 as the result
                of we fulfilled all the orders of CNG facilities manufacturing by
                providing machining, installation and relative service to customers
                who
                provided steel bottles, key raw materials of CNG facilities, to us,
                which
                generated a higher gross margin.





41


·
            The
                gross margin for the new developed vehicle conversion kits business
                is 35%
                which is lower than the overall margin of the first half year of
                2006,
                which resulted in an overall decline in gross margin in the first
                half
                year of 2007 compared with the first half of 2006.




*Operating
      Expenses.* Operating expenses were approximately $1.6 million in the first half year of
      2007, an increase of $610,000, or 60.7%, comparing with the same period of
      2007.
      The increase was mainly from the $345,000 cost relating to the grant to stock
      options to purchase 1,380,000 shares of common stock, which is included in
      general and administrative expenses and $37,000 cost accrued for warrants issued
      for IR services in February 2007. If we don’t consider that adjusted non-money
      expenses, operating expenses increased about $228,000 half year on half year.
      In
      the half year of 2007, comparing with the sales increase trend, the operating
      expenses increasing is lower, which is the result of cost saving strategies
      we
      put in place in Yuhan and Sinogas, which results G&A expenses decreased a
      lot.





*Income
      from Operations.* Income
      from operations was approximately $2.6 million for the first half year of 2007,
      compared with approximately $1.2 million in the same period of 2006 resulted
      from the above mentioned reasons.





*Interest
      Expense* .
      In the
      first half year of 2006, the interest expense was about $245,000, of which
      includes $159,000 non-monetary GAAP accrual for convertible notes issued in
      June
      2006. Exclude that non-monetary GAAP adjustment, the interest expenses was
      about
      $86,000, while the interest expense in the same period of 2007 is $178,000.
      This
      increase resulted from an increase of $1.63 million short term bank loan which
      we incurred in connection with the expansion of our business, particularly
      the
      development of the CNG service station business as well as the interest rate
      increase as well as loan interest rate increase.





*Income
      Taxes.* As
      Sinogas, Yuhan, and Wuhan Sinoenergy have received an exemption from corporate
      income tax separately in Septemter of 2006 and in the beginning of 2007, so
      there is no any income tax accrued in the first half year of 2007. The income
      tax expenses for the six months end June 30, 2007 was mainly represent income
      tax accrued by the newly acquired Lixun, of which we are applying tax holiday.





42


*Net
      income* .
      As a
      result of the foregoing, we had net income of $2.3 million, or $0.10per share
      (basic and diluted), for the first half of 2007 as compared with net income
      of
      $473,000, or $ 0.03 per share (basic and diluted) for the first half of 2006.





**Liquidity
      and Capital Resources**




At
      June
      30, 2007, we had cash of approximately $4,304,000, an increase of approximately
      $3,716,000 from December 31, 2006. At June 30, 2007, we had working capital
      of
      approximately $5,256,000 and stockholders’ equity of approximately $30.2
      million, compared with working capital of approximately $300,000 and
      stockholders’ equity of approximately $16.0 million at December 31, 2006. The
      increase in cash, working capital and stockholders’ equity results largely from
      the $11.3 million which we received from the exercise of warrants during the
      first half year of 2007.




On
      March
      23, 2007, we purchased a 60% interest in Lixun
      for
      approximately $390,000. Lixun designs and manufactures electric control devices
      for alternative
      fuel, such as compressed natural gas and liquefied petroleum gas vehicles,
      as
      well as a full range of electric devices, such as computer controllers,
      conversion switches, spark advancers, tolerance sensors and emulators for use
      in
      multi-powered vehicles. These operations has been consolidated with our
      operations commencing April 1, 2007.





When
      we
      formed Yuhan with Kantai, we had a 55% interest in Yuhan. We have since acquired
      an additional 35% for $1,500,000, of which, at June 30, 2007, we had paid $1.2
      million and owed $300,000. **** We
      have the
      right
      to acquire the remaining 10% interest in Yuhan during the first six months
      of
      2008 for approximately $640,000.





On
      February 1, 2007, the Company and Hong Kong China New Energy Development
      Investment Co. Ltd (“New Energy”), signed a cooperation agreement relating to an
      investment in the construction and operation of CNG stations with the Huangmei
      County government. Pursuant to the agreement, New Energy and the Company will
      form a natural gas company named Hubei Gather Eenergy Gas Co., Ltd (“Hubei
      Gather”) in Huangmei to construct and operate a super-large CNG mother station
      with expected annual processing capacity of 100-300 million cubic meters in
      the
      Huangmei region. The registered capital is $5 million of which Sinoenergy
      Holding Ltd will contribute $2,750,000 and New Energy will contribute $2,
      250,000. On March 23, 2007, Hubei Gather received a business license. The term
      of the business of Hubei Gather is from March 23, 2007 to March 22, 2027. As
      of
      June 30, 2007, $750,000 has been invested in Hubei Gather by the Company and
      New
      Energy.




On
      April
      20, 2007, the Company and Shanghai CNPC Enterprise Group (CNPC Enterprise)
      signed equity purchase agreement, pursuant to which the Company will purchase
      the 70% of Xuancheng Sinoenergy Gas owned by CNPC Enterprises for $1,772,700.
      Xuancheng Sinoenergy Gas was incorporated o n
      March
      26, 2007, of which the Company owns 30% and CNPC Enterprise is the 70% equity
      owner. Xuancheng Sinoenergy is in the development stage and has not commenced
      operations. As of the date
      of this report, the transaction has not be completed and the Company has paid
      to
      CNPC Enterprise $722,211 on account.





43


On
      April
      20, 2007, the Company and Tianjin Port Free Trade Zone Green Fuel Equipment
      Corporation (Green Fuel) signed equity purchase agreement, pursuant to which
      the
      Company will purchase the 45% equity of Anhui Gather owned by Green Fuel for
      $2,750,000 including $344,330 register capital paid by Green Fuel and $500,000
      for the cost to obtain 200 million cubic meters natural gas quota from Sinopec.
      As of June 30, 2007, the Company has paid $844,330 to Green Fuel. The Company
      is
      to pay the remaining unpaid registered capital of $1,905,670 to Anhui Gagher
      according to requirement of PRC government. On July 4, 2007, Anhui Gather
      received PRC government approval for the transfer of the stock to the Company,
      and its business license was updated accordingly.





Anhui
      Gather was incorporated on March 23, 2007, with Hong Kong China New Energy
      Development Investment Co. Ltd owning 55% equity and Green Fuel owning 45%
      equity. The business scope was to construct and operate a super-large CNG mother
      station with expected annual processing capacity of 100-300 million cubic
      meters. As of the date of this report, Anhui Gather is in the development stage
      and had not commenced operations.




The
      Company has purchased the land use right for the real property on which the
      Company’s facilities are located from Beijing Sanhuan. The initial purchase
      price was $12.3 million. Based on increased expenses incurred by Beijing Sanhuan
      as well as the increased value of the land, the price was increased to $18.6
      million. The increase is subject to the condition that Beijing Sanhuan will
      provide a special purpose audit to support the increased cost and the Company
      will obtain a report on the land use valuation. The Company has lent Beijing
      Sanhuan $2.1 million, which will be offset by the Company’s obligation to pay
      the additional purchase price.





In
      addition to our funding obligations described above, we have the following
      commitments for capital expenditures:





(a)
      The
      Company has a purchase order with Fornovo Gas S.r.l of Italy for the purchase
      of
      36 compressor units and 60 high capacity dispensers for a total purchase price
      of $9.6 million.





(b)
      The
      Company has a purchase order with LOVATO for the purchase of fittings of
      conversion kits with the total price of $476,000.





44


(c)
      The
      Company has a purchase order with NK Co., Ltd (a Korea company) for the purchase
      of steel bottles with total price of $1,14million.





At
      June
      30, 2007, the Company has paid a total of $3,878,802 for the purchase, and
      $1,551,529 goods have been delivered to the Company for the above mentioned
      purchase orders in paragraphs (a), (b) and (c) .




(d)
      During the second quarter of 2007, Wuhan Sinoenergy, the subsidiary of the
      Company, has leased four parcels of land from other land owners in Wuhan City
      for its CNG stations building. The lease terms are from 10 year to 20 years
      with
      annual rental fee of $100,000 totally; Also Wuhan Sinoenergy has purchased
      a
      land located in Wuhan city for its CNG station with the price of $106,000.
      As of
      reporting date, $36,842 has been paid.




On
      April
      30, 2007, we received a $2,585,000 short term loan from Bank of Communication
      Qingdao 1st Branch (Qingdao Communication Bank). The loan bears the normal
      interest rate prevailed by China People Bank of 6.39%, and will be adjusted
      accordingly. We used the proceeds of this loan to pay in full our obligations
      under our $1,900,000 loan from 1 ST Branch,
      and we made a payment of $462,900 on account of our loan from Shenzhen
      Development Bank, leaving a balance due of approximately $830,000.




**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 and other
      receivables, the valuation and costing of inventory, depreciation of property,
      plant and equipment, impairment of long-lived assets, 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 of raw materials, work in process, finished goods and low value
      consumable articles and 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 as well as license fees payable to Beijing
      Sanhuan. Inventory costs do not exceed net realizable value.




45


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 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.





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.





Revenue
      Recognition - We recognize 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. We recognize
      product sales generally at the time the product is shipped.





Foreign
      Currency Transactions -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 stockholders’ 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 for 2006.




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.





46


Stock-Based
      Compensation - We grant stock options to employees and stock options or warrants
      to non-employees in non-capital raising transactions for services and for
      financing costs. We have adopted Statement of Financial Accounting Standards
      (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation,” which establishes
      a fair value method of accounting for stock-based compensation plans. In
      accordance with SFAS No. 123R, the cost of stock options and warrants issued
      to
      employees and non-employees is measured at the grant date based on the fair
      value. The fair value is determined using the Black-Scholes option pricing
      model. The resulting amount is charged to expense on the straight-line basis
      over the period in which the Company expects to receive benefit, which is
      generally the vesting period.





**New
      Accounting Pronouncements**





In
      May
      2005, The FASB issued Statement No. 154, “Accounting Changes and Error
      Corrections,” a replacement of APB Opinion 20, “Accounting Changes” and FASB
      Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.”
This statement changes the requirements for the accounting for and reporting
      of
      a change in accounting principle. APB Opinion 20 previously required that most
      voluntary changes in accounting principles be recognized by including in net
      income of the period of the change the cumulative effect of changing to the
      new
      accounting principal. FASB Statement No. 154 requires retrospective application
      to prior periods’ financial statements of changes in accounting principle,
      unless it is impracticable to determine either the period specific effects
      or
      the cumulative effect of the change. This statement is effective for accounting
      changes and corrections of errors made in fiscal periods that begin after
      December 15, 2005. Management does not anticipate this statement will impact
      the
      Company’s consolidated financial position or consolidated results of operations
      and cash flows.





In
      February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid
      Financial Instruments,” an amendment of FASB Statement No.133, “Accounting for
      Derivative Instruments and Hedging Activities” and FASB Statement No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities.” This Statement permits fair value re measurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation; clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of Statement No. 133, establishes
      a
      requirement to evaluate interests in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation; clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives and amends Statement 140 to eliminate the prohibition on a
      qualifying special purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. Management does not anticipate this Statement will impact the
      Company’s consolidated financial position or consolidated results of operations
      and cash flows.





47


In
      March
      2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial
      Assets,” an amendment of FASB Statement No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” This
      Statement amends Statement No. 140 with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. Management does not
      anticipate this Statement will impact the Company’s consolidated financial
      position or consolidated results of operations and cash flows.





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a
      framework for measuring fair value, and expands disclosures about fair value
      measurements. SFAS 157 is effective as of the beginning of the first fiscal
      year
      that begins after November 15, 2007. As such, the Company is required to adopt
      these provisions at the beginning of the fiscal year ended December 31, 2008.
      The Company is currently evaluating the impact of SFAS 157 on its consolidated
      financial statements.





In
      September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans,” which amended several other
      FASB Statements. SFAS 158 requires recognition in the balance sheet of the
      funded status of defined benefit pension and other postretirement benefit plans,
      and the recognition in other comprehensive income of unrecognized gains or
      losses and prior service costs or credits arising during the period.
      Additionally, SFAS 158 requires the measurement date for plan assets and
      liabilities to coincide with sponsor’s year-end. The Company has adopted a
      defined contribution plan as required in the PRC, and, accordingly we do not
      believe that the adoption of SFAS 158 will have any impact on us.





The
      FASB
      issued FASB Interpretation No.(“FIN”) 48, “Accounting for Uncertainty in Income
      Taxes,” in July 2006 .This interpretation establishes new standards for the
      financial statement recognition, measurement and disclosure of uncertain tax
      positions taken or expected to be taken in income tax returns. Then new rules
      will be effective for Sinoenergy in the first quarter of 2008. We continue
      to
      evaluate the impact of this interpretation, and do not anticipate its adoption
      will have a material effect on our financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108,
“Considering the Effects of Prior Year Misstatements when quantifying
      misstatements in Current Year Financial Statements,” which eliminated the
      diversity in practice surrounding the quantification and evaluation of financial
      statement errors. The guidance outlined in SAB 108 is effective for Sinoenergy
      and is consistent with our historical practices for assessing such matters
      when
      circumstances have required such an evaluation. Accordingly, we do not believe
      that adoption of SAB 108 will have any impact on us.





In
      February 2007, the FASB issued SFAX 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities-Including an Amendment of SFAS 115,” which
      allows for the option to measure financial instruments and certain other items
      at fair value. Unrealized gains and losses on items for which the fair value
      option has been elected are reported in earnings. We do not presently have
      any
      financial assets or liabilities that we would elect to measure at fair value,
      and therefore we expect this standard will have no impact on our financial
      statements.





48


**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
      6.**  **Exhibits
      and Reports on Form 8-K**





31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act




31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act




32.1
            Certification
                of Chief Executive and Financial Officer pursuant to Section 906
                of the
                Sarbanes-Oxley Act




49


**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.




SINOENERGY
                CORPORATION.
                (Registrant)Dated:
              August 10 , 2007
            
            /s/ Bo HuangBo
              Huang, Chief Executive
              Officer


Dated:
                August 10 , 2007
              
              /s/ Qiong (Laby) WuQiong
                (Laby) Wu, Chief Financial
                Officer




50