**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





**March
      31, 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.)





234-5149
                Country Hills Blvd. NW; Suite 429, Calgary, Alberta, Canada T3A
                5K8(Address
                of principal executive offices)Issuer’s
                telephone number: (832) 274-3766








Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act during the past 12 months, (or for such shorter
      period that the Registrant was required to file such reports), and (2) has
      been
      subject to such filing requirements for the past 90 days. Yes [X]  No
      [
 ]





Indicate
      by checkmark whether the Registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act). Yes [  ]  No
      [X]





As
      of May
      16, 2007, there were 29,435,684 shares
      of
      the common stock, par value $.001 per share, outstanding.





Transitional
      Small Business Disclosure Format (check one): Yes [  ]  No
      [X]








**SINOENERGY
      CORPORATION AND SUBSIDIARIES**





PagePart
                I. Financial InformationItem
                1. Consolidated Financial StatementsConsolidated
                balance sheets at March 31, 2007 (unaudited) and December 31,
                2006
            2Unaudited
                consolidated statements of operations for the three months ended
                March 31,
                2007 and 2006
            3Unaudited
                consolidated statement of stockholders’ equity for the three months ended
                March 31, 2007
            4Unaudited
                consolidated statements of cash flows for the three months ended
                March 31,
                2007 and 2006
            5Notes
                to consolidated financial statements
            6Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            33Item
                3. Controls and Procedures
            44Part
                II. Other Information
            45Item
                6. Exhibits
            45











**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Balance Sheets**


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





March
                31, 2007
            
            December
                31, 2006**ASSETS**
            
            Note(s)
            
            Unaudited
            
            AuditedCURRENT
                ASSETSCash
            
            
            
            
            
            2,493
            
            
            588Accounts
                receivable (net)
            
            
            4-Related
                party
            
            
            
            
            
            646
            
            
            594-Third
                party
            
            
            
            
            
            2,457
            
            
            3,777Other
                receivables
            
            
            5-Related
                party
            
            
            
            
            
            6,470
            
            
            1,220-Third
                party
            
            
            
            
            
            1,308
            
            
            1,176Deposits
                and prepayments-Third party
            
            
            6
            
            
            4,760
            
            
            3,187Deferred
                expenses
            
            
            
            
            
            -
            
            
            4Inventories
            
            
            7
            
            
            829
            
            
            937TOTAL
                CURRENT ASSETS
            
            
            
            
            
            18,963
            
            
            11,483LONG
                TERM ASSETSLong
                term investment
            
            
            8
            
            
            390Property,
                plant and equipment (net)
            
            
            9
            
            
            3,629
            
            
            3,556Intangible
                assets
            
            
            10
            
            
            12,044
            
            
            12,114Goodwill
            
            
            11
            
            
            676
            
            
            676Long
                term deferred tax asset
            
            
            
            
            
            4
            
            
            4TOTAL
                ASSETS
            
            
            
            
            
            35,706
            
            
            27,833


**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESShort
                term bank loan
            
            
            12
            
            
            3,879
            
            
            3,160Accounts
                payable-
                Related party
            
            
            
            
            
            452
            
            
            452-
                Third party
            
            
            
            
            
            370
            
            
            211Other
                payables
            
            
            13-
                Related party
            
            
            
            
            
            4,878
            
            
            4,073-
                Third party
            
            
            
            
            
            1,137
            
            
            2,359Accrued
                expenses
            
            
            
            
            
            238
            
            
            176Warranty
                accrual
            
            
            
            
            
            46
            
            
            40Advances
                from customers
            
            
            14
            
            
            1,823
            
            
            701Income
                taxes payable
            
            
            15
            
            
            7
            
            
            7TOTAL
                CURRENT LIABILITIES
            
            
            
            
            
            12,830
            
            
            11,179Minority
                interests
            
            
            16
            
            
            619
            
            
            614Commitments
            
            
            23STOCKHOLDERS’
                EQUITYCommon
                stock-$.001 Par Value;
              Issued
                and Outstanding- 21,386,115 shares at March 31, 2007, 14,636,472
                shares at
                December 31, 2006
            
            
            20
            
            
            21
            
            
            15Series
                A convertible preferred stock-$0.001 Par Value - 5,357,765 shares
                at March
                31, 2007, 5,692,307 shares at December 31, 2006
            
            
            20
            
            
            5
            
            
            6Additional
                paid-in capital
            
            
            20
            
            
            15,777
            
            
            9,935Capital
                surplus
            
            
            
            
            
            20
            
            
            20Statutory
                surplus reserve fund
            
            
            18
            
            
            1,140
            
            
            1,140Retained
                earnings
            
            
            
            
            
            4,926
            
            
            4,576Accumulated
                other comprehensive income
            
            
            
            
            
            368
            
            
            348Total
                stockholders’ equity
            
            
            
            
            
            22,257
            
            
            16,040TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            
            
            
            
            35,706
            
            
            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)**








Note(s)
            
            Three
                Months Ended March 31,2007
            
            2006
                (Restated)NET
                REVENUE
            
            
            19
            
            
            2,626
            
            
            2,500COST
                OF REVENUE
            
            
            
            
            
            (1,591
            )
            
            (1,396
            )GROSS
                PROFIT
            
            
            
            
            
            1,035
            
            
            1,104OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            40
            
            
            64General
                and administrative expenses
            
            
            
            
            
            582
            
            
            326TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            622
            
            
            390INCOME
                FROM OPERATIONS
            
            
            
            
            
            413
            
            
            714OTHER
                INCOME(EXPENSES)Other
                non-operating income
            
            
            
            
            
            1
            
            
            2Interest
                expense
            
            
            
            
            
            (55
            )
            
            (42
            )Other
                expenses
            
            
            
            
            
            (4
            )
            
            (3
            )OTHER
                INCOME NET
            
            
            
            
            
            (58
            )
            
            (43
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            
            
            
            355
            
            
            671Income
                taxes
            
            
            15
            
            
            -
            
            
            313INCOME
                BEFORE MINORITY INTEREST
            
            
            
            
            
            355
            
            
            358Minority
                interest
            
            
            
            
            
            (5
            )
            
            (22
            )NET
                INCOME
            
            
            
            
            
            350
            
            
            336Other
                comprehensive incomeForeign
                currency translation adjustments
            
            
            
            
            
            20
            
            
            -COMPREHENSIVE
                INCOME
            
            
            
            
            
            370
            
            
            336Earnings
                Per Share -Basic
            
            
            21
            
            
            0.02
            
            
            0.02Weighted
                Average Shares Outstanding- Basic
            
            
            21
            
            
            17,561
            
            
            14,216Earnings
                Per Share-Diluted
            
            
            
            
            
            0.02
            
            
            0.02Weighted
                Average Shares Outstanding- Diluted
            
            
            21
            
            
            23,155
            
            
            14,216





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


3


**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
                equityBalance,
                December 31, 2006
            
            
            14,636,472
            
            
            15
            
            
            6
            
            
            9,935
            
            
            1,140
            
            
            348
            
            
            4,576
            
            
            20
            
            
            16,040Preferred
                A share transfer to common stock
            
            
            334,543
            
            
            1
            
            
            (1
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0Warrants
                exercise
            
            
            6,415,100
            
            
            5
            
            
            
            
            
            5,832
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,837Warrants
                issued for service
            
            
            
            
            
            
            
            
            
            
            
            10
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10Net
                income for the period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            350
            
            
            
            
            
            350Foreign
                currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20
            
            
            
            
            
            
            
            
            20Balance,
                March 31, 2007
            
            
            21,386,115
            
            
            21
            
            
            5
            
            
            15,777
            
            
            1,140
            
            
            368
            
            
            4,926
            
            
            20
            
            
            22,257








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


4


**Sinoenergy
      Corporation and Subsidiaries**


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


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




For
                the Three Months ended March 31,2007
            
            2006
              (restated)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            
            350
            
            
            336Value
                of warrants issued for service
            
            
            10
            
            
            -Minority
                interest
            
            
            5
            
            
            22Depreciation
            
            
            100
            
            
            73Amortization
                of intangible assets
            
            
            70
            
            
            74Provision
                for doubtful accounts
            
            
            125
            
            
            -Changes
                in operating assets and liabilities:Decrease/(Increase)
                in accounts receivable
            
            
            1,275
            
            
            (1,781
            )(Increase)
                in other receivables, deposits and prepayments
            
            
            (7,081
            )
            
            (150
            )Decrease
                in inventories
            
            
            108
            
            
            (223
            )Increase
                in accounts payable
            
            
            159
            
            
            881Increase
                in accrued expenses
            
            
            68
            
            
            5(Increase)/decrease
                in deferred expenses
            
            
            -
            
            
            2Increase
                /(decrease) in advances from customers
            
            
            1,121
            
            
            (334
            )(Decrease)/Increase
                in other payables
            
            
            (288
            )
            
            446(Decrease)/increase
                in income tax payable
            
            
            -
            
            
            492Net
                cash (used in ) operating activities
            
            
            (3,978
            )
            
            (157
            )CASH
                FLOWS FROM INVESTING ACTIVITESPayment
                for purchase of property, plant and equipment
            
            
            (173
            )
            
            (65
            )Payment
                for purchase of land use right
            
            
            -
            
            
            -Other
                investment payment
            
            
            (517
            )Net
                cash used in investing activities
            
            
            (690
            )
            
            (65
            )CASH
                FLOWS FROM FINANCING ACTIVITESCash
                received from bank loan
            
            
            718
            
            
            -Cash
                received from warrants exercise
            
            
            5,836
            
            
            -Net
                cash provided in financing activities
            
            
            6,554
            
            
            -Effect
                of changes in exchange rate
            
            
            19
            
            
            -Net
                increase in cash
            
            
            1,905
            
            
            (222
            )Cash
                at beginning of the year
            
            
            588
            
            
            334Cash
                at end of the year
            
            
            2,493
            
            
            112Supplementary
                Cash flow disclosure:Interest
                Paid
            
            
            55
            
            
            42Tax
                Paid
            
            
            -
            
            
            -





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





5
 **Sinoenergy
            Corporation and Subsidiaries**
 **Notes
            to the** **unaudited
            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 three 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.


6
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  **(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.




**(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.




**(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 Sinoenergy Holding (a company registered in British Virgin Islands)
      purchase of all the shares from the former shareholders of Sinogas and Sinogas
      changed from the local investment limited liability company into the
      wholly-owned foreign investment enterprise.


7
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  **(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, 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
      March 31, 2007, we have paid a total of $503,000 and owed $997,000 to Kangtai,
      and held 90% equity of Yuhan. The agreement, as amended, gives us 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.


8
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  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 March 31, 2007, for which it
      received a 90% interest. For a 10% interest, Jinglongma agreed to contribute
      capital of $192,000, of which it contributed $24,000 through March 31, 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




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 March 31, 2007, Hubei Gather has
      not received any funding.




In
      March
      2007, the Company purchased a 60% interest in Jiaxing
      Lixun Automotive Electronic Co, Ltd (“Lixun”) from its stockholders 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 operations will be consolidated with the Company’s from April
      1, 2007. The operations of Lixun were not material during the period from March
      23, 2007, when the Company acquired Lixun, to March 31, 2007.


9
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  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% equity and Sinogas has contributed $390,000 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
      that investment under equity method.




**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, although the Company’s management
      believes that the disclosures contained in these financial statements are
      adequate to make the information presented therein not misleading.




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 receivable. 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. Because quoted market prices are not available
      for
      the Company’s reporting units, the fair values of the reporting units are
      estimated based upon several valuation analyses, including comparable companies,
      comparable transactions and premiums paid. The goodwill on the Company’s
      financial statements was a result of the Yuhan acquisition, and relates entirely
      to the pressure container reporting segment.




10
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  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
      March
      31, 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.





Long-term
      investment


Investments
      in entities in which the Company owns more than 20% and less 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 there is an impairment in the value of the
      investment..




11
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  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
      years


Machinery
      and equipment 8
      years


Motor
      vehicles                        1 0
      years


Office
      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 is acquired at the end of year 2004 is valued and
      amortized according to relative industry standard. The patent is acquired in
      May
      of 2005, and is amortized over the 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 located is an intangible asset.





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.


12
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  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,
      simultaneously, the cost is recognized based on total contracted cost and the
      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.


13
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  Warranty
      reserves





Warranty
      reserves represent the Company’s obligation to repair or replace defective
      products under certain conditions.  The estimate of the warranty reserves
      is based on historical experience.  In year 2005 and 2006, the warranty
      rate was determined to be 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.


14
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  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.


15
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  The
      Company’s only component of other comprehensive income (loss) is foreign
      currency translation gain of $20,000 for the three months ended March 31 2007.
      This amount 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):





March
                31, 2007
              (unaudited)
            
            December
                31, 2006Accounts
                receivable
            
            $
            3,194
            
            $
            4,468Less:
                allowance for doubtful accounts
            
            
            91
            
            
            97Balance
            
            $
            3,103
            
            $
            4,371





(a)
      Accounts receivable from related parties




Accounts
      receivable at March 31, 2007 include the following related party receivables:
      $336,241 due from Kangtai, the minority stockholder of Yuhan, for sales made
      by
      Kangtai on behalf of Yuhan, $310,314 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 includes 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 March 31, 2007 includes the following accounts receivable from
      third parties: $458,755 for CNG deposit and transportation equipment sales,
      $840,150 for pressure container sales, and $918,012 for CNG station technical
      supporting and construction consulting service provided to a Shanghai company
      with the total sales amount of $1.28 million.


16
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  Accounts
      receivable at March 31, 2007 includes 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.





**5** **.
      Other Receivables**





( a)
      Other
      Receivable with Related Party





Under
      the
      foreign currency control regulations of the PRC, it is difficult for the
      Company, as a US company, to exchange United States dollars for RMB. As a result
      the Company uses Beijing Sanhuan, a related party, as an exchange agent and
      remits dollars to Beijing Sanhuan and Beijing Sanhuan exchanges the US dollars
      into RMB and return to the Company. The receivable from related party at March
      31, 2007 (unaudited) includes $5,206,000 due from Beijing Sanhuan, representing
      the dollar amount of RMB that Beijing Sanhuan owes to the Company at that date
      pursuant to this currency exchange procedures. Other receivables from related
      parties include $741,396 for rental fee as well as water and power charge to
      Kangtai, and $134,544 from an unsecured loan due from Kangtai.





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





(b)
      Other
      Receivable with Third Party





Other
      receivables at March 31, 2007 incluce $513,828 due from Shanghai Zhongyou Group
      for unsecured loan, $323,244 representing a deposit to apply to for bidding
      for
      a project, and $714,000 representing unsecured loans to other third parties.





Other
      receivables with third party as of 2006 year end mainly represents $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.


17
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  **6.
      Deposits and Prepayments**





The
      prepayment balance at March 31, 2007 mainly represents $4,411,732 deposits to
      suppliers for CNG station equipment purchased by the Company for use in the
      construction of CNG filling stations.





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.





**7.
      Inventories**




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




March
                31,
              2007
            
            December
                31,
              2006Raw
                materials
            
            $
            376
            
            $
            339Work
                in progress
            
            
            447
            
            
            483Finished
                goods
            
            
            6
            
            
            115Total
            
            $
            829
            
            $
            937





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


18
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**


March
                31,
              2007
            
            December
                31,
              2006**Cost**Buildings
                and facility
            
            $
            2,773
            
            $
            2,736Machinery
                equipment
            
            
            1,376
            
            
            2,137Motor
                vehicles
            
            
            127
            
            
            153Office
                equipment and others
            
            
            65
            
            
            70$
            4,341
            
            $
            5,096**Accumulated
                depreciation**Buildings
                and facility
            
            $
            371
            
            $
            379Machinery
                equipment
            
            
            319
            
            
            1,139Motor
                vehicles
            
            
            11
            
            
            8Office
                equipment and others
            
            
            11
            
            
            14$
            712
            
            $
            1,540**Carrying
                value**Buildings
                and facility
            
            $
            2,402
            
            $
            2,357Machinery
                equipment
            
            
            1,057
            
            
            998Motor
                vehicles
            
            
            116
            
            
            145Office
                equipment and others
            
            
            54
            
            
            56$
            3,629
            
            $
            3,556





Included
      in the cost of buildings and facility is $140,414, representing
      construction-in-process relating to the construction of CNG stations by Wuhan
      and Pingdingshan Sinoenergy, which commenced in August and December 2006,
      respectively.





**10.
      Intangible Assets**





March
                31,
              2007
            
            December
                31,
              2006**Cost**Patent,
                technology know-how
            
            $
            290
            
            $
            290Land
                use right
            
            
            12,294
            
            
            12,294Total
            
            $
            12,584
            
            $
            12,584Accumulated
                amortization
            
            
            (540
            )
            
            (470
            )Carrying
                value
            
            $
            12,044
            
            $
            12,114





Patents
      and technology know how are amortized over 10 years up to September, 2014


Included
      in the cost of patent and know-how, (RMB 667,500) $81,000 is the technical
      know
      how purchased and (RMB1,874,800) $226,000 is paid in capital from Kangtai
      (minority shareholder) when the Yuhan was incorporated.


19
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  The
      land
      use right is the land use right which is purchased by the company from Beijing
      Sanhuan. The Company has an agreement with Beijing Sanhuan, a related 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 is approximately $12.3 million. As of March 31, 2007, Sinogas
      has
      paid Beijing Sanhuan $9.1 million for the purchase of the land use right, and
      the outstanding balance of approximately $3.2 million is reflected as a current
      liability in the financial statements. This balance will be paid when Sinogas
      obtains final approval from the local government for the transfer of the land
      use right into its name. Application has been made to the government
      authorities, and the Company expects that the transfer will be completed before
      July 2007. Upon government approval, the land use right will have a term of
      50
      years from the date of approval.





**11.
      Goodwill**





On
      May
      25, 2006, the Company and Kangtai formed Yuhan, in which the Company 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 March 31,
      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 March 31, 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 the fair value of Yuhan’s net assets at date of acquisition.
      There was no any impairment for the goodwill in the three months ended March
      31,
      2007.





**12.
      Short Term Loan**





The
      Company had a $2.5 million short-term loan from the Qingdao First Branch of
      Shibei District, Agriculture Bank of China, (hereafter refers to as 1st Branch,
      or the bank). The loan is a short-term working capital loan with the borrowing
      date starting from November 2, 2005 for $1.5 million and from November 7, 2005
      for $1 million and matured on November 1, 2006. The interest rate for the short
      term loan is 6.669% annually.





Beijing
      Sanhuan, a related company, and Beijing Zhongyou Environment Tech. Crop., a
      third party that is a customer of the Company, together signed a ceiling
      guarantee contract pursuant to which Beijing Sanhuan and Beijing Zhongyou
      guarantees the Company’s obligations to 1 st Branch.


20
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  The
      Company also has a $1.2 million short term loan from Shenzhen Development Bank,
      Qingdao Branch (“Shenzhen Development Bank”). In November 27, 2006, the Company
      signed a short term loan with 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 cost incurred for the guarantee.





**13.
      Other Payables**





(a)
      Other
      Payables to Related Party:





Other
      payables to related parties at March 31, 2007, includes $905,071 unsecured
      loan
      from Beijin Sanhuan. And $3,142,049 payables to Beijing Sanhuan for balance
      of
      the purchase price of the land use right, $818,874 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 $129,073 from Mr.
      Tanzhou Deng, the chairman of the Company, which are carried from the balance
      of
      December 31, 2006.





(b)
      Other
      Payables to Third Party





The
      principal component in the other payables -- third party as of both March 31,
      2007 and December 31, 2006, is a $1,077,313 unsecured demand loan from SB China
      V.C. Limited (a Hong Kong company). In China, foreign currencies are controlled
      by government, and currency exchange agreement with a bank must be approved
      by
      the government with a more complex and expensive process. To save time and
      avoid
      more exchange loss, in October 2006, Sinoenergy Holding borrowed US dollars
      through unsecured demand loans for its foreign currency capital payment into
      Wuhan Sinoenergy. That US dollar borrowing will be repaid by the proceeds
      received from capital market in the first half of 2007.


(c)
        VAT
        and Business taxes
 
 As
        of
        March31, 2007, the Company owed VAT and business tax of $407,000 and $193,000,
        respectively, which, are accrued for the revenues recorded in USGAAP. Although
        the Company believes that it is in compliance with the common sense of tax
        practice of PRC, it is possible that the tax authorities may dispute that
        position. According to the PRC tax laws, any potential tax penalty payable
        on
        late or deficient payments of this tax could be between zero and five times
        the
        amount of the late or deficient tax payable, and will be expensed as a period
        expense if and when a determination has been made by the taxing authorities
        that
        a penalty is due.





**14.
      Advance from Customers**





Advances
      from customers at March 31, 2007 and December 31, 2006 were primarily the
      advances received for sales. Yuhan receives 30% to 60% of contract amount as
      down-payment before product manufacturing.


21
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  **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 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 March
      31, 2007 are summarized as follows:





Beginning
                balance (December 31, 2006)
            
            
            614Minority
                interests in income
            
            
            5Balance,
                March 31,2007
            
            
            619





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





The
      principal related companies and related parties with which the Company had
      transactions in the three months ended March 31, 2007 and 2006, are as
      follows:





Name
                of the Person
            
            RelationshipBeijing
                Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)
            
            Parent
                company of a subsidiary before November 8, 2005. The legal representative
                of Beijang Sanhuan is the Company’s CEO.****Qingdao
                Kangtai Machinery Equipment Manufacture Co. Limited
                (Kangtai)
            
            Minority
                shareholder of a subsidiary (Yuhan) from May
                2005


22
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**


Wuhan
                Fukang Automotive Cleaning Energy Company (Wuhan Fukang)
            
            Minority
                shareholder of a subsidiary (Wuhan Sinoenergy) from August
                2006.Name
                of Related PartyMr.
                Guili Shi
            
            Shareholder
                of KangtaiMr.
                GuiQiang Shi
            
            Shareholder
                of KangtaiMr.
                Tanzhou Deng
            
            Chairman
                of the Company




Significant
      transactions between the Company and its related parties during the three months
      ended March 31, 2007 and 2006 are as follows:





(1)
            Sales
                and purchase transactions with related
                parties





Name
                of the related party
            
            For
                the three months ended
              March
                31,2007(unaudited)
            
            For
                the three months ended
              March
                31, 2006(unaudited)Beijing
                Sanhuan
            
            -Act
                as a agent of the Company for foreign currency transfer to RMB
            
            --Wuhan
                Fukang
            
            -$1,598,329
                sales of conversion kits
            
            --Kangtai
            
            --
            
            -
                Sales with amount of $672,945





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 prevailing market prices.





(2)
            Related-company
                receivables





Name
                of the Company
            March
                31, 2007 (unaudited)
            December
                31, 2006Beijing
                Sanhuan
            -
                $5,206,000 Beijing Sanhuan owned to the company for foreign currency
                transferring
            -$4,986,279
                prepayment for land use right transferWuhan
                Fukang
            -$310,310
                receivable balance for conversion kit sales
            --


23
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**


Kangtai
            -$
                336,241 sales received on behalf of the Company;
              
              -$
                236,313 receivables for water and power fee charge;
              
              -$
                505,083 inter-company receivables for rental fee;
              
              -$
                134, 544 inter-company loan
            -
                $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





Name
                of the Company
            March
                31, 2007 (unaudited)
            December
                31, 2006Beijing
                Sanhuan
            -
                $905,071 unsecured loan from Beijing Sanhuan;
              
              -
                $3,142,049 payable for land use right
            -
                $3,112,071 payables for land use right;
              
              -
                $451,734 for know-how using of CNG station system
                integrationKangtai
            -
                $
                818,874 unpaid part for 35% equity purchase of Yuhan
            -
                $811,061 payable for 35% equity purchase of Yuhan;Mr.
                Guili Shi
            --
            -
                $18,996Mr.
                GuiQiang Shi
            -
                $1,293
            -
                $1,264Mr.
                Tanzhou Deng
            -
                $
                129,073
            -
                $129,073





The
      amounts due from and to related parties are interest free, unsecured 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.


24
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  **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. The Company
      has
      three 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.




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




The
      following tables set forth information relating to our business segments for
      the
      three months ended March 31, 2007 and 2006 (dollars in thousands).





Three
                months ended March 31, 2007
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            TotalNet
                revenue
            
            $
            783
            
            $
            1,843
            
            
            -
            
            $
            2,626Cost
                of revenues
            
            
            614
            
            
            977
            
            
            -
            
            
            1,591Gross
                profit
            
            
            169
            
            
            866
            
            
            -
            
            
            1,035Gross
                margin
            
            
            22
            %
            
            47
            %
            
            
            
            
            40
            %Operating
                expenses:Selling
                expenses
            
            $
            5
            
            $
            35
            
            
            -
            
            $
            40General
                and administrative expenses
            
            
            80
            
            
            236
            
            
            266
            
            
            582Total
                operating expense
            
            
            85
            
            
            271
            
            
            266
            
            
            622Income
                (loss) from operations
            
            $
            84
            
            $
            595
            
            
            ($
                266
            )
            $
            413Total
                assets
            
            
            3,425
            
            
            28,000
            
            
            4,281
            
            
            35,706





25
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**


Three
                months ended March 31, 2006
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            TotalNet
                revenue
            
            $
            1,168
            
            $
            1,332
            
            
            -
            
            $
            2,500Cost
                of revenues
            
            
            929
            
            
            467
            
            
            -
            
            
            1,396Gross
                profit
            
            
            239
            
            
            865
            
            
            -
            
            
            1,104Gross
                margin
            
            
            20
            %
            
            65
            %
            
            
            
            
            44
            %Operating
                expenses:Selling
                expenses
            
            $
            40
            
            $
            24
            
            
            -
            
            $
            64General
                and administrative expenses
            
            
            120
            
            
            206
            
            
            -
            
            
            326Total
                operating expense
            
            
            160
            
            
            230
            
            
            -
            
            
            390Income
                (loss) from operations
            
            $
            79
            
            $
            635
            
            
            -
            
            $
            714Total
                assets
            
            
            5,324
            
            
            12,464
            
            
            -
            
            
            17,788





**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 $.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 three months
      ended March 31, 2007:




·
            334,543
                shares of common stock were issued upon conversion of series A preferred
                stock.




·
            5,314,286
                shares of common stock were issued upon exercise of $0.85 warrants,
                from
                which the Company received
                $4,517,143.




·
            1,100,814
                shares of common stock were issued upon exercise of $1.20 warrants,
                from
                which the Company received $1,320,977, bringing the total received
                from
                warrant exercises to $5,838,120.


26
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  (b)
      Issuance of warrants





In
      February 2007, the Company issued to CCG Elite, a financial public relations
      firm, three-year warrants to purchase 150,000 shares of common stock at an
      exercise price of $2.10. These warrants were valued at $109,500 and are being
      amortized over the one-year term of the service agreement. The value of the
      warrants is included in selling, general and administrative expenses. The
      assumptions used to determine the warrants’ valuation expense under the
      Black-Scholes pricing model were as follows:





Shares
                issuable upon execise of warrants
            
            
            150,000Assumptions:Expected
                volatility
            
            
            59.4
            %Risk
                free interest rate
            
            
            4.99
            %Expected
                life years
            
            
            3Dividend
                yield
            
            
            -Weighted
                average fair value share
            
            $
            0.73





**(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.





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
            
            
            -
            
            
            -
            
            
            -Options
                outstanding at March 31, 2007
            
            
            120,000
            
            $
            0.65
            
            
            4.25
                yearsOptions
                exercisable at March 31, 2007
            
            
            60,000
            
            $
            0.65
            
            
            4.25
                years





27
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  The
      fair
      value of options grant used for purposes of estimating the pro forma amounts
      summarized above is estimated on the date of grant using 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.





The
      breakdown for the fully diluted outstanding shares for the three months ended
      March 31, 2007 is as follows:





Weighted
                average common stock outstanding during period
            
            
            17,561,733Common
                stock issuable upon conversion of series A preferred stock
            
            
            2,773,347Common
                stock issuable pursuant to $.85 warrants
            
            
            606,844Common
                stock issuable pursuant to $1.20 warrants
            
            
            2,130,866Common
                stock issuable upon exercise of options outstanding during the
                period
            
            
            82,375Total
                diluted outstanding shares
            
            
            23,155,165





**22.
      Restatement for the comparative figure of three months ended March 31,
      2006**





The
      statement of operations for the three months ended March 31, 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.




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


28
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**




Three
                months ended March 31,2006As
                previously reported
            
            RetatedNet
                revenue
            
            
            2,500
            
            
            2,500Cost
                of revenue
            
            
            -1,245
            
            
            -1,396Gross
                profit
            
            
            1,255
            
            
            1,104Operating
                expensesSelling
                expenses
            
            
            64
            
            
            64General
                and administrative expenses
            
            
            265
            
            
            320Total
                operating expenses
            
            
            329
            
            
            390Income
                from operations
            
            
            926
            
            
            714Other
                income (expenses)Other
                non-operating income
            
            
            2
            
            
            2Interest
                expense
            
            
            -42
            
            
            -42Other
                expenses
            
            
            -3
            
            
            -3Other
                income (loss) net
            
            
            -43
            
            
            -43Income
                (loss) before income taxes
            
            
            883
            
            
            671Income
                tax
            
            
            -313
            
            
            -313Income
                (loss) before minority interest
            
            
            570
            
            
            358Minority
                interest
            
            
            -22
            
            
            -22Net
                income
            
            
            548
            
            
            336Earnings
                per share -basic
            
            
            0.04
            
            
            0.02Weighted
                average shares outstanding- basic
            
            
            14,216
            
            
            14,216Earnings
                per share-diluted
            
            
            0.04
            
            
            0.02Weighted
                average shares outstanding- diluted
            
            
            14,216
            
            
            14,216





**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 an agreement to acquire the land use rights for the land on which
      Sinogas’ business is conducted for approximately $12.3 million, on which there
      is an outstanding balance of approximately $3.1 million.





(b)
      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.


29
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  (c)
      The
      Company has a purchase agreement signed with China Yuanhang Gas Company
      (Yuanhang Gas), pursuant to which the Company engaged Yuanhang Gas as its import
      agent to purchase from the Italian supplier steel tubes for use in the
      manufacture of CNG gas station equipment for a purchase price of $6.3 million.
      Since the purchase price is in Euros, the dollar amount of the Company’s
      obligation is subject to fluctuations in the exchange rate between Euros and
      United States dollars.





At
      March
      31, 2007, the Company has paid a total of $3,219,078 as a deposit for long-term
      letter of credit and prepayments for the above mentioned two purchase orders
      in
      paragraphs (c) and (d).




**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 $13,475 and $15,744 for the three months ended March 31, 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**




(a)
      Stock
      options grants





On
      April
      2, 2007, the Company’s four independent director received the automatic grant of
      option to purchase a total of 20,000 shares of common stock at the fair market
      value on that date, which was $2.03, pursuant to the Company’s 2006 long-term
      incentive plan.





On
      April
      9, 2007, the Company granted five year options to purchase 1,118,000 shares
      of
      common stock at $2.00 per share, being the fair market value on the date of
      grant. The options vest cumulatively as to 50% on August 3, 2007 and 50% on
      August 3, 2008.


30
 **Sinoenergy
              Corporation and Subsidiaries**
 **Notes
              to the** **unaudited
              consolidated financial statements**
 
  (b)
      Short-term loan





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.





On
      April
      30, 2007, the Company used the proceeds of the Qingdqo loan to repay the $1.9
      million loan term from 1 st Branch,
      and make a $462,900 payment on the loan from Shenzhen Development Bank, leaving
      a balance of approximately $830,000.





(c) Issuance
      of common stock





During
      the period from April 1 to May 16, 2007, the Company issued (i) 2,967,692 shares
      of common stock upon conversion of the series A preferred stock and (ii)
      4,674,186 shares of common stock upon exercise of warrants, from which the
      Company received proceeds of $5,489,023.  .




31
 
 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.”*




**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.




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. While in the first three months of 2007 we can 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.


32


On
      February 1, 2007, we 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, the New Energy and we 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. The registered capital
      is
      $5 million of which we will contribute $2,750,000 and New Energy will contribute
      $2, 250,000.




On
      March
      23, 2007, Hubei Gather was approved and was issued a business license with
      a
      term expiring on March 22, 2027. As of March 31, 2007, neither we nor New Energy
      provided any funding to Hubei Gather.




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. Lixun’s
      operations will be consolidated with the Company’s from April 1, 2007. The
      operations of Lixun were not material during the period from March 23, 2007,
      when the Company acquired Lixun, to March 31, 2007.




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




*•*
            CNG
                vehicle and gas station equipment manufacture and installation; and




*•*
            the
                design of CNG station and construction plans, construction of CNG
                stations
                and installation of CNG station equipment and related systems.





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.
      Due to rapid development and early stage of CNG station business in the PRC,
      we
      have been able to generate substantial gross margins in this portion of our
      business.


33


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




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 annual report as a result of fluctuations in the
      currency rates.





**Results
      of Operations**





In
      the
      first quarter of 2007, we had three 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. They are:




**(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:


34


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





·
            CNG
                trailer


·
            CNG
                deposited system for gas station usage


·
            Conversion
                kits for various types of
                vehicles


·
            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.


35


The
      following tables set forth information relating to our business segments for
      the
      three months ended March 31, 2007 and 2006 (dollars in thousands).





Three
                months ended March 31, 2007
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station operation
            
            TotalNet
                revenue
            
            $
            783
            
            $
            1,843
            
            
            -
            
            $
            2,626Cost
                of revenues
            
            
            614
            
            
            977
            
            
            -
            
            
            1,591Gross
                profit
            
            
            169
            
            
            866
            
            
            -
            
            
            1,035Gross
                margin
            
            
            22
            %
            
            47
            %
            
            
            
            
            40
            %Operating
                expenses:Selling
                expenses
            
            $
            5
            
            $
            35
            
            
            -
            
            $
            40General
                and administrative expenses
            
            
            80
            
            
            236
            
            
            266
            
            
            582Total
                operating expense
            
            
            85
            
            
            271
            
            
            266
            
            
            622Income
                (loss) from operations
            
            $
            84
            
            $
            595
            
            
            ($
                266
            )
            $
            413Total
                assets
            
            
            3,425
            
            
            28,000
            
            
            4,281
            
            
            35,706





Three
                months ended March 31, 2006
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station operation
            
            TotalNet
                revenue
            
            $
            1,168
            
            $
            1,332
            
            
            -
            
            $
            2,500Cost
                of revenues
            
            
            929
            
            
            467
            
            
            -
            
            
            1,396Gross
                profit
            
            
            239
            
            
            865
            
            
            -
            
            
            1,104Gross
                margin
            
            
            20
            %
            
            65
            %
            
            
            
            
            44
            %Operating
                expenses:Selling
                expenses
            
            $
            40
            
            $
            24
            
            
            -
            
            $
            64General
                and administrative expenses
            
            
            120
            
            
            206
            
            
            -
            
            
            326Total
                operating expense
            
            
            160
            
            
            230
            
            
            -
            
            
            390Income
                (loss) from operations
            
            $
            79
            
            $
            635
            
            
            -
            
            $
            714Total
                assets
            
            
            5,324
            
            
            12,464
            
            
            -
            
            
            17,788





*Net
      Revenue.* Net
      revenue for three months ended March 31, 2007 (the “March 2007 quarter”) was
      approximately $2.6 million, a modest increase from the net revenue of
      approximately $2.5 million for the three months ended March 31, 2006 (the “March
      2006 quarter”). This increase reflects a decline in sales of non-standard
      pressure containers of $385,000 or approximately 33.0%, which was offset by
      an
      increase of approximately $511,000, or 38.4%, in revenue from CNG station
      facilities and construction. The decline in sales from non-standard pressure
      containers resulted from our re-tooling of the production line as part of our
      plan for the strategic development of that line of business. 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.


36


*Cost
      of Revenue.* The cost
      of revenue for March 2007 quarter was approximately $1,591,000, compared with
      the $1,396,000 in the March 2006 quarter, with a 14% increase, resulting in
      a
      modest decrease in gross profit from $1,104,000 to $1,035,000. The overall
      percentage increase in cost of revenue was greater than the revenue, resulting
      in a decline in our gross margin from 44.2% in the March 2006 quarter to 39.4%
      in the March 2007 quarter. Our cost of revenue for the non-standard pressure
      containers decreased approximately $315,000, or 33.9%, from $929,000 in the
      March 2006 quarter to $614,000 in the March 2007 quarter, reflecting a modest
      increase in gross margin from 20.5% to 21.6%. Our cost of revenue for the CNG
      station facilities and construction division increased by approximately
      $510,000, or 109.2%, from $467,000 in the March 2006 period to $977,000 in
      the
      March 2007 period, reflecting a decrease in gross margin from 64.9% to 47.0%,
      The decrease in the gross margin from the CNG station facilities and
      construction division reflect the following factors:





•
            In
                the first quarter of 2007, all of our revenue in this segment was
                derived
                from the sale of the equipment for the CNG stations rather than service
                revenue relating to the construction of the CNG stations. The service
                revenue generates a significantly higher gross margin than the sale
                of the
                equipment.




•
            Our
                cost of revenue for the CNG facilities and construction segment includes
                for the March 2007 quarter the purchase of raw materials, including
                the
                steel bottles purchased from Italy with a significant cost and long
                delivery period. In the March 2006 period, customers provided these
                raw
                materials and we provided the machining, installation and related
                service,
                which generate a higher gross
                margin.




*Operating
      Expenses.* Operating expenses were approximately $622,000, an increase of $232,000, or
      59.5%, from the March 2006 quarter to the March 2007 quarter. The increase
      was
      mainly from CNG station operating segment due to more development work were
      done
      for new CNG stations construction preparing work. Our CNG station operating
      business began in August 2006. This segment did not generate any revenue in
      the
      March 2007 quarter and it incurred general and administrative expenses of
      $195,000. In addition, during the March 2007 quarter, we had increased general
      and administrative expenses resulting for our status as a public company. In
      the
      March 2006 quarter, we were a private company and did not incur these
      expenses.


37


*Income
      from Operations.* Income
      from operations was approximately $413,000 for the March 2007 quarter, compared
      with approximately $714,000 in March 2006 quarter.





*Interest
      Expense* .
      Interest expense increased from $42,000 in the March 2006 quarter to $55,000
      in
      the March 2007 quarter. This increase results from an increase of $1.3 million
      in short term bank loan which we incurred in connection with the expansion
      of
      our business, particularly the development of the CNG service station
      business.




*Income
        Taxes.* Two of
        our subsidiaries, Sinogas and Yuhan, have received exemptions from corporate
        income tax. As a result of the exemption, the Company incurred no income
        tax in
        the March 2007 quarter, compared with income tax of $313,000 in the March
        2006
        quarter.
 
 *Net
        income.* As a
        result of the factors described above, the Company had net income of $350,000,
        or $.02 per share (basic and diluted), for the March 2007 quarter, as compared
        with net income of $336,000, or $.02 per share (basic and diluted), for the
        March 2006 quarter.





**Liquidity
      and Capital Resources**




At
      March
      31, 2007, we had cash of approximately $2,493,000, an increase of approximately
      $587,799 from December 31, 2006. At March 31, 2007, we had working capital
      of
      approximately $6,133,000 and stockholders’ equity of approximately $22.4
      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 $5,838,000 which we received from the exercise of warrants during the March
      2007 quarter. During the March 2007, we used $2,126,000 in our operations,
      resulting, in large part from an increase of $5,222,000 in receivables, deposits
      and prepayments. During the period from April 1, 2007 to May 16, 2007, we
      received an additional $5,489,000 from the
      exercise of warrants.




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 will be 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 March 15, 2007, we had paid
      $503,000 and owed $997,000. **** 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, we and 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, the New Energy and the
      Company will form a natural gas company named Hubei Gather 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 $5,000,000 of which we will contribute $2,750,000 and New Energy
      will
      contribute $2, 250,000. As of March 31, 2007, this venture has not been funded.


38


On
      March
      18, 2007, we, through our subsidiary, Sinogas, and Shanghai CNPC Enterprise
      Group signed a cooperation agreement to establish Xuancheng Sinoenergy Vechcle
      Gas Company (“Xuancheng Sinoenergy”) to operate CNG stations. Based on the
      agreement, Shanghai CNPC Enterprise contributed $905,000 for 70% equity and
      Sinogascontributed capital of $388,000 for a 30% interest. As of March 31,
      2007,
      this venture has been funded. Xuancheng
      Sinoenergy is in the development stage, and as of March 31, 2007, had not been
      engaged in any business activity. The Company accounts for its interest in
      Xuancheng Sinoenergy under the equity method.




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





Pursuant
      to a purchase agreement with Fornovo Gas S.r. l of Italy, we agreed to purchase
      36 gasvector compressor units plus 60 high capacity dispensers for $9.6 million
      for our CNG stations.




Pursuant
      to a purchase agreement with China Yuanhang Gas Company (Yuanhang Gas), we
      appointed Yuanhang Gas as our import agent to purchase steel tube for CNG gas
      stations equipment manufacturing from Italy for $6.3 million. The purchase
      price
      of this product is in Euros and the purchase price in dollars is subject to
      fluctuations in the exchange rate between Euros and United States dollars.
      At
      March 31, 2007, we have paid $3.1 million as deposit for long-term letters
      of
      credit and prepayment for these two purchase agreements.




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, the
      salability and recoverability of inventory, income taxes and contingencies.
      We
      base our estimates on historical experience and on other assumptions that we
      believes to be reasonable under the circumstances, the results of which form
      our
      basis for making judgments about the carrying values of assets and liabilities
      that are not readily apparent from other sources. Actual results may differ
      from
      these estimates under different assumptions or conditions.


39


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.




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.


40


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.





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.


41


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.





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.


42


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.





**Item
      3. Controls and Procedures**


Disclosure
        controls and procedures are defined as controls
        and other procedures that are designed to ensure that information required
        to be
        disclosed by us in the reports that we file or submit under the Securities
        Exchange Act of 1934, as amended, is recorded, processed, summarized and
        reported within the time periods specified in the Commission’s rules and forms.
        Disclosure controls and procedures include, without limitation, controls
        and
        procedures designed to ensure that information required to be disclosed by
        us in
        these reports is accumulated and communicated to our management, including
        our
        principal executive and principal financial officers, as appropriate to allow
        timely decisions regarding required disclosure. An evaluation was performed,
        under the supervision of, and with the participation of, our management,
        including our chief executive officer and chief financial officer, of the
        effectiveness of the design and operation of our disclosure controls and
        procedures. Based on that evaluation, our management, including the chief
        executive officer and chief financial officer, concluded that our disclosure
        controls and procedures are effective to ensure that the information required
        to
        be disclosed in these reports is recorded, processed, summarized and reported
        as
        and when required, except as follows.
  We
        identified certain material weaknesses in the systems of internal controls
        as
        they relate to our subsidiaries. We are currently addressing those weaknesses
        and we expect to implement changes before the third quarter of 2007. In the
        interim, we performed additional procedures to ensure that the all material
        adjustments were processed to ensure that the consolidated financial statements
        were prepared in accordance with generally accepted accounting principles.
        Accordingly, management believes that the consolidated financial statements
        included in this quarterly report, fairly present, in all material respects,
        our
        financial condition, results of operations and cash flows for the periods
        presented in accordance with generally accepted accounting
        principles.
  The
        certification of our chief executive officer and chief financial officer,
        which
        is included as Exhibits 31.1 and 31.2 to this quarterly report on
        Form 10-QSB, include, in paragraph 4 of such certification, information
        concerning our disclosure controls and procedures and internal control over
        financial reporting. Such certifications should be read in conjunction with
        the
        information contained in this Item 3 for a more complete understanding of
        the
        matters covered by such certification.
 There
          were no other changes in our internal control or in other factors that
          could
          have significantly affected those controls subsequent to the date of our
          most
          recent evaluation.


43




**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








44





**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:
                  May 21, 2007
              /s/
                  Bo
                  HuangBo
                  Huang, Chief Executive Officer/s/
                  Qiong (Laby)
                  WuDated:
                  May 21, 2007
              Qiong
                  (Laby) Wu, Chief Financial Officer


45