**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





**September
      30, 2006**





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
o





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





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





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









**SINOENERGY
      CORPORATION AND SUBSIDIARY**





PagePart
                I. Financial InformationItem
                1. Financial StatementsBalance
                sheets at June 30, 2006 (unaudited) and December 31. 2005
            
            2Unaudited
                statements of operations for the three and six months ended June
                30, 2006
                and 2005
            
            3Unaudited
                statements of cash flows for the three and six months ended June
                30, 2006
                and 2005
            
            4Unaudited
                statement of stockholders’ equity for the six months ended June 30,
                2006
            
            5Notes
                to financial statements
            
            6Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            20Item
                3. Controls and Procedures
            
            24Part
                II. Other InformationItem
                6. Exhibits
            
            25










**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Balance Sheets**


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


September
                  30, 2006
              
              December
                  31, 2005Note(s)
              
              Unaudited
              
              Audited**ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              
              
              
              
              1,628
              
              
              332Accounts
                  receivable-third party (net)
              
              
              3-Related
                  party
              
              
              
              
              
              293
              
              
              1,346-Third
                  party
              
              
              
              
              
              3,697
              
              
              1,780Other
                  receivables-
              
              
              4-Related
                  party
              
              
              
              
              
              739
              
              
              464-Third
                  party
              
              
              
              
              
              2,154
              
              
              275Deposits
                  and prepayments
              
              
              5-Related
                  parties
              
              
              
              
              
              7,652
              
              
              4,986-
                  Third parties
              
              
              
              
              
              460
              
              
              1,027Inventories
              
              
              6
              
              
              1,309
              
              
              1,825TOTAL
                  CURRENT ASSET
              
              
              
              
              
              17,932
              
              
              12,035LONG
                  TERM ASSETSProperty,
                  plant and equipment (net)
              
              
              7
              
              
              3,415
              
              
              3,455Intangible
                  assets
              
              
              8
              
              
              226
              
              
              268Long
                  term deferred tax asset
              
              
              
              
              
              3
              
              
              17TOTAL
                  ASSETS
              
              
              
              
              
              21,576
              
              
              15,775**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**CURRENT
                  LIABILITIESShort
                  term loan
              
              
              9
              
              
              2,529
              
              
              2,478Accounts
                  payable-third party
              
              
              
              
              
              175
              
              
              480Other
                  payables-
                  Related party
              
              
              10
              
              
              338
              
              
              396-
                  Third parties
              
              
              
              
              
              1,523
              
              
              830Accrued
                  expenses
              
              
              
              
              
              89
              
              
              23Warranty
                  accrual
              
              
              
              
              
              34
              
              
              14Advances
                  from customers
              
              
              11
              
              
              905
              
              
              2,234Income
                  taxes payable
              
              
              12
              
              
              121
              
              
              1,162TOTAL
                  CURRENT LIABILITIES
              
              
              
              
              
              5,714
              
              
              7,616Long
                  term deferred tax liabilities
              
              
              13
              
              
              -
              
              
              28Minority
                  interests
              
              
              14
              
              
              300
              
              
              641TOTAL
                  LIABILITIES
              
              
              
              
              
              6,014
              
              
              8,285STOCKHOLDERS’
                  EQUITYCommon
                  stock - $.001 Par Value;Issued
                and Outstanding --14,636,472 at September 30, 2006, 14,215,285 at
                December
                31, 2005
              
              
              
              
              
              15
              
              
              15Series
                  A convertible preferred stock-$0.001 Par ValueSeptember
                  30, 2006 - 5,692,307, December 31, 2005 -- -0-
              
              
              
              
              
              6
              
              
              -Paid-in
                  capital
              
              
              
              
              
              8,543
              
              
              4,935Capital
                  surplus
              
              
              
              
              
              20
              
              
              67Statutory
                  surplus reserve fund
              
              
              16
              
              
              329
              
              
              329Retained
                  earnings
              
              
              
              
              
              6,268
              
              
              2,019Accumulated
                  other comprehensive income
              
              
              
              
              
              381
              
              
              124Total
                  stockholders’ equity
              
              
              
              
              
              15,562
              
              
              7,489TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              
              
              
              
              21,576
              
              
              15,775




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 September 30, 2006
            
            Nine
                Months Ended Sep 30, 20062006
            
            2005
            
            2006
            
            2005NET
                REVENUE
            
            
            17
            
            
            3,881
            
            
            640
            
            
            9,764
            
            
            2,689COST
                OF REVENUE
            
            
            
            
            
            (1,248
            )
            
            (428
            )
            
            (4,526
            )
            
            (1,461
            )GROSS
                PROFIT
            
            
            
            
            
            2,633
            
            
            212
            
            
            5,238
            
            
            1,228OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            68
            
            
            34
            
            
            190
            
            
            72General
                and administrative expenses
            
            
            
            
            
            452
            
            
            201
            
            
            1,212
            
            
            380TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            520
            
            
            235
            
            
            1,402
            
            
            452INCOME(LOSS)
                FROM OPERATIONS
            
            
            
            
            
            2,113
            
            
            (23
            )
            
            3,836
            
            
            776OTHER
                INCOME(EXPENSES)Other
                non-operating income
            
            
            
            
            
            22
            
            
            -
            
            
            31
            
            
            65Interest
                expense
            
            
            
            
            
            (45
            )
            
            -
            
            
            (443
            )
            
            -Other
                expenses
            
            
            
            
            
            (143
            )
            
            -
            
            
            (146
            )
            
            -OTHER
                INCOME (LOSS) NET
            
            
            
            
            
            (166
            )
            
            -
            
            
            (558
            )
            
            65INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            
            
            
            1,947
            
            
            (23
            )
            
            3,278
            
            
            841Income
                tax
            
            
            12
            
            
            1,564
            
            
            13
            
            
            1,011
            
            
            (266
            )INCOME
                BEFORE MINORITY INTEREST
            
            
            
            
            
            3,511
            
            
            (10
            )
            
            4,289
            
            
            575Minority
                interest
            
            
            
            
            
            (7
            )
            
            (23
            )
            
            (39
            )
            
            (18
            )NET
                INCOME
            
            
            
            
            
            3,504
            
            
            (33
            )
            
            4,250
            
            
            557Earnings
                Per Share -Basic
            
            
            
            
            
            0.24
            
            
            (0.00
            )
            
            0.30
            
            
            0.04Weighted
                Average Shares Outstanding- Basic
            
            
            
            
            
            14,636
            
            
            14,216
            
            
            14,343
            
            
            14,216Earnings
                Per Share-Diluted
            
            
            
            
            
            0.17
            
            
            (0.00
            )
            
            0.21
            
            
            0.04Weighted
                Average Shares Outstanding- Diluted
            
            
            
            
            
            20,236
            
            
            14,216
            
            
            19,985
            
            
            14,216





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


3


**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Statements of Changes inStockholders’ Equity**


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





Number
                of Shares
            
            Par
                Value Common Stock
            
            Preferred
                A share
            
            Paid
                in Capital
            
            STATUTORY
              SURPLUS
              RESERVE
            
            ACCUMULATED
                COMPREHENSIVE INC0ME
            
            RETAINED
                EARNINGS
            
            CAPTIAL
                SURPLUS
            
            TOTAL
              STOCKHOLDERS’
                EQUITYBalance,
                December 31, 2005(Audited)
            
            
            14,215,385
            
            
            14
            
            
            
            
            
            4,936
            
            
            329
            
            
            124
            
            
            2,019
            
            
            67
            
            
            7,489Issuance
                of common stock
            
            
            421,087
            
            
            1
            
            
            
            
            
            3,613
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,614Net
                income for the nine months ended September 30, 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,249
            
            
            
            
            
            4,249Issuance
                of Preferred Stock
            
            
            
            
            
            
            
            
            6
            
            
            (6
            )Transfer
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            257
            
            
            
            
            
            (47
            )
            
            210Balance,
                September 30, 2006(Un-audited)
            
            
            14,636,472
            
            
            15
            
            
            6
            
            
            8,543
            
            
            329
            
            
            381
            
            
            6,268
            
            
            20
            
            
            15,562





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 September 30,
              
              For
                  the Nine Months ended September 30,2006
              
              2005
              
              2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              
              3,504
              
              
              (33
              )
              
              4,250
              
              
              557Minority
                  interest
              
              
              7
              
              
              23
              
              
              39
              
              
              18Depreciation
              
              
              86
              
              
              112
              
              
              231
              
              
              227Amortization
                  of intangible assets
              
              
              17
              
              
              23
              
              
              49
              
              
              38Provision
                  for doubtful debts
              
              
              -
              
              
              -
              
              
              4
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              2,417
              
              
              (468
              )
              
              (941
              )
              
              (558
              )Other
                  receivables, deposits and prepayments
              
              
              (2,000
              )
              
              (241
              )
              
              (4,098
              )
              
              (1,394
              )Inventories
              
              
              503
              
              
              (1,185
              )
              
              532
              
              
              (1,487
              )Accounts
                  payable
              
              
              (1,011
              )
              
              724
              
              
              (309
              )
              
              725Accrued
                  expenses
              
              
              110
              
              
              -
              
              
              130
              
              
              2Deferred
                  expenses
              
              
              3
              
              
              (13
              )
              
              9
              
              
              (81
              )Advance
                  from customers
              
              
              (917
              )
              
              1,065
              
              
              (1,348
              )
              
              1,144Other
                  payables
              
              
              (487
              )
              
              (78
              )
              
              647
              
              
              418Income
                  tax payable
              
              
              (1,645
              )
              
              21
              
              
              (1,054
              )
              
              272Deferred
                  tax credit/(debit)
              
              
              (13
              )
              
              (11
              )
              
              (15
              )
              
              2Net
                  cash provided by operating activities
              
              
              574
              
              
              (60
              )
              
              (1,874
              )
              
              (116
              )CASH
                  FLOWS FROM INVESTING ACTIVITESPayment
                  for purchase of property, plant and equipment
              
              
              (144
              )
              
              (113
              )
              
              (231
              )
              
              (221
              )Net
                  cash used in investing activities
              
              
              (144
              )
              
              (113
              )
              
              (231
              )
              
              (221
              )CASH
                  FLOWS FROM FINANCING ACTIVITESCash
                  received from short term borrowing
              
              
              -
              
              
              -
              
              
              312
              
              
              -Cash
                  received from capital contribution
              
              
              200
              
              
              -
              
              
              3,301
              
              
              -Cash
                  received /(paid) for other financing activities
              
              
              (429
              )
              
              -
              
              
              (427
              )
              
              292Net
                  cash used in financing activities
              
              
              (229
              )
              
              -
              
              
              3,186
              
              
              292Effect
                  of changes in exchange rate
              
              
              215
              
              
              123
              
              
              215
              
              
              123Net
                  increase/(decrease) in cash and cash equivalents
              
              
              416
              
              
              (50
              )
              
              1,296
              
              
              78Cash
                  and cash equivalents at beginning of the period
              
              
              1,212
              
              
              169
              
              
              332
              
              
              41Cash
                  and cash equivalents at end of the period
              
              
              1,628
              
              
              119
              
              
              1,628
              
              
              119Supplementary
                  Cash flow disclosure:Interest
                  Paid
              
              
              45
              
              
              -
              
              
              443
              
              
              -Tax
                  Paid
              
              
              414
              
              
              136
              
              
              924
              
              
              346




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


5


**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**




**1.**
            **The
                Company**




**(1)
      Recapitalization Transaction** ****





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




On
      June
      2, 2006, Sinoenergy
      (former Franklyn ) entered
      into the following agreements:




·
            An
                agreement with Sinoenergy Holding Limited (“SinoenergyHolding”),
                a British Virgin Islands corporation and its stockholders, pursuant
                to
                whichSinoenergyissued 14,215,385 shares of common stock to the former stockholders
                of
                Sinoenergy.Sinoenergy
                owns all of the registered capital of Qingdao Sinogas General Machinery
                Limited Corporation (“Sinogas”), a wholly foreign owned enterprise
                (“WFOE”) registered under laws of the People’s Republic of China (the
                “PRC”). Sinoenergy had no business other than its ownership of
                Sinogas.
                As a result of this transaction, Sinoenergy and its subsidiary, Sinogas,
                became subsidiaries ofSinoenergy
                Holdingand the business of Sinogas became the business ofSinoenergy.




·
            An
                agreement withSinoenergy’s
                principal stockholders, pursuant to whichSinoenergypurchased 3,305,000 shares of common stock for $213,525 using the
                proceeds
                of the financing described below.




·
            A
                securities purchase agreement pursuant to whichSinoenergy
                sold, for $3,500,000, notes inthe
                amount of $3,500,000, 369,001 shares of common stock and warrants
                to
                purchase an aggregate of 18,000,003 shares of common stock..This
                agreement was amended in July 2006, andSinoenergyissued, for $200,000, a 6% convertible note in the principal amount
                of
                $200,000, 21,086 shares of common stock and warrants to purchase
                an
                aggregate of 1,028,571 shares of common stock.The convertible notes are convertible into shares of series A convertible
                preferred stock or common stock at a conversion price of $.65 per
                share,
                subject to adjustment under certain condition. The warrants consist
                of
                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 warrants were valued using
                a Black
                Scholes option pricing model, using a volatility of 45% and a weighted
                average risk free interest rate of 4.5%. The value of the conversion
                premium for the notes is the excess of the value of the preferred
                stock
                over the net proceeds allocable to the note. The embedded conversion
                premium and the value of warrants were recorded based on EITF 00-27
                and
                98-05 and recorded as an adjustment to paid in capital.With
                the convertible note being transferred into series A preferred shares
                on
                September 28, 2006 (details is presented in following), that conversion
                premium has been transferred to paid in capital in the financial
                statement
                as at September 30, 2006.




Under
      generally accepted accounting principles, both acquisitions described above
      are
      considered to be capital transactions in substance, rather than business
      combinations. That is, the acquisitions are equivalent, in the acquisition
      of
      Sinoenergy and Sinogas, to the issuance of stock by Sinogas for the net monetary
      assets of Sinoenergy, and in the Sinoenergy Holding acquisition,
      the issuance of stock by Sinoenergy Holing 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 in the Sionenergy /Sinoenergy Holding acquisition
      of the “legal acquirer”, Sinoenergy ,
      are
      those of the “accounting acquirer”, Sinoenergy. The accompanying financial
      statements reflect the recapitalization of the shareholders’ equity as if the
      transactions occurred as of the beginning of the first period
      presented.




6




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


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 $.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 $.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.





The
      certificate of designation for the series A preferred stock provides
      that:




·
            Each
                share of series A preferred stock is convertible into one share of
                common
                stock, subject to adjustment.




·
            If,
                while Barron Partners owns shares of series A preferred stock, the
                Company
                issues common stock at a price, or options, warrants or otherconvertible
                securities with a conversion or exercise price less than the conversion
                price (initially $.65 per share), with certain specifiedexceptions,
                the number of shares issuable upon conversion of one share of series
                A
                preferred stock is adjusted to reflect a conversion price
                equalto
                the lower price.




·
            If
                the Company’s consolidated pre-tax income per share, on a fully-diluted
                basis, for the fiscal year ended December 31, 2006, is less than
                $.212per
                share, the conversion price shall be reduced proportionately by up
                to 40%.
                The full 40% adjustment will be made if pre-tax income per
                shareon
                a fully-diluted basis is $.1272 or
                less.




·
            If
                the Company’s consolidated pre-tax income for the year ended December 31,
                2007 is less than $.353 per share on a fully-diluted basis,
                thenthe
                conversion price shall be reduced by the percentage shortfall, up
                to a
                maximum of 40%. The full 40% adjustment will be made if
                pre-taxincome
                per share on a fully-diluted basis is $.2118 or
                less.




·
              No
                  dividends are payable with respect to the series A preferred
                  stock.




·
            While
                the series A preferred stock is outstanding, the Company may not
                pay
                dividends on or redeem shares of common
                stock.




7




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**




**(2)
      History of Sinogas**





Qingdao
      Sinogas General Machinery Limited Corporation (“Sinogas”) was registered in
      Qingdao, China in September 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.





Sinogas
      was jointly owned by the following three entities: (a) Beijing Sanhuan
      Technology Development Co., Ltd. (Beijing Sanhuan), with an agreed contribution
      of $6.75 million, representing 90% of the aggregate capital; (b) Qingdao
      Machinery Industry Co., Ltd., with an agreed contribution of $375,000,
      representing 5% of the aggregate capital; (c) Jiangsu Dong Fang Hong Chemical
      Fertilizer Co., Ltd. (“Jiangsu”), with an agreed contribution of $375,000,
      representing 5% of the aggregate capital.





The
      predecessor of Sinogas was Qingdao General Machinery Plant (the “Plant”), a
      state-owned entity. With the approval from Qingdao Municipal Government, Beijing
      Sanhuan acquired the Plant’s total assets provided that it paid the Plant’s
      debts. After Beijing Sanhuan paid the Plant’s debts, Bejing Sanhuan was entitled
      to all the assets of the Plant, and having obtained government approval,
      reorganized the Plant into the Company. On July 30, 2004, PRC government
      approved the acquisition by Beijing Sanhuan of the Plant. On October 29, 2004,
      the Company acquired its business license from Qingdao Municipal Government
      to
      operate business in industries of Compressed Natural Gas (CNG) station and
      equipments/services, as well as non-standard chemical and refinery
      equipments.





In
      October 2005 Beijing Sanhuan purchased the 5% interest in the Company held
      by
      Qingdao Machinery Industry Co., Ltd., with the result that Beijing Sanjuan
      held
      95% of the Company’s equity and Jiangsu held the remaining 5%. In November,
      2005, Beijing Sanhuan and Jiangsu transferred 100% of their equity to Sinoenergy
      Holding which was owned by Wentao Yang.





On
      November 29, 2005, Qingdao Foreign Trade and Economic Cooperation Bureau
      approved the Sinoenergy Holding purchase of all the shares from the former
      shareholders of the Corporation and the Corporation changed from the local
      investment limited liability company into the wholly-owned foreign investment
      enterprise.





On
      February 21, 2006, Sinoenergy Holding entered into a share transfer agreement
      with Skywide Capital Management Limited, a British Virgin Islands corporation
      which is owned by Tianzhou Deng and Bo Huang (“Skywide”) and Eastpride Capital
      Limited, a British Virgin Islands corporation owned by Wentao Yang
      (“Eastpride”), with the result that 90% shares of the Corporation were held by
      Skywide and 10% share of the Corporation were held by Eastpride.





**(3)
      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. The Company is subject to
      the
      consideration and risks of operating in the PRC. These include risks associated
      with the political and economic environment, foreign currency exchange and
      the
      legal system in the PRC. The economy of PRC differs significantly from the
      economies of the “western” industrialized nations in such respects as structure,
      level of development, gross national product, growth rate, capital reinvestment,
      resource allocation, self-sufficiency, rate of inflation and balance of payments
      position, among others. Only recently has the PRC government encouraged
      substantial private economic activities. The Chinese economy has experienced
      significant growth in the past several years, but such growth has been uneven
      among various sectors of the economy and geographic regions. Actions by the
      PRC
      government to control inflation have significantly restrained economic expansion
      in the recent past. Similar actions by the PRC government in the future could
      have a significant adverse effect on economic conditions in PRC.




8




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**




Many
      laws
      and regulations dealing with economic matters in general and foreign investment
      in particular have been enacted in the PRC. However, the PRC still does not
      have
      a comprehensive system of laws, and enforcement of the existing laws may be
      uncertain and sporadic.





The
      Company’s operating assets and primary sources of income and cash flows are of
      interests in the PRC. The PRC economy has, for many years, been a
      centrally-planned economy, operating on the basis of annual, five-year and
      ten-year state plans adopted by central PRC governmental authorities, which
      set
      out national production and development targets. The PRC government has been
      pursuing economic reforms since it first adopted its “open-door” policy in 1978.
      There is no assurance that the PRC government will continue to pursue economic
      reforms or that there will not be any significant change in its economic or
      other policies, particularly in the event of any change in the political
      leadership of, or the political, economic or social conditions in, the PRC.
      There is also no assurance that the Company will not be adversely affected
      by
      any such change in governmental policies or any unfavorable change in the
      political, economic or social conditions, the laws or regulations, or the rate
      or method of taxation in the PRC.





As
      many
      of the economic reforms which have been or are being implemented by the PRC
      government are unprecedented or experimental, they may be subject to adjustment
      or refinement, which may have adverse effects on the Company. Further, through
      state plans and other economic and fiscal measures, it remains possible for
      the
      PRC government to exert significant influence on the PRC economy.





The
      devaluation of the Renminbi (RMB) against the United States dollar would
      consequently have adverse effects on the Company’s financial performance and
      asset values when measured in terms of the United Stated dollar. Should the
      RMB
      significantly devalue against the United States dollar, such devaluation could
      have a material adverse effect on the Company’s earnings and the foreign
      currency equivalent of such earnings. The Company does not hedge its RMB-United
      States dollar exchange rate exposure.





On
      January 1, 1994 the PRC government introduced a single rate of exchange as
      quoted daily by the People’s Bank of China. Subsequently in 2005, the PRC
      government introduced a certain floating rate of exchange. No representation
      is
      made that the RMB amounts have been, or could be, converted into United States
      dollars at that or any rate. This quotation of exchange rates does not imply
      free convertibility of RMB to other foreign currencies. All foreign exchange
      transactions continue to take place either through the Bank of China or other
      banks authorized to buy and sell foreign currencies at the exchange rate quoted
      by the People’s Bank of China. Approval of foreign currency payments by the
      People’s Bank of China or other institutions requires submitting a payment
      application form together with suppliers’ invoices, shipping documents and
      signed contracts.




9




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**




**(4)
      Subsidiary of the Company**





Sinogas
      is a wholly-owned subsidiary of Sinoenergy Holding and Sinoenergy Holding is
      a
      wholly-owned subsidiary of Sinoenergy. Sinogas and Qingdao Kangtai Machinery
      Equipment Manufacture Co. Limited (“Kantai”), a non-affiliated party,
      established Qingdao Sinogas Yuhan Chemical Equipment Co., Ltd. (“Qingdao
      Yuhan”), which, at September 30, 2006, was 80% owned by Sinogas and 20% owned by
      Kantai.





The
      term
      of the business of Qingdao 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).





Pursuant
      to an agreement among Sinoenergy, Sinogas, Kangtai and Mr.Guili Shi, who
      purchased 25% of Qingdao Yuhan’s equity from Kangtai in July 2006, Sinoenery and
      Sinogas will purchase all the 45% of equities of Yuhan hold by Kangtai and
      Mr.
      Guili Shi for total price of $1.5 million payable in three
      installments.





On
      August
      2, 2006, Sinoenergy paid $375,000 to Mr. Guili Shi, and the 25% equity, which
      had been hold by Mr.Guili Shi, was transferred to Sinoenergy. At the same day,
      the business license for Yuhan has been renewed by relative Qingdao Government.
      After the equity purchase, the Company has held 80% of equities of
      Yuhan.





The
      remaining $1,125,000 was originally due in two installments -- $500,000 by
      September 30, 2006 and the balance of $625,000 due September 30, 2007. The
      September 2006 payment is being deferred pending government approval of the
      transfer.





In
      June
      2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its deputy) 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,
      will contribute capital totaled $3,375,000 for a 90% interest, and each of
      Wuhan
      Clean Energy and Wuhan Yixiang will contribute $190,000 for a 5%
      interest.





Simultaneously,
      Sinogas and Beijing Sanhuan signed a deputy agreement, pursuant to which Sinogas
      has appointed Beijing Sanhuan as its deputy to hold the 40% of shares of Wuhan
      Sinoenergy. According to the deputy agreement, except for providing any required
      information for Wuhan Sinoenergy’s registration, Beijing Sanhuan, as a deputy of
      Sinogas, does not have any right and liabilities of a shareholder and does
      not
      take part in managment of Wuhan Sinoenergy.





In
      August
      2, 2006, Wuhan Administration Bureau for Industry and Commerce issued Business
      License to Wuhan Sinoenergy. The term of the business of Wuhan Sinoenergy is
      from August 2, 2006 to August 2, 2026 and the business scope is of manufacturing
      and sales to automotive transferring kits, establishing and operating CNG
      stations.




10




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and
        2005**


**2.
      Summary of Significant Accounting Policies**





**(a)
      Basis of Presentation**





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





These
      consolidated financial statements should be read in conjunction with the annual
      audited financial statements and the notes thereto included in the Company’s
      annual report on Form 10-KSB, and other reports filed with the SEC.





The
      accompanying unaudited interim financial statements reflect all adjustments
      of a
      normal and recurring nature which are, in the opinion of management, necessary
      to present fairly the financial position, results of operations and cash flows
      of the Company for the interim periods presented. The results of operations
      for
      these periods are not necessarily comparable to, or indicative of, results
      of
      any other interim period or for the fiscal year taken as a whole.





**(b)
      Use of Estimates**





In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and revenues and expenses during the reported
      periods. Significant estimates include depreciation and allowance for doubtful
      accounts receivable. Actual results could differ from those
      estimates.





**(c)
      Cash and Cash Equivalents**





The
      Company considers all highly liquid investments with original maturities of
      three months or less at the time of purchase to be cash equivalents. As of
      September 30, 2006 and December 31, 2005 the Company did not have any cash
      equivalents.





**(d)
      Allowance for Doubtful Accounts**





The
      Company recognizes an allowance for doubtful accounts to ensure accounts
      receivable are not overstated due to uncollectibility. An allowance for doubtful
      accounts is maintained for all customers based on a variety of factors,
      including the length of time the receivables are past due, significant one-time
      events and historical experience. An additional reserve for individual accounts
      is recorded when the Company becomes aware of a customer’s inability to meet its
      financial obligations, such as in the case of bankruptcy filings or
      deterioration in the customer’s operating results or financial position. If
      circumstances related to customers change, estimates of the recoverability
      of
      receivables would be further adjusted.





**(e)
      Inventories**





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





11




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


**(f)
      Property, Plant and Equipment**





Property,
      plant and equipment are stated at cost. Depreciation is provided principally
      by
      use of the straight-line method over the useful lives of the related assets.
      Expenditures for maintenance and repairs, which do not improve or extend the
      expected useful life of the assets, are expensed to operations while major
      repairs are capitalized.





Management
      estimates a 10% residual value for its property, plant and equipment according
      to industry standards in the PRC. The estimated useful lives are as
      follows:


Building
                  and facility
              
              
              20
                  yearsMachinery
                  and equipment
              
              
              8
                  yearsMotor
                  vehicles
              
              
              10
                  yearsOffice
                  equipment and others
              
              
              5~8
                  years





The
      gain
      or loss on disposal of property, plant and equipment is the difference between
      the net sales proceeds and the carrying amount of the relevant assets, and,
      if
      any, is recognized in the statements of operations.





**(g)
      Intangible Assets**





Intangible
      assets, representing patents and technical know-how acquired, are stated at
      cost
      less accumulated amortization and impairment losses. Amortization is calculated
      on the straight-line method over the estimated useful lives of 10 years. The
      technical know how, which is acquired in the end of year 2004 is valued and
      amortized according to relative industry standard. The patent is acquired in
      May
      of 2005, and is amortized according to its validated period. At September 30,
      2006, there was no change in the value of the patent.





**(h)
      Impairment of Assets**





In
      accordance with Statement of Financial Accounting Standards (‘SFAS”) No. 144,
      "Accounting for Impairment or Disposal of Long-Lived Assets", the Company
      evaluates its long-lived assets to determine whether later events and
      circumstances warrant revised estimates of useful lives or a reduction in
      carrying value due to impairment. If indicators of impairment exist and if
      the
      value of the assets is impaired, an impairment loss would be
      recognized.





**(i)
      Revenue Recognition**




Revenue
      Recognition - The Company recognizes revenue when the significant risks and
      rewards of ownership have been transferred to the customer pursuant to PRC
      law,
      including factors such as when persuasive evidence of an arrangement exists,
      delivery has occurred, the sales price is fixed or determinable, sales and
      value
      added tax laws have been complied with, and collectibility is probable. The
      Company recognizes product sales generally at the time the product is
      shipped.




12




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**




The
      Company has a large construction contract open at the fiscal year end. Revenue
      is recognized at the balance sheet date on the percentage of completion basis.
      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.




Sales
      Taxes - The Company is subject to value added tax (“VAT”). The applicable VAT
      tax rate is 17% for products sold in the PRC. The amount of VAT liability is
      determined by applying the applicable tax rate to the invoiced amount of goods
      sold less VAT paid on purchases made with the relevant supporting invoices.
      VAT
      is collected from customers by the Company on behalf of the PRC tax authorities
      and is therefore not charged to the consolidated statements of operations.




**(
      j ) Warranty reserves**





Warranty
      reserves represent the Company’s obligation to repair or replace defective
      products under certain conditions.  The estimate of the warranty reserves
      is based on historical experience.  In year 2005 and the nine moths of
      2006, the warranty rate was determined to be 0.2 % of gross sales.





At
      present, the nearly all the products sold are pressure vessels, of which the
      operating permission is firmly controlled by PRC government. As a result, all
      the pressure vessels being sold must be tested by the Qingdao Bureau of Quality
      and Technical Supervision.





**(k)
      Income Taxes**





The
      Company accounts for income taxes under SFAS No. 109, "Accounting for Income
      Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
      for the future tax consequences attributable to differences between the
      financial statement carrying amounts of existing assets and liabilities and
      their respective tax bases. Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the years in
      which those temporary differences are expected to be recovered or settled.
      Under
      SFAS No. 109, the effect on deferred tax assets and liabilities of a change
      in
      tax rates is recognized in income in the period that includes the enactment
      date.


The
      Company reviewed the differences between the tax basis under PRC tax laws and
      financial reporting under PRC GAAP. Timing differences, relative deferred tax
      asset or liabilities have been recognized.





**(l)
      Foreign Currency Transactions**





The
      Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
      U.S. dollars. The Company’s balance sheet accounts are
      translated using the closing exchange rate in effect at the balance sheet date
      and operating accounts are translated using the average exchange rate prevailing
      during the reporting period. Translation gains and losses are deferred and accumulated as a component of
      other comprehensive income in owners’ equity. Transaction gains and losses that
      arise from exchange rate fluctuations from transactions denominated in a
      currency other than the functional currency are included in the statement of
      operations as incurred.




13




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


**(m)
      Fair Value of Financial Instruments**





SFAS
      No.
      107, “Disclosures about Fair Values of Financial Instruments”, requires
      disclosing fair value to the extent practicable for financial instruments that
      are recognized or unrecognized in the balance sheet. The fair value of the
      financial instruments disclosed herein is not necessarily representative of
      the
      amount that could be realized or settled, nor does the fair value amount
      consider the tax consequences of realization or settlement.





For
      certain financial instruments, including cash, account receivable, related
      party
      and other receivables, accounts payable, other payables and accrued expenses,
      it
      was assumed that the carrying amounts approximate fair value because of the
      near
      term maturities of such obligations.





**(n)
      Minority Interest**





The
      minority shareholders’ interest refers to the percentage of the owner’s equity
      of Qingdao Yuhan owned by Kangtai and the owner’ equity of Wuhan Sinoenergy
      owned by Wuhan Cleaning Energy and Wuhan Yixiang.





The
      minority shareholders’ interest in the consolidated financial statements means
      the percentage of Qingdao Yuhan and Wuhan Sinoenergy Gas’s net assets owned by
      above mentioned shareholders according to their respective investment
      ratios.





**(o)
      Earnings Per Share**





Basic
      earnings per share is computed by dividing the earnings for the year by the
      weighted average number of common shares outstanding for the year. Diluted
      earnings per share reflects the potential dilution of securities by including
      other potential common stock, including stock options and warrants, in the
      weighted average number of common shares outstanding for a period, if dilutive.





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





Details
      of allowance for doubtful receivables deducted from accounts receivable are
      as
      follows:





September
                30, 2006
            
            December
                31 , 2005US$’000
            
            
            US$’000Accounts
                receivable
            
            $
            3,998
            
            $
            3,130Less:allowance
                for doubtful accounts
            
            
            8
            
            
            4Balance,
                September 30, 2006
            
            $
            3,990
            
            $
            3,126








Within
      the balance at September 30, 2006, $588,329 represents the receivable balance
      for a 22CNG gas stations contract, which has been signed and completed in year
      2005; $265,523 represents receivables for the 23 CNG gas station construction
      contract, which has been signed in the end of 2005 and completed in the third
      quarter of 2006, and $1,388,344 receivables for the CNG construction contract
      which is signed and is now in process and the revenue is recognized according
      to
      percentage of completion basis.





The
      balance, $292,669, represents receivables from minority shareholder of Kangtai
      for one transaction received by Kangtai on behalf of Sinogas. That balance
      has
      been offset against other payables to such person in October 2006.




14




**Sinoenergy
          Corporation and Subsidiaries**
 **Notes
          to the Consolidated Financial Statements (Unaudited)**
 **Three
          and Nine Months Ended September 30, 2006 and 2005**


**4.
      Other Receivables**





(1)
            Other
                Receivable With Related Party





Because
      the Company is a holding company, under the foreign currency control regulations
      of the PRC, it is difficult for the Company to exchange United States dollars
      for RMB. As a result the Company uses Beijing Sanhuan as an exchange agent
      and
      remits dollars to Beijing Sanhuan and Beijing Sanhuan delivers the RMB to
      Sinogas. The receivable from related party at September 30, 2006 includes
      $386,682 due from Beijing Sanhuan, representing the dollar amount of RMB that
      Beijing Sanhuan owes to Sinogas at that date pursuant to this currency exchange
      procedures. Other receivables from related parties include $145,594 for plant
      rental charge to Kangtai and $206,816 from an unsecured loan due from
      Kangtai.





The
      balance at December 31, 2005, represents power and water fee receivables as
      well
      as plant rental charge to Kangtai..





(2)
            Other
                Receivable With Third Party





The
      other
      receivables with third parties mainly represents $1,464,210 deposit for
      long-term letter of credit which is required to import raw material and
      equipment purchased by Sinogas and Wuhan Sionenergy; $502,484 due from Shanghai
      Zhongyou Group, who took over the debt owned by Xuancheng City Gas (subsidiary
      of Shanghai Zhongyou Group) to the Company for equipment purchase in this
      quarter.





**5.
      Deposits and Prepayments**




The
      related parties balance is mainly of prepayment to Beijing Sanhuan under an
      agreement pursuant to which Beijing Sanhuan is to transfer to a Sinogas the
      land
      use right relating to the land on which Sinogas’s facilities are located. The
      total transferring price for the land is $12,000,000 (RMB 96,000,000). That
      balance as at December 31, 2005 was $4,986,279 and $7,652,309 as at September
      30, 2006.





The
      third
      parties balances represent advance payments to suppliers by the Company and
      its
      subsidiary for routine operations.





**6.
      Inventories**




Inventories
      at December 31, 2005 and September 30, 2006 are summarized as
      follows:




September
                30, 2006
            
            December
                31,2005US$’000
            
            
            US$’000Raw
                materials
            
            $
            395
            
            $
            423Work
                in progress
            
            
            767
            
            
            1,249Finished
                goods
            
            
            97
            
            
            55Low
                value consumable articles
            
            
            50
            
            
            48Total
            
            $
            1,309
            
            $
            1,825





There
      was
      no inventory reserve as of December 31, 2005 and September 30,
      2006.




15




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**




To
      improve working capital, the Company seeks to keep inventory at a minimum level
      needed for efficient production.




**7.
      Property, Plant and Equipment**





As
      of
      December 31, 2005 and September 30, 2006, property, plant and equipment consist
      of following:





September
                30, 2006
            
            December
                31 2005US$’000
            
            
            US$’000**Cost**Buildings
                and facility
            
            $
            2,623
            
            $
            2,571Machinery
                equipment
            
            
            2,135
            
            
            2,031Motor
                vehicles
            
            
            46
            
            
            36Office
                equipment and others
            
            
            58
            
            
            21$
            4,862
            
            $
            4,659**Accumulated
                depreciation**Buildings
                and facility
            
            $
            292
            
            $
            215Machinery
                equipment
            
            
            1,135
            
            
            985Motor
                vehicles
            
            
            6
            
            
            19Office
                equipment and others
            
            
            13
            
            
            1$
            1,446
            
            $
            1,204**Carrying
                value**Buildings
                and facility
            
            $
            2,331
            
            $
            2,356Machinery
                equipment
            
            
            1,000
            
            
            1,046Motor
                vehicles
            
            
            40
            
            
            17Office
                equipment and others
            
            
            45
            
            
            20$
            3,416
            
            $
            3,455





**8.
      Intangible Assets**





September
                30, 2006
            
            December
                31, 2005Patent
                and technology know how
            
            
            US$’000
            
            
            US$’000Cost
            
            $
            285
            
            $
            285Accumulated
                amortization
            
            
            (59
            )
            
            (17
            )Carrying
                value
            
            $
            226
            
            $
            268





Patents
      as well as technology know how of the Company are amortized over 10 years up
      to
      September, 2014





To
      the
      cost of intangible assets as at December 31, 2005, $82,000 is the technical
      know
      how purchased from the plant and $ 207,000 is paid in capital input by Kangtai
      (minority shareholder) when the Qingdao Yuhan was incorporated.




16




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**




**9.
      Short Term Loan**





The
      balance totaled $ 2,528,861 represents the short term loan borrowed from the
      Qingdao First Branch of Shibei District, Agriculture Bank of China, (hereafter
      refers to as 1st Branch) on November 1, 2005. According to the loan contract,
      the type of loan is specified as short-term working capital loan with the
      borrowing date starting from November 2, 2005 for $1.5 million and from November
      7, 2005 for $1 million and maturing on November 1, 2006. The interest rate
      for
      the short term loan is 6.669% annually.





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





**10.
      Other Payables**





(1)
            Other
                Payables to Related Party:





The
      balances as at September 30, 2006 consist of $307,389 unsecured demand loans
      from related party Kangtai, with no stated interest rate or due date; $18,996
      unsecured demand loans from Mr. Guili Shi and $1,264 to Mr Guiqiang Shi who
      are
      both the shareholder of Kangtai; and $10,115 from Mr. Tanzhou Deng the chairman
      of the company. The balance as at December 31, 2005 are unsecured demand loans
      from related party Kangtai, with no stated interest rate or due date .




(2)
            Other
                Payables to Third Party





The
      balances are mainly for payables for sales tax (VAT and business tax), unsecured
      demand loans from third parties and miscellaneous payables to other creditors.
      Within the balance as at September 30, 2006 and December 31, 2005, separately
      there represent $810,652 and $298,000 VAT and business tax payables





**11.
      Advance from Customers**





The
      balances as at December 31, 2005 and September 30, 2006 were mainly the advances
      received by Yuhan, the subsidiary of the Company. To all the sales order, Yuhan
      receives 30% to 60% of contract amount as down-payment before product
      manufacturing.





**12.
      Income Taxes Payable**





Pursuant
      to the PRC Income Tax Laws, the Company’s subsidiaries are subject to enterprise
      income tax at a statutory rate of 33% (30% national income tax plus 3% local
      income tax).





Being
      licensed as wholly foreign owned manufacturing enterprise, on Nov. 2, 2006,
      Sinogas was 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 third year (2008). Based on the income tax exemption for
      2006,
      the Company, in the third quarter of 2006 reversed the corporate income tax
      accrual at June 30, 2006.





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 for the nine months
      ended September 30, 2006.




17




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


**13.
      Long Term Deferred Tax Liabilities**





In
      connection with the establishment of Yuhan, the actual contributed capital
      amount by Kangtai is $158,084 higher than shared registered capital. Under
      PRC
      accounting policy, the Company records 55% of that over contributed capital
      as
      $86,946 into capital surplus. Under PRC tax law, that capital surplus would
      not
      be regarded as taxable income until the investment to Yuhan is disposed. Under
      USGAAP, the negative goodwill amount is recognized as operating income. Deferred
      tax liabilities resulting from timing differences are recognized.





**14.
      Minority Interests’ Equity**





The
      activities of the minority interests’ equity during the year ended December 31,
      2005 and September 30, 2006 are summarized as follows:





US$’000Beginning
                balance (May 2005)
            
            $
            -Add:
                contribution by minority shareholders
            
            $
            558Minority interests’ income
            
            
            14Others
            
            
            69Balance,
                December 31, 2005
            
            $
            $641Add:
                Minority interests’ income
            
            
            39Less:
                Equity sold
            
            
            (380
            )$
            $300





**15.**  **Related
      Party Relationships and Transactions**





The
      principal related companies and related parties with which the Company had
      transactions during the first three quarters of year 2006 are as
      follows:




Name
                of the Company
            
            RelationshipBeijing
                Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)
            
            Parent
                company before November 8, 2005.Qingdao
                Kangtai Machinery Equipment Manufacture Co. Limited
                (Kangtai)
            
            Minority
                investor from May 2005




Name
                of Related PartyMr.
              Guili Shi
              Mr.
                GuiQiang Shi
              Mr.
                Tanzhou Deng
            
            Shareholder
              of Kangtai
              Shareholder
                of Kangtai
              Chairman
                of the Company  18
 **Sinoenergy
          Corporation and Subsidiaries**
 **Notes
          to the Consolidated Financial Statements (Unaudited)**
 **Three
          and Nine Months Ended September 30, 2006 and 2005**


Significant
      transactions between the Company and its related company during the year are
      as
      follows:





(1)
            Sales
                and purchase transactions with related
                parties





For
                  the three months ended September 30,
              
              For
                  the nine months ended June 30,Name
                of theCompany
              
              2006
              
              2005
              
              2006
              
              2005Kangtai
              
              Sales
                  with amount of $37,546
              
              Sales
                  with amount of $566,886
              
              Sales
                  with amount of $1,519,049
              
              Sales
                  with amount of $566,886





Kangtai
      is the predecessor Company of Qingdao Yuhan. Kangtai purchases products from
      Yuhan to fulfill open purchase orders. Yuhan completes those contracts fulfilled
      by Kantai prior the separation.




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




(2)
            Inter-company
                receivables




Name
                of the Company
              
              December
                  31,2005
              
              September
                  30, 2006Beijing
                  Sanhuan
              
              $4,986,279
                  prepayment for land use right transferring
              
              $7,652,309
                  prepayment for land use right transferring;
                $386,682
                  for RMB currency exchange for the Company;Kangtai
              
              $2,921,415Including
                  the receivable on a rental of $1,063,606
              
              $
                  206,816 inter-company loan
                $145,594
                  receivables for plant rental charge.





(3)
            Inter-company
                payables





Name
                  of theCompany
              
              December
                  31, 2005
              
              September
                  30, 2006Kangtai
              
              
              $395,726
                    inter-company loan
              
              
              $307,389
                    unsecured inter-company loanMr.
                  Guili Shi
              
              
              nil
              
              $
              18,966Mr.
                  GuiQiang Shi
              
              
              nil
              
              $
              1,264Mr.
                  Tanzhou Deng
              
              
              nil
              
              $
              10,115




19


**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


The
      amount due from/to related parties are interest-free, unsecured and have no
      fixed terms





**16.
      Statutory Surplus Reserve Fund**





In
      accordance with PRC regulations, Sinogas is required to make appropriations
      to
      the statutory surplus reserve fund, based on after-tax net income determined
      in
      accordance with PRC GAAP. According to the Memorandum and Articles of
      Association of Sinogas, appropriation to the statutory surplus reserve fund
      should be at least 10% of the after-tax net income determined in accordance
      with
      the PRC GAAP until the reserve fund is equal to 50% of the entity’s registered
      capital. Appropriations to the statutory public welfare fund should be at least
      5% of the after-tax net income determined in accordance with the PRC GAAP.
      Statutory surplus reserve is established for the purpose of remedying Sinogas’
losses, expanding operations, or increasing registered capital, and is
      non-distributable other than in liquidation.





**17.
      Revenue Gross Profit Margin**





According
      to products sold, the revenue is mainly composed of the following:


For
                  the three moths ended September 30,
              
              GP
                  margin2006
              
              2005
              
              2006
              
              2005US$’000
              
              
              US$’000
              
              
              %
              
              
              %CNG
                  Vehicles and CNG Equipment
              
              
              i(1)
              
              $
              882
              
              $
              21
              
              
              73
              %
              
              53
              %CNG
                  Gas stations
              
              
              i(2)
              
              
              1,754
              
              
              -
              
              
              86
              %
              
              -Pressure
                  Containers
              
              
              (ii)
              
              
              1,174
              
              
              619
              
              
              35
              %
              
              32
              %Rental
                  income and others
              
              
              
              
              
              71
              
              
              -
              
              
              -$
              3,881
              
              $
              640




For
                  the nine moths ended September 30
              
              GP
                  margin2006
              
              2005
              
              2006
              
              2005US$’000
              
              US$’000
              
              %
              
              %CNG
                  Vehicles and CNG Equipment
              
              
              i(1)
              
              $
              1,424
              
              $
              939
              
              
              68
              %
              
              6
              %CNG
                  Gas stations
              
              
              i(2)
              
              
              3,885
              
              
              467
              
              
              82
              %
              
              67
              %Pressure
                  Containers
              
              
              (ii)
              
              
              4,229
              
              
              799
              
              
              23
              %
              
              3
              %Rental
                  income and others
              
              
              
              
              
              226
              
              
              484$
              9,764
              
              $
              2,689




(i)
            CNG/LPG
                vehicle and gas station equipment
                business





CNG/LPG
      vehicle and gas station equipment business include two parts of
      divisions/services.




20


**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**
  (1)
        CNG/LPG vehicle and gas station equipment
        manufacture and installation, which include following products:


·
            CNG
                trailer





·
            CNG
                deposited system for gas station usage





·
            Conversion
                kits for various types of vehicle





·
            CNG
                compressor skid





·
            CNG
                dispenser (retail measurement
                system)




(2)
      CNG
      station system business




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, the company
      enjoys a very high profit margin in this segment by utilizing its specialty
      in
      this area.




(ii)
      Non-standard equipment and pressure container business:





Non-standard
      equipment and pressure container business has been carried over from the
      predecessor since Qingdao 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.





·
            design
                and manufacture of various types of pressure containers in the metallurgy
                and electricity generation industries





·
            design
                and manufacture of various types of pressure containers in the food
                and
                brewery industries





·
            design
                and manufacture of various types of non-standard
                equipment





The
      relatively high gross margin for CNG stations reflects both our technology
      and
      that relatively low level of competition for the construction of CNG stations
      in
      the PRC.





In
      2005,
      the revenue from CNG stations represents revenue from one contract covering
      22
      CNG stations, for which the Company performed designing, construction, equipment
      installation, and related engineering work. The total contract price is $3
      million.





For
      the
      nine months ended September 30, 2006, the revenue of CNG station represents
      designing, construction and technical consulting service charge from two CNG
      station contracts, one of which, with total contract price of $3.2 million,
      was
      signed in December of 2005 and completed in the third quarter of 2006; and
      another contract with total contact price of $1.24 million was signed in July
      2006 and is in the process of fulfilling.





To
      the
      pressure container revenue, in the first half year of 2005, (before Qingdao
      Yuhan’s establishing) the Company subcontracted most of the manufacturing
      process for pressure container to third parties, so the gross profit margin
      of
      the nine months of 2005 was lower; While the pressure container sales in the
      nine months of year 2006 were from the operation of Yuhan, which was a pressure
      container manufacturing company, so the gross profit margin increased
      significantly compared with the same period of 2005.




21


**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


**18.
      Concentrations and Credit Risk**





The
      Company operates principally in the PRC and grants credit to its customers
      in
      this geographic region. Although the PRC is economically stable, it is always
      possible that unanticipated events in foreign countries could disrupt the
      Company’s operations.





At
      September 30, 2006, the Company has a credit risk exposure of uninsured cash
      in
      banks of approximately US$1,628,000. The Company does not require collateral
      or
      other securities to support financial instruments that are subject to credit
      risk.





The
      net
      sales to customers representing at least 10% of net total sales as well as
      relative account receivable balance are as follows:-




Sales
              
              AR
              
              Sales
              
              ARFor
                  year 2005 ended December 31,
              
              December
                  31, 2005
              
              For
                  the nine months ended September 30, 2006
              
              September
                  30, 2006Customers
              
              
              US$’000
              
              
              %
              
              
              US$’000
              
              
              %
              
              
              US$’000
              
              
              %
              
              
              US$’000
              
              
              %Customer
                  A
              
              $
              3,740
              
              
              46
              
              $
              1,494
              
              
              67Customer
                  B
              
              
              831
              
              
              10
              
              
              -
              
              
              -Customer
                  C
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              3,208
              
              
              33
              %
              $
              266
              
              
              7





**19.
      Commitments and Contingencies**




(1)
      Legal
      Proceedings - The Company is not currently a party to any threatened or pending
      legal proceedings, other than incidental litigation arising in the ordinary
      course of business. In the opinion of management, the ultimate disposition
      of
      these matters will not have a material adverse effect on the Company’s
      consolidated financial position, results of operations or cash flows.




The
      Company has the following material contractual obligations and capital
      expenditure commitments:




(a)
      The
      Agreement signed between the Sinogas and Beijing Sanhuan on April 6, 2005.
      According to the agreement, with the precondition that Sinogas is responsible
      for the obtaining the designation of the land changed to land for commercial
      use, at which time Beijing Sanhuan transfers the real property on which Sinogas’
facilities are located to Sinogas for $12,000,000. At September 30, 2006,
      $7,652,309 has been paid. The land use right ownership transferring process
      is
      in process.





(b)
      The
      Contract signed between the Corporation and Qingdao Jinyu Industrial Development
      Co., Ltd. on May 20, 1997. According to the Contract, the Corporation leases
      its
      own land at No. 18, Siliu South Road (within its factory site) to Qingdao Jinyu
      Industrial Development Co., Ltd.. The contractual rate is $7,500 for the first
      year and is specified to yearly increase by 6% afterwards. Starting from the
      ninth year, the yearly increase with the rent should be 8%, with the total
      lease
      duration being 20 years. It goes into effect after being signed by both parties
      and is legally binding to. Meanwhile, the rights and obligations of both parties
      are protected by Chinese laws.




22




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


(2)
      Capital commitment





A
      purchase agreement signed between Sinoenergy Holding (on behalf of its
      subsidiaries as Wuhan Sinoenergy and Sinogas) and Fornovo Gas S.r. l of Italy.
      Pursuant to the agreement, Sinoenergy Holding would purchase 36 compressor
      units
      GASVECTOR plus 60 high capacity dispensers in the sum of $9.6 million. A
      purchase agreement signed between Sinogas and China Yuanhang Gas Company
      (Yuanhang Gas), pursuant to the agreement, Sinogas consigned Yuanhang Gas as
      import agent to purchase steel tube for CNG gas stations equipment manufacturing
      from Italy in the sum of $6.3 million. The purchase price of this products
      is in
      Euros and the purchase price in dollars is subject to fluctuations in the
      exchange rate between Euros and United States dollars.





At
      September 30, 2006, the Company has paid totally $1,464,210 as deposit for
      long-term credit letters for the above mentioned two purchase agreement.





**20.
      Retirement Benefits**





The
      full-time employees of the Company are entitled to staff welfare benefits
      including medical care, casualty, housing benefits, education benefits,
      unemployment insurance and pension benefits through a Chinese
      government-mandated multi-employer defined contribution plan. The Company is
      required to accrue the employer-portion for these benefits based on certain
      percentages of the employees’ salaries. The total provision for such employee
      benefits was US$22,028 and US$3,275 for the third quarter of year 2006 and
      2005,
      respectively and were recorded as other payables. The PRC government is
      responsible for the staff welfare benefits including medical care, casualty,
      housing benefits, unemployment insurance and pension benefits to be paid to
      these employees. The Company is responsible for the education benefits to be
      paid.




**21.
      Subsequent Events**




On
      November 2, 2006, Sinogas has got the certificate numbered
      QingSiGuoShuiHan[2006]No.18 issued by Qingdao State Bureau for corporate income
      tax holiday. According to the certificate, Sinogas has been granted to two
      years
      100% corporate
      income tax exemption from the first operating profit year and 50% corporate
      income tax exemption in the following three years.





**22.
      New Accounting Pronouncements**





The
      FASB
      has issued SFAS No. 148 “Accounting for Stock-Based Compensation - Transition
      and Disclosures”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based
      Compensation”, to provide alternative methods of transition for a voluntary
      change to the fair value based method of accounting for stock-based employee
      compensation. In addition, SFAS No. 148 amends the disclosure requirements
      of
      SFAS No. 123 to require prominent disclosures in both annual and interim
      financial statements about the method of accounting for stock-based employee
      compensation and the effect of the method used on reported results.





In
      December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment, an Amendment
      of SFAS No. 123." SFAS No. 123R requires companies to recognize in the statement
      of operations the grant-date fair value of stock options and other equity-based
      compensation issued to employees. The Company has disclosed and recorded its
      stock-based employee compensation according to SFAS No.148 and SFAS No.
      123R.




23




**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets."
      The Statement is an amendment of APB Opinion No. 29. SFAS No. 153 eliminates
      the
      exception for non-monetary exchanges of similar productive assets and replaces
      it with a general exception for exchanges of non-monetary assets that do not
      have commercial substance. The adoption of SFAS No. 153 has no impact on the
      Company’s financial statements.





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





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





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.




24


**Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements (Unaudited)**
 **Three
        and Nine Months Ended September 30, 2006 and 2005**


In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“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.




25





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





**Forward-Looking
      Statements**





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





**Overview**




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




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





All
      of
      our products and services are performed pursuant to agreements with our
      customers, which provide the specifications for the products and services.
      We do
      not sell our products from inventory. As a result, our revenue is dependent
      upon
      the flow of contracts. In any fiscal period, a small number of customers may
      represent a disproportionately large percentage of our business in one period
      and a significantly lower percentage, if any, in a subsequent period. For
      example, our largest customer for the year ended December 31, 2005, Millennium
      Group Limited (Hong Kong), which accounted for revenue of approximately $3.8
      million, or 46% of our revenue for the year, and is not a significant customer
      in the first half of 2006. Our contract with Millenium Group related to the
      construction of CNG stations for Millenium, and that contract was completed
      in
      2005, and does not require any significant products or services after the
      completion of the station. For the nine months ended September 30, 2006, we
      derived $3.2 million, or 33% of our revenue, from sales to one customer, China
      Xinxin Energy Company, for the construction of CNG stations. Our contracts
      are
      generally for one-year terms, and there is no assurance that the contracts
      will
      be renewed at the end of the term.




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




26




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





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




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




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




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




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




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




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




At
      September 30, 2006, we held an 80% interest in our subsidiary, Qingdao Sinogas
      Yuhan Chemical Equipment Co., Ltd. (“Yuhan”), with the other 20% being owned by
      Qingdao Kangtai Machinery Equipment Manufacture Co. Limited (“Kangtai”). We had
      previously owned a 55% interest in Yuhan. We subcontract construction work
      for
      CNG stations to Kangtai on terms that are commercially reasonable. We paid
      Kangtai $432,499 for these services during the nine months ended September
      30,
      2006. In August 2006, we entered into an agreement to acquire for $1,500,000
      the
      remaining 45% interest from Kangtai and an individual to whom Kangtai
      transferred an interest in Yuhan. We paid $375,000 and acquired an
      additional 25% interest, raising our interest in Yuhan to 80%, in August
      2006.




27




Yuhan
      was
      set up by Sinogas and Kangtai on May 25, 2005. In connection with Yuhan’s
      organization, Kangtai transferred equipment to Yuhan as part of its investment
      in Yuhan. Kangtai transferred certain contracts to Yuhan, and Yuhan assumed
      the
      manufacturing obligations under these contract and purchased the related
      inventories from Kangtai at fair market value. Kangtai purchased the
      manufactured products from Yuhan at fair market value and sold the products
      to
      the end users. The sales of these products to Kangtai amounted to $1,519,049
      for
      the nine months ended September 30, 2006. Because a portion of these
      transactions relate to sales to third parties through Kangtai, we treat that
      portion as a third-party receivable.





**Critical
      Accounting Policies and Estimates**




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




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




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




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




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




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




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





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




28




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.




**Results
      of Operations**




**Nine
      months ended September 30, 2006 and 2005**




*Net
      Revenue.* Net
      revenue for the nine months ended September 30, 2006, was approximately $9.8
      million, a 263% increase over net revenue of approximately $2.7 million for
      the
      comparable period of 2005. The Company was incorporated on October 29, 2004,
      and
      revenue in the first half of 2005, particularly in the first quarter, was low
      since the Company was in the start-up phase. The revenue in the first nine
      months of 2006 includes $3.9 million, representing 40 % of net revenue for
      the
      period, relating to two contracts pursuant to which we are constructing and
      equipping CNG stations.




*Cost
      of Revenues.* The
      Company’s cost of revenue for the nine months ended September 30, 2006 was
      approximately $4.5 million, compared with approximately $1.5 million for the
      comparable period of 2005. The gross margin for the nine months ended September
      30, 2006 was 53.6%, an increase from 45.7% for the comparable period of 2005.
      Since the first have of 2005, particularly the first quarter, does not reflect
      fully developed operations, the comparisons between the first nine months of
      2005 and 2006 reflects our ability to scale up our operations and not any
      indication of a quarter to quarter change in gross margin.




*Operating
      Expenses.* Operating expenses were $1.4 million for the nine months ended September 30,
      2006, compared to $452,000 for same period of 2005.The increase was primarily
      due to the Company’s efforts to market development for its products and services
      as well as additional expenses resulting from the Company’s status as a public
      corporation following the reverse acquisition in June 2006.




*Income
      from Operations.* Operating profit was approximately $3.8 million for the first nine months of
      2006 compared with approximately $776,000 in the comparable period of 2005.
      The
      increase was primarily the result of factors described above.




*Income
      Taxes.* As
      Siongas has received an exemption from corporate income tax for, we reversed
      the
      income tax accrual at June 30, 2006 in accordance with USGAAP.




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




*Net
      Revenue.* Net
      revenue for the three months ended September 30 2006, was approximately $3.9
      million, comparing with $640,000 for the comparable period of 2005. In the
      three
      months ended September 30, 2005, the company was in its organizational
      period, so revenue was lower. The revenue in the three months ended
      September 30, 2006 includes $1.8 million, representing 46 % of net revenue
      for
      the period, relating to a contract pursuant to which we are constructing and
      equipping 22 CNG stations.




*Cost
      of Revenues.* The
      Company’s cost of revenue for the three months ended September 30, 2006 was
      approximately $1.2 million, compared with approximately $428,000 for the
      comparable period of 2005. The gross margin for the three months ended September
      30, 2006 was 68%, a increase from 33% for the comparable period of 2005. With
      the maturity of management and manufacturing process, the manufacturing cost
      decreased, a lot of outsourcing work in year 2005 has been done by the Company,
      all of which increased the GP margin.




*Operating
      Expenses.* Operating expenses were $520,000 for the three months ended September 30, 2006,
      compared to $235,000 for same period of 2005.The increase was primarily due
      to
      the Company’s efforts to market development for its products and services as
      well as additional expenses resulting from the Company’s status as a public
      corporation following the reverse acquisition in June 2006.




29




*Income
      from Operations.* Operating profit was approximately $2.1 million for the three months of 2006
      compared with a loss of approximately $23,000 in the comparable period of 2005.
      The increase was primarily the result of factors described above.




*Income
      Taxes.* As
      Siongas has received an exemption from corporate income tax for, we reversed
      the
      income tax accrual at June 30, 2006 in accordance with USGAAP.





**Liquidity
      and Capital Resources**




At
      September 30, 2006, we had cash of approximately $1.6 million, an increase
      of
      approximately $1.3 million from December 31, 2005. At September 30, 2006, we
      had
      working capital of approximately $12.2 million and stockholders’ equity of
      approximately $15.6 million, compared with working capital of approximately
      $4.4
      million and stockholders’ equity of approximately $7.5 million at December 31,
      2005.




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




At
      September 30, 2006, we owed the balance of $1,125,000 to acquire the remaining
      20% minority interest in Yuhan, of which $500,000 was due in September 2006
      and
      $625,000 is due in September 2007. The September 2006 payment was deferred
      pending PRC government approval of the transfer.,




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





Our
      capital commitments:





A
      purchase agreement signed between Sinoenergy Holding (on behalf of its
      subsidiaries as Wuhan Sinoenergy and Sinogas) and Fornovo Gas S.r. l of Italy.
      Pursuant to the agreement, Sinoenergy Holding would purchase 36 compressor
      units
      GASVECTOR plus 60 high capacity dispensers for $9.6 million. A purchase
      agreement signed between Sinogas and China Yuanhang Gas Company (Yuanhang Gas),
      pursuant to the agreement, Sinogas consigned Yuanhang Gas as import agent to
      purchase steel tube for CNG gas stations equipment manufacturing from Italy
      in
      the sum of $6.3 million. The purchase price of this products is in Euros and
      the
      purchase price in dollars is subject to fluctuations in the exchange rate
      between Euros and United States dollars.





At
      September 30, 2006, the company has paid totally $1,464,210 as deposit for
      long-term credit letters for the above mentioned two purchase
      agreements.




30




**Item
      3. Controls and Procedures**





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




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




**PART
      II. OTHER INFORMATION**





**Item
      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




31


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




SINOENERGY
              CORPORATION.
              (Registrant)Dated:
              November 14, 2006
            
            /s/
              Bo
              HuangBo
              Huang, Chief Executive
              Officer





Dated:
              November 14, 2006
            
            /s/ Qiong
              (Laby) WuQiong
              (Laby) Wu, Chief Financial
              Officer


32