UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-KSB
 
 x
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2007o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ____________ to
  ______________
 Commission
File Number 000-51753
 
 SINO
CLEAN ENERGY INC.
 (Exact
name of Registrant as specified in its charter)
 
 NEVADA
                (State
      or other jurisdiction of
                incorporation
      or organization)
              75-2882833
                (I.R.S.
      Employer Identification No.)
 
 Room
      2205, Suite A, Zhengxin Building,
                No.
      5, Gaoxin 1st Road, Gao Xin District,
                Xi’an, Shaanxi Province,
      People’s Republic of China
                (Address
      of principal executive offices)
              N/A
                (Zip
      Code)
 
 (8629)
      8209-1099
                (Issuer's
      telephone number, including area code)Securities
      registered pursuant to Section 12(b) of the Act:Title
      of each class
                None
              Name
      of each exchange on which registered
                NoneSecurities
      registered pursuant to Section 12(g) of the Act:Title
      of Class
                Common
      Stock, $.001 par value
 
 Check
whether the issuer (1) 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
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
 
 Issuer's
revenues for its most recent fiscal year: $2,802,750
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on April 7, 2008 was approximately
$11,338,000.  The per share stock price for computational purposes was
$0.20, based on the closing sale price per share for the Registrant's common
stock on the OTC Bulletin Board on April 3, 2008.  This value is not intended
to be a representation as to the value or worth of the Registrant's common
stock. The number of non-affiliates of the Registrant has been calculated by
subtracting the number of shares held by persons affiliated with the Registrant
from the number of outstanding shares.
 
 The
number of shares of the Registrant's common stock outstanding on April 11, 2008
was 84,681,750.
  Transitional
Business Disclosure Format (Check One). Yes o No x
 
  
  TABLE OF CONTENTS
 TO
      ANNUAL REPORT ON FORM 10-KSB
 FOR
      YEAR ENDED DECEMBER 31, 2007
 
 PageIntroductory
      Notes - Forward Looking Statements and Certain Terminology
              A-1
  PART
      IItem
      1.
              Description
      of Business
              1Item
      2.
              Description
      of Property
              7Item
      3.
              Legal
      Proceedings
              8Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              8
  PART
      IIItem
      5.
              Market
      for Registrant's Common Equity and Related Stockholder
    Matters
              9Item
      6.
              Management's
      Discussion and Analysis or Plan of Operation
              11Item
      7.
              Financial
      Statements
              30Item
      8.
              Changes
      in and Disagreements on Accounting and Financial
Disclosure
              31Item
      8A.
              Controls
      and Procedures
              31Item
      8B.
              Other
      Information
              32
  PART
      IIIItem
      9.
              Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
              33Item
      10.
              Executive
      Compensation
              35Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management
              36Item
      12.
              Certain
      Relationships and Related Transactions
              37Item
      13.
              Exhibits
              38Item
      14.
              Principal
      Accountant Fees and Services
              39
  Signatures
              
              40
 
 
 
  Table of Contents
  INTRODUCTORY
NOTES - FORWARD LOOKING STATEMENTS AND CERTAIN TERMINOLOGY
 
 Some of
the statements made by us in this Annual Report on Form 10-KSB are
forward-looking in nature, including but not limited to, statements relating to
our future revenue, product development, demand, acceptance and market share,
gross margins, levels of research and development, our management's plans and
objectives for our current and future operations, and other statements that are
not historical facts.  Forward-looking statements include, but are not
limited to, statements that are not historical facts, and statements including
forms of the words "intend", "believe", "will", "may", "could", "expect",
"anticipate", "plan", "possible", and similar terms.  Actual results
could differ materially from the results implied by the forward looking
statements due to a variety of factors, many of which are discussed throughout
this Annual Report and particularly in the sections titled “Factors That May
Affect Future Results” and “Factors Affecting Business, Operating Results and
Financial Condition”, both of which are included in the section titled
“Management’s Discussion and Analysis of Plan of Operation.”  Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.  We undertake no obligation to
publicly release any revisions to these forward-looking statements that may
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.  Factors that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by us include, but are not limited to:
  ●
              our
      ability to finance our activities and maintain our financial
      liquidity;
 
 ●
              our
      ability to attract and retain qualified, knowledgeable
      employees;
 
 ●
              the
      impact of general economic conditions on our
  business;
 
 ●
              postponements,
      reductions, or cancellations in orders from new or existing
      customers;
 
 ●
              the
      limited number of potential customers for our
  products;
 
 ●
              the
      variability in gross margins on our
products;
 
 ●
              our
      ability to design and market new products
  successfully;
 
 ●
              our
      failure to acquire new customers in the
future;
 
 ●
              deterioration
      of business and economic conditions in our
  markets;
 
 ●
              intensely
      competitive industry conditions with increasing price competition;
      and
 
 ●
              the
      rate of growth in the alternative fuel
markets.
  In this
document, the words "we," "our," "ours," "us," and “Company” refer to Sino Clean
Energy Inc. and our subsidiaries.
 
  Table of Contents
  PART
I
  ITEM 1.
                DESCRIPTION OF
      BUSINESS
  History Of Endo Networks,
Inc.
 
 Sino
Clean Energy Inc. (“SCLX” or the “Company”) is engaged in the research,
development, production and sale of its “coal water mixture” product, a fuel
substitute for oil, gas or coal. The Company was originally incorporated in
Texas as “Discount Mortgage Services, Inc.” on July 11, 2000 and in September
2001, the Company purchased Endo Networks, Inc., a corporation incorporated in
Ontario, Canada on January 11, 2001 (“Endo Canada”). In November 2001, the
Company changed its name to Endo Networks, Inc. and was redomiciled to the State
of Nevada in December 2002.
 
 Prior to
the Share Exchange transaction described below, SCLX conducted through, and all
of SCLX’s assets were contained within, Endo Canada, in which conceptual and
software development was ongoing for approximately two years by the Company
founders, through ongoing contract relationships with software development
companies. The Company helped businesses acquire new customers and build sales
and loyalty with existing customers. The Company used interactive technology
such as touch screen kiosks, handheld computers, and websites, combined with
promotional marketing tactics to filter large numbers of consumers, to find
qualified prospects, and even precondition them for a sale. Our services can be
deployed within a business' own retail environment, to increase sales with their
own customer base by increasing frequency of visit and/or average spend with
individual customers, or they can be deployed within a partner location such as
an office tower or a consumer show, to find and acquire qualified new customers.
The Company’s prior areas of expertise included: web, kiosk, handheld, wireless,
loyalty, promotional marketing, direct marketing, integration with point of
sale, surveys, incentive, sampling, and field and event marketing. The client
base included specialty retail, general retail, food service, automotive,
alcohol, energy, consumer packaged goods, entertainment, amateur sports, and
telecommunications companies.
 
 However,
since its inception, the Company had incurred losses and had substantial trouble
maintaining consistent cash flow necessary to operate our business. As recently
as its last fiscal year and quarter, the Company reported losses and working
with a capital deficit for those same periods. The additional investment and
infrastructure needed to sustain our business and develop our operations could
not be supported by its current cash flow. In view of the foregoing, the
Company’s lack of our growth and the limited platform for our future growth in
its current state, the Company’s Board determined that it would be in our
stockholders’ best interests to sell all of Endo’s assets to Peter B. Day, the
Company’s previous President, CEO and sole director prior to the Closing of the
Share Exchange. In making the determination to sell all of our assets to Mr.
Day, the Board gave primary consideration to Mr. Day’s familiarity with our
operations and business relations.  The Company’s Board believed that
Mr. Day’s knowledge of our operations would lead to an efficient and expeditious
sale process.  The Board was also able to negotiate Mr. Day’s
agreement to assume any liability with respect to the Company’s assets prior to
the Closing.  The Asset and Share Purchase Agreement (the “Purchase
Agreement”) by and between the Company and Mr. Day was approved by our Board and
executed on June 26, 2006, and a majority of our shareholders approved the
Purchase Agreement at our Annual Shareholder meeting on September 5,
2006.  The Purchase Agreement was filed as Exhibit A to our Schedule
14A Information Statement, which was filed with the Securities and Exchange
Commission on August 8, 2006, and is incorporated herein by
reference.  The description of the Purchase Agreement contained herein
and the transactions contemplated thereby do not purport to be complete and are
qualified in their entirety by reference to such documents.  On
September 30, 2006, the Company completed its sale of all of its assets and
shares of Endo Canada to Mr. Day, pursuant to the terms of that certain Purchase
Agreement. Following the Closing of the Purchase Agreement, the Company sought
to identify, evaluate and investigate various companies with the intent that, if
such investigation warrants, a transaction could be negotiated and completed
pursuant to which the Company would acquire a target company with an operating
business with the intent of continuing the acquired company’s business as a
publicly held entity.
 
 On
October 18, 2006, the Company executed a Share Exchange Agreement (“Exchange
Agreement”) by and among Hangson Limited, a business company incorporated under
the laws of the British Virgin Islands (“Hangson”), and the stockholders of 100%
of Hangson’s common stock (the “Hangson Stockholders”), on the one hand, and
Endo and a majority of the Company’s stockholders (“Endo Stockholders”), on the
other hand.  The closing of this share exchange transaction (the
“Share Exchange”) occurred on October 20, 2006 (the “Closing Date” or the
“Closing”). Separately, Hangson entered into consulting service agreements and
equity-related agreements (the “Contractual Arrangements”) with Shaanxi Suoang
Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”), which is a
limited liability company headquartered in the People’s Republic of China
(“PRC”) and organized under the laws of the PRC.  Hangson’s business
operations are conducted through Shaanxi Suoang under these Contractual
Arrangements.
 
 -1-
 Table of Contents
 Under the
Exchange Agreement, on the Closing Date, the Company issued a total of
26,000,000 shares of Common Stock (the “ENDO Shares”) to the Hangson
Stockholders and to Viking Partners, Inc., a consultant in this transaction, in exchange
for 100% of the common stock of Hangson.  Additionally, immediately
prior to the Closing Date, Peter B. Day, the Company’s then President, CEO and
sole director voluntarily cancelled 715,500 (post-reverse split) shares of the
915,500 (post 1 for 5 reverse split) shares of the Company’s common stock that
he owns; and three of Company’s other shareholders also voluntarily cancelled a
total of 438,850 (post 1 for 5 reverse split) shares of the Company’s common
stock that they own, and the Company issued an additional 669,600 shares
pursuant to certain anti-dilution provisions contained in agreements the Company
had with two consultants.  Also pursuant to the Share Exchange, and as
approved by a majority of the Company’s shareholders, the Company split its
common stock on a 1-for-5 reverse basis (the “Reverse Split”) prior to the
Closing Date.  After the cancellations, the consultant anti-dilution
share issuances, the Reverse Split and minor corrective stock issuances for
rounding of fractional shares resulting from the Reverse Split, the Company had
approximately 2,227,250 shares of common stock outstanding and after the Share
Exchange, the Company had approximately 28,227,250 shares of common stock
outstanding, with the Hangson’s Shareholders owning approximately 85% of the
Company’s common stock. In addition, at Closing, Hangson paid the Company’s
creditors a total of US $500,000 for services rendered, in order to satisfy
certain obligations as set forth in the Exchange Agreement.  We
accounted for this Share Exchange as a reverse acquisition and recapitalization
and, as a result, the Company’s consolidated financial statements are in
substance those of Hangson, with the assets and liabilities, and revenues and
expenses, of the Company being included effective from the date of the Share
Exchange.
 
 From and
after the Closing Date of the Share Exchange, the Company’s primary operations
consisted of the operations of Hangson and its variable interest entity (“VIE”),
Shaanxi Suo’ang Biological Science & Technology Co., Ltd. (“Shaanxi
Suoang”)
 
 Having no
substantive operation of its own, Hangson, through its VIE, Shaanxi Suoang is
currently engaged in the research, development, production and sale of
“coal-water mixture,” which is a fuel substitute for coal, oil or
gas.  Shaanxi Suoang operates the “coal-water mixture” business
through its subsidiary, Shaanxi Suo’ang New Energy Enterprise Company
Limited.
 
 Recent Developments
 
 On May 8,
2006, Shaanxi Suoang entered into an agreement to establish a subsidiary named
Shaanxi Suo’ang New Energy Enterprise Company Limited (“Suoang New Energy”) in
which Shaanxi Suoang has injected a capital of $496,000 representing an 80%
equity interest in Suoang New Energy. Suoang New Energy was formed for the
purpose of engaging in the research, development, production and sale of
“coal water mixture”, a fuel to substitute for coal, oil or gas.
 
 During
the majority of the 2006 fiscal year, we were engaged in two lines of business:
production and sale of coal-polymer (“COPO”) resin products, including but not
limited to, degradable mulch used for the conservation of moisture and warmth of
soil and protection of the roots of plants, and materials used for plastic
injection molding, electric wire covering, and garbage bags, and also its
“coal-water mixture” fuel substitute business described above. However, the
Company has subsequently decided to focus solely on its coal-water mixture fuel
product business. In December 2006, we began phasing out of the COPO resin
product business by selling our patented technology related to COPO resin
production. Further, we ceased operations of our COPO resin product
manufacturing plant in January 2007, and we also sold the COPO resin plant
machinery. Going forward, we will concentrate on the development, production and
sale of our “coal-water mixture” fuel substitute. In January 2007, we entered
into our first contracts for the sale of our coal water mixture product. We
expect production of our coal water mixture will commence in July
2007.
 
 Effective
January 4, 2007, we changed our name from “Endo Networks, Inc.” to “China West
Coal Energy Inc.” (the “Name Change”) and we increased the number of our
authorized shares of capital stock to 250,000,000 shares, which includes
200,000,000 shares of common stock and 50,000,000 shares of preferred stock
(“Authorized Shares Amendment”), by filing a Certificate of Amendment to amend
our Articles of Incorporation. On November 27, 2006, holders of a majority of
our outstanding common stock approved the Name Change and the Authorized Shares
Amendment to our Articles of Incorporation. On December 8, 2006, we filed a
definitive information statement on Schedule 14C with the SEC, which was
delivered to our stockholders of record to notify them that the stockholders had
approved the Name Change and the Authorized Shares Amendment to our Articles of
Incorporation.
  As
discussed more fully in our Current Report on Form 8-K filed with the SEC on
January 16, 2007, the Company’s Board of Directors, by unanimous written
consent, approved a change of the Company ’s fiscal year. The Company’s new
fiscal year will begin on January 1 and end on December 31 of each year, and
this change is applicable with the year ending December 31,
2006.
 
 As
discussed more fully in our Current Report on Form 8-K dated August 18, 2007,
effective on August 15, 2007, the Company merged with its wholly owned
subsidiary, Sino Clean Energy Inc., pursuant to Articles of Merger that the
Company filed
with the Nevada Secretary of State.  The merger was in the form of a
parent/subsidiary merger, with the Company as the surviving corporation. In
accordance with Section 92A.180 of the Nevada Revised Statutes, shareholder
approval of the merger was not required.  Upon completion of the
merger, the Company’s name has been changed to “Sino Clean Energy Inc.” and the
Company’s Articles of Incorporation have been amended to reflect this name
change. We changed our name to better reflect the direction and business of the
Company.
  -2-
 Table of Contents
 The Board
of Directors of the Company also authorized and approved a 3-for-1 forward stock
split (“Stock Split”) of its issued and outstanding shares of common stock, par
value $0.001 per share (“Common Stock”) by way of share dividend, effective on
August 15, 2007.  To effect the Stock Split, the Company authorized
the issuance of two shares of common stock for each one outstanding share of
common stock held by the shareholders of record on August 15, 2007.
 
 Immediately
prior to the Stock Split, the Company had 28,227,250 shares of common stock
issued and outstanding. After giving effect to the Stock Split, the Company has
approximately 84,681,750 shares of common stock issued and
outstanding.  The Company's common stock was quoted for trading on a
post-split basis on Nasdaq’s Over-the-Counter Bulletin Board under the new
trading symbol “SCLX” as of August 21, 2007.
 
 Throughout
the remainder of this report, when we use phrases such as "we," "our,"
"Company," "us," we are referring to SCLX, Hangson, and Shaanxi Suoang as a
combined entity.
 
 Overview of Hangson
Limited
 
 Hangson
is a company that was incorporated on June 2, 2006 under the laws of the British
Virgin Islands and is the Company’s wholly owned subsidiary. The Company was
previously engaged in both the production and sale of COPO resin products and
also the research, development, production and sale of its “coal-water mixture,”
product, an available fuel substitute for coal, oil or gas. However, the Company
subsequently decided that it would be in the best interest of the Company
to cease operations of the COPO resin products business and focus on the
“coal-water mixture” product business. Because of the control that the Company
exercises over Shaanxi Suoang pursuant to the “Contractual Arrangements”
described below by and between Shaanxi Suoang and Hangson, Shaanxi Suoang has
phased out of the COPO resin products business and will instead focus on
research, development, production and sale of “coal-water mixture” fuel
substitute. In December 2006, the patented technology owned through Shaanxi
Suoang in connection with the COPO resin products was sold to HanZhongWeiDa
Commercial Company Limited, a company controlled by Leping Yao, a shareholder of
Shaanxi Suoang, for consideration of $256,200.  Further, in January
2007, we ceased operations at our COPO resin product manufacturing plant and we
sold our COPO resin products’ manufacturing plant machinery to HanZhongWeiDa
Commercial Company Limited for cash consideration of $89,670 and the related
COPO products inventory to an unrelated third party for $12,767.
 
 Hangson
does not conduct any substantive operations of its own and conducts its primary
business operations through its VIE, Shaanxi Suoang. Shaanxi Suoang, in turn,
conducts its coal-water mixture operations through its subsidiary, Suoang New
Energy.
 
 PRC law
currently has limits on foreign ownership of certain companies.  To
comply with these foreign ownership restrictions, we operate our business in
China through Shaanxi Suoang, which is a limited liability company headquartered
in Xi’an, China and organized under the laws of China. Shaanxi Suoang has the
licenses and approvals necessary to operate our business in China.  We
have contractual arrangements with Shaanxi Suoang and its shareholders pursuant
to which we provide technology consulting and other general business operation
services to Shaanxi Suoang.  Through these contractual arrangements,
we also have the ability to substantially influence Shaanxi Suoang’s daily
operations and financial affairs, appoint its senior executives and approve all
matters requiring shareholder approval.  As a result of these
contractual arrangements, which enable us to control Shaanxi Suoang, we are
considered the primary beneficiary of Shaanxi Suoang. Accordingly, we
consolidate Shaanxi Suoang’s results, assets and liabilities in our financial
statements.  For a description of these contractual arrangements, see
the section below titled “Contractual Arrangements with Shaanxi Suoang and its
Shareholders.” The Company’s consolidated assets do not include any collateral
for Shaanxi Suoang’s obligations. The creditors of Shaanxi Suoang do not have
recourse to the general credit of the Company.
  Contractual
Arrangements With Shaanxi Suoang And Its Shareholders
 
 Our
relationships with Shaanxi Suoang and its shareholders are governed by a series
of contractual arrangements. Under PRC laws, each of Hangson, and Shaanxi Suoang
is an independent legal person and none of them is exposed to liabilities
incurred by the other party.  Other than pursuant to the contractual
arrangements between Hangson and Shaanxi Suoang, Shaanxi Suoang
does not transfer any other funds generated from its operations to
Hangson.  As of August 18, 2006, we entered into the following
contractual arrangements with Shaanxi Suoang as described below:
 
 -3-
 Table of Contents
 Consulting
Services Agreement. Pursuant to the exclusive
consulting services agreements between Hangson and Shaanxi Suoang, Hangson has
the exclusive right to provide to Shaanxi Suoang general business operations
services as well as consulting services related to the technological research
and development of coal-based products as well as general business operation
advice and strategic planning (the “Services”).  Under this agreement,
Hangson owns the intellectual property rights developed or discovered through
research and development, in the course of providing the Services, or derived
from the provision of the Services. Shaanxi Suoang pays a quarterly consulting
service fees in Renminbi (“RMB”) to Hangson that is equal to all of
Shaanxi Suoang’s revenue for such quarter.
 
 Operating
Agreement.
Pursuant to the operating agreement among Hangson, Shaanxi Suoang and all
shareholders of Shaanxi Suoang (collectively “Shaanxi Suoang’s Shareholders”),
Hangson provides guidance and instructions on Shaanxi Suoang’s daily operations,
financial management and employment issues.  The shareholders of
Shaanxi Suoang must designate the candidates recommended by Hangson as their
representatives on Shaanxi Suoang’s board of directors.  Hangson has
the right to appoint senior executives of Shaanxi Suoang.  In
addition, Hangson agrees to guarantee Shaanxi Suoang’s performance under any
agreements or arrangements relating to Shaanxi Suoang’s business arrangements
with any third party. Shaanxi Suoang, in return, agrees to pledge its
accounts receivable and all of its assets to Hangson.  Moreover,
Shaanxi Suoang agrees that without the prior consent of Hangson, Shaanxi Suoang
will not engage in any transactions that could materially affect the assets,
liabilities, rights or operations of Shaanxi Suoang, including, without
limitation, incurrence or assumption of any indebtedness, sale or purchase of
any assets or rights, incurrence of any encumbrance on any of its assets or
intellectual property rights in favor of a third party or transfer of any
agreements relating to its business operation to any third party. The term of
this agreement is ten (10) years from August 18, 2006 and may be extended only
upon Hangson’s written confirmation prior to the expiration of
this agreement, with the extended term to be mutually agreed upon by the
parties.
 
 Equity
Pledge Agreement.Under the equity pledge
agreement between the shareholders of Shaanxi Suoang and Hangson, the
shareholders of Shaanxi Suoang pledged all of their equity interests in Shaanxi
Suoang to Hangson to guarantee Shaanxi Suoang’s performance of its obligations
under the technology consulting agreement.  If Shaanxi Suoang or
Shaanxi Suoang’s Shareholders breaches its respective contractual obligations,
Hangson, as pledgee, will be entitled to certain rights, including the
right to sell the pledged equity interests.  Shaanxi Suoang’s
Shareholders also agreed that upon occurrence of any event of default, Hangson
shall be granted an exclusive, irrevocable power of attorney to take actions in
the place and stead of the Shaanxi Suoang’s Shareholders to carry out the
security provisions of the equity pledge agreement and take any action and
execute any instrument that Hangson may deem necessary or advisable to
accomplish the purposes of the equity pledge agreement. The shareholders of
Shaanxi Suoang agreed not to dispose of the pledged equity interests or take any
actions that would prejudice Hangson’ interest.  The equity pledge
agreement will expire two (2) years after Shaanxi Suoang’s obligations under the
exclusive consulting services agreements have been fulfilled.
 
 Option
Agreement. Under the option
agreement between the shareholders of Shaanxi Suoang and Hangson, the
shareholders of Shaanxi Suoang irrevocably granted Hangson or its designated
person an exclusive option to purchase, to the extent permitted under PRC law,
all or part of the equity interests in Shaanxi Suoang for the cost of the
initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. Hangson or its designated person
has sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten (10) years from August 18, 2006 and may
be extended prior to its expiration by written agreement of the
parties.
 
 Proxy
Agreement. Pursuant to the proxy agreement among Hangson and Shaanxi
Suoang’s Shareholders, Shaanxi Suoang’s Shareholders agreed to irrevocably grant
a person to be designated by Hangson with the right to exercise Shaanxi Suoang’s
Shareholders’ voting rights and their other rights, including the attendance at
and the voting of Shaanxi Suoang’s Shareholders’ shares at the shareholders’
meetings (or by written consent in lieu of such meetings) in accordance with
applicable laws and its Article of Association, including but not limited to the
rights to sell or transfer all or any of his equity interests of the Shaanxi
Suoang, and appoint and vote for the directors and Chairman as the authorized
representative of the shareholders of Shaanxi Suoang.  The term of
this Proxy Agreement is ten (10) years from August 18, 2006 and may be extended
prior to its expiration by written agreement of the parties.
 
 Shaanxi Suo’ang Biological Science &
Technology Co.,
Ltd.
 
 As
discussed above, our operations are conducted through Shaanxi Suoang, which is a
limited liability company headquartered in Xian, China and organized under the
laws of PRC.  Shaanxi Suoang was organized in May 2002.  As
described above, Shaanxi Suoang is now solely engaged in research, development,
marketing and the sales of “coal water mixture”, which is an available fuel
substitute for oil, gas or coal through its subsidiary, Suoang New
Energy.
  -4-
 Table of Contents
  Principal
Products Or Services
 
 Shaanxi
Suoang is currently engaged in research, development, marketing and sales of its
coal water mixture fuel (hereinafter “CWM Fuel”).  CWM Fuel is a fuel
substitute that can be used instead of oil, coal and gas, in industrial boilers,
power plant boilers and industrial kilns.  The Company believes CWM
Fuel will be a substitute for oil, coal and gas for use in boilers used for
central heating for government buildings, schools, armed forces’ barracks, and
residential communities, and also for use in industrial production
facilities.  Construction of the first phase of the Company’s CWM Fuel
production plant was completed in June 2007.  The Company’s CWM Fuel
production plant became operational and production of its CWM Fuel commenced in
August 2007.  The current production capacity is 100,000 tonnages of
CWM Fuel per year.  In view of the strong demand for CWM Fuel, the
Company plans to begin the second phase of construction in mid-2008, so as to
increase the current production capacity to 300,000 tonnages a
year.
 
 Coal
Water Mixture Fuel
 
 CWM Fuel
is a viscous, heavy liquid fuel that is produced by mixing grinded coal, water
and chemical additives.  This liquid fuel can be stored, pumped and
burned as a substitute for oil or gas in properly modified furnaces or
boilers.  In general, CWM Fuel is cheaper than oil or gas but its
combustion thermal efficiency may be similar to oil or gas. Further, CWM Fuel
may burn cleaner than coal and thus, may be a more environmentally friendly
fuel.
 
 The
Company is currently constructing a CWM Fuel production facility in the city of
Tongchuan with an expected annual production capacity of 300,000 tons that will
enable the Company to supply several industrial users and two central heating
stations in Tongchuan.
 
 China is
a large producer and consumer of coal and will remain so for the foreseeable
future. Pollution resulting from coal combustion causes concern both within and
outside China. Approximately 90% of environmental pollution in China is
attributable to direct coal combustion. The Chinese Government is currently
developing policies and implementing control-measures to reduce this pollution.
Clean coal technology (CCT) can play an important part in this process,
contributing to both improved energy utilization efficiency and reduced
environmental pollution.
 
 In August
1995, the Chinese government formulated “the 9th
Five-Year Plan for Clean Coal Technology in China and a Development Program to
2010.”  In the “10th
Five-Year Plan” the State emphasized the need to strengthen clean coal
technology R&D and also to promote commercialization of proven clean coal
technologies.  The potential clean coal technology market in China is
substantial.  The Company’s CWM Fuel, being a mixture of coal, water,
and additives, presents itself as a fuel to substitute direct coal
combustion.  Use of the CWM Fuel not only allows the mixture to be
transported as a fluid, which avoids coal dust dispersion and spontaneous
combustion during transportation and storage, but it also allows the equipment
used to burn this fuel to be simplified. CWM Fuel may enhance the combustion
efficiency rate of coal while reducing the dust emission rate.
 
 Because
direct coal combustion has caused serious pollution in China, the Chinese
government has enacted relevant laws and regulations to require enterprises to
replace old direct coal combustion industrial burners or furnaces with furnaces
that use cleaner fuels.  In the city of Xian, for example, thousands
of plants continue to use old direct coal combustion burners or furnaces. In
addition, we believe on average, approximately 200 furnaces are purchased by
local enterprises in Xian each year. But based on prevailing regulations, no new
direct coal combustion furnace is allowed to be installed within Xian’s city
limits.  Therefore, considering the high and fluctuating prices of
petroleum, the potential demand for the Company’s CWM Fuel product as a cleaner
substitute for direct coal combustion is expected to be
substantial.
 
 In 2003,
Shaanxi Suoang’s board of directors realized this opportunity and initiated the
development of our CWM Fuel product. After studying the market demand for CWM
Fuel in the cities of Qingdao, Shenyang, Maoming, Foshan for two years and
conducting a feasibility study, the Company decided to develop its CWM Fuel
product which complies with the environmental protection policies of
“prohibiting the burning of raw coal” in large-sized or medium-sized cities such
as Xian. Shaanxi Suoang developed a series of technologies in 2004, including
“techniques for the production of coal water mixture by utilizing the waste
fluid from paper making and silt in urban area” and the “garbage combustion
techniques based on coal water mixture.”  Given the expected demand
for coal water mixture products and CWM Fuel product that we have developed, we
believe that the conditions for the application, promotion and industrialized
production and sale of CWM Fuel is now mature.  The Company has
invested approximately RMB60 million to initiate the construction of the
production facility base for its CWM Fuel in the city of Tongchuan, and the
Company is currently planning for an annual production capacity of 300,000 tons,
which would be one of the largest in Western China.
  -5-
 Table of Contents
  The
Company has also acted an agent for Qingdao Haizhong Industry Inc., a boiler
manufacturer that produces boilers that are compatible with the Company’s CWM
Fuel and has received commission income for acting as agent for sales of such
boilers.  Future plans also include the potential purchase of coal
mines to supply the coal needed to manufacture the CWM Fuel.
 
 DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES AND OUR CUSTOMERS
 
 Our CWM
Fuel product will be sold and distributed by the Company directly to its
customers. We plan to conduct promotional marketing activities to publicize our
product and enhance the Company’s image as well as to reinforce the recognition
of the Company’s brand name through assistance from the local
government.  The Company’s promotional activities included promotion
of its CWM Fuel at the“Popularizing CWM
and Enhancing Energy Conservation and Pollutants Reduction Conference ” held in
Xi’an City on March 27, 2008 and the first “ Clean Fuel Popularization
Conference” sponsored by Shaanxi Province Environmental Protection Bureau on
March 13, 2008.
 
 In January
2007, we entered into our first contracts for the sale of our CWM Fuel product
and the Company has continued to enter into contracts for the sale of its CWM
Fuel throughout 2007.  Because the Company has just commenced sales of
our CWM Fuel product, we will be dependent on a limited number of customers for
a substantial portion of our revenues from the sale of this
product.  Nonrenewal or termination of our contracts with major
customer or the failure by these customers to issue additional orders under the
existing contracts would have a materially adverse effect on our
revenues.  There can be no assurance that the Company will be able to
obtain additional contracts for CWM Fuel product sales similar in scope to
those we have recently obtained, that it will be able to retain
existing customers and attract new customers, or that it will not remain largely
dependent on a limited customer base accounting for a substantial portion of
revenues.
 
 COMPETITION
 
 In
regards to our CWM Fuel product, we have no major competitors in Shaanxi
province but we have four competitors in other provinces: Tai’an Liangda CWM
Co., Ltd., Datong Huihai CWM Company, Daqing Shengtai Clean Coal Fuel Co., Ltd.,
and Ningbo Hongyuan CWM Co., Ltd.  The Company will be able to compete
with these competitors because of its strong R&D capability, extensive sales
network, abundant coal resources, the local government’s assistance and the lack
of competitors in the Shaanxi market.
 
 SOURCES
AND AVAILABILITY OF RAW MATERIALS AND THE PRINCIPAL SUPPLIERS
 
 Our
principal raw material is coal that is supplied directly from the local coal
mines and used to manufacture our products.  Our principal supplier of
coal is Tong Chuan City Yao Zhou District Zhao Jin  County Xin Yuan
Coal Mine.  The prices for this raw material are subject to market
forces largely beyond our control, including energy costs, market demand, and
freight costs.  The prices for this raw material have varied
significantly in the past and may vary significantly in the future.
 
 PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS
 
 We may
enter into confidentiality, non-compete and invention assignment agreements with
our employees and consultants and nondisclosure agreements with third
parties.  Coal and alternative energy companies are at times involved
in litigation based on allegations of infringement or other violations of
intellectual property rights.  Furthermore, the application of laws
governing intellectual property rights in the PRC and abroad is uncertain and
evolving and could involve substantial risks to us.
 
 GOVERNMENT
APPROVAL AND REGULATION OF THE COMPANY’S PRINCIPAL PRODUCTS OR
SERVICES
 
 The State
Environmental Protection Laws of the PRC governs us and our
products.  The Company is subject to various PRC federal, state and
local environmental laws and regulations, including the State Environmental
Protection Laws concerning emissions to the air, discharges to waterways, the
release of materials into the environment, the generation, handling,
storage, transportation, treatment and disposal of waste materials or otherwise
relating to the protection of the environment.  The Company endeavors
to ensure the safe and lawful operation of its facilities in manufacturing and
distribution of products and believes it is in compliance in all material
respects with applicable PRC laws and regulations.
 
 No
enterprise may start production at its facilities until it receives approval
from the Ministry of Commerce to begin operations.  The Company
currently has obtained the requisite approval and licenses from the Ministry of
Commerce in order to operate our production facilities.
  -6-
 Table of Contents
  COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
 
 No
environmental compliance expenses were incurred in 2007 in connection with our
CWM Fuel business.
  RESEARCH
AND DEVELOPMENT
 
 We plan
to conduct research and development (“R&D”) in the future to further
develop and improve the quality of our CWM Fuel products.  However, in
2007, because we were in the beginning phase of our CWM Fuel business, we had no
R&D expenses.
 
 EMPLOYEES
 
 In 2006,
the Company had 76 employees, all of which were full time
employees.  In 2007, the Company had 63 employees, all of which were
full time employees.  We believe the success of our business depends,
in part, on our ability to attract and retain qualified personnel, particularly
qualified scientific, technical and key management personnel and we strive to
have good relationships with our employees.
 
 PRINCIPAL
EXECUTIVE OFFICES
 
 Our
principal executive office is located at Room 2205, Suite A,
Zhengxin Building, No. 5, Gaoxin 1st Road, Gao Xin District, Xi’an,
Shaanxi Province, People’s Republic of China and our telephone number is
(029) 8209-1099.
 
 REPORTS
TO SECURITY HOLDERS
 
 We file
reports including our annual report, information statements as well as other
reports required of publicly held companies with the Securities and Exchange
Commission ("SEC"). You can read and copy any materials we file with the
Commission at its' Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. You can obtain additional information about the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the Commission, including us.
  ITEM 2.
              DESCRIPTION OF
      PROPERTY
 
 The
Company’s headquarters are currently located in approximately 298 square meters
of office space at Room 2205, Suite A, Zhengxin Bldg., No.5, Gaoxin 1st Road,
Gao Xin District, Xi’an, Shaanxi Province, People’s Republic of
China.  The Company leases this office space. We terminated the
tenancy agreement for our COPO resin product manufacturing plant in December
2006.
 
 In July
2006, the Company purchased a land use right for the property located at Yao
Zhou Ou in Tongchuan City for the CWM Fuel production facility and obtained
the land use right certificate for this property in December
2007.   In June 2007, the Company completed its first phrase of
production facility for CWM Fuel and the facility became operational and
production of CWM Fuel commenced in August 2007.
 
 The table
below provides summary descriptions of the properties used for the Company’s
business operations in 2007:
 
 Property
      Location
              Area
      (sq. meters)
              Lease
      Expiration Period
              PurposeRoom
      2205, Suite A, Zhengxin Bldg., No.5, Gaoxin 1st Road, Gao Xin District,
      Xi’an, Shaanxi Province, People’s Republic of China
              248
              June
      15, 2010
              Company
      headquartersYao
      Zhou Ou,
                Tongchuan City,
                People’s
      Republic of China
              40,626
              December
      8, 2057
              Production
      facility for coal water mixture - first phase of construction
      completed
   -7-
 Table of Contents
  During
the year 2004, the Company exchanged leasehold properties consisting of three
floors in a commercial building located in the Hanzhong City, China and having a
net book value of $1,691,555 for another leasehold properties also consisting of
three floors in the same building and having a fair value of
$1,773,697.  The terms of the exchange also required the Company to
pay cash of $501,205.  The Company accounted for the cash component as
an acquisition of real estate, and the nonmonetary component based on the
recorded amount of $1,691,555 of the leasehold properties given up.
 
 In order
to raise funds to support the Company’s new CWM Fuel business, on June 13,
2006, the Company signed a property transfer agreement with Hanzhong Si Xiong Ke
Chuang Business Company Limited (“Buyer”), a company controlled by Yanjun Zhao,
a Company shareholder, to dispose of the above-described leasehold properties
together with the leasehold improvement at the cash consideration of
approximately $2,450,000.  According to the property transfer
agreement, the cash consideration would be settled by installment with the last
installment on or before March 31, 2007 and the title of the property will be
passed to buyer upon receipt of the 95% of the total consideration due to the
Company under the property transfer agreement.  As of December 31,
2007, the Company has received $1,507,000 in connection with this property
transfer transaction.
 
 On March
25, 2007, the Company and the Buyer entered into a supplementary agreement
whereby the Company agreed to transfer the title of the properties to the Buyer
upon the Buyer’s payment of the remaining balance to the Company on or before
May 31, 2007.  On June 21, 2007, the Company and the buyer entered
into another extension agreement with the Buyer whereby the Company extended the
date for payment of the remaining balance and transfer of the title of
properties to the buyer to on or before October 31, 2007.  On March 6,
2008, the Company entered a supplementary agreement whereby the Company agreed
to transfer the title of the properties before May 31, 2008 and the Buyer agreed
to pay the Company the balance of the purchase price owed within one month after
the transfer of property title.
 ITEM 3.
              LEGAL
      PROCEEDINGS
  
 We may be
subject to, from time to time, various legal proceedings relating to claims
arising out of our operations in the ordinary course of our business. We are not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
business, financial condition, or results of operations of the
Company.
  ITEM 4.
              SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
 
  -8-
 Table of Contents
  PART
II
  ITEM 5.
                MARKET FOR
      COMMON EQUITY AND RELATED STOCKHOLDERMATTERS
  
 Our
common stock is not listed on any stock exchange. The common stock is traded
over-the-counter on the Over-the-Counter Electronic Bulletin Board under the
symbol "SCLX".  The following table sets forth the high and low bid
information for the common stock for each quarter within the last two fiscal
years (for fiscal year ended December 31), as reported by the Over-the-Counter
Electronic Bulletin Board.  The bid prices reflect inter-dealer
quotations, do not include retail markups, markdowns or commissions and do not
necessarily reflect actual transactions.
  LOW
              
              
              HIGH2007Fourth
      Quarter
              
              $
              0.15
              
              
              $
              0.35Third
      Quarter
              
              $
              0.20
              
              
              $
              1.01Second
      Quarter
              
              $
              0.45
              
              
              $
              1.01First
      Quarter
              
              $
              0.60
              
              
              $
              1.052006Fourth
      Quarter
              
              $
              0.00
              
              
              $
              0.80Third
      Quarter
              
              $
              0.13
              
              
              $
              0.16Second
      Quarter
              
              $
              0.14
              
              
              $
              0.15First
      Quarter
              
              $
              0.10
              
              
              $
              0.14
  As of April 11, 2008, there
were 1,614 stockholders of record of our common stock.
   DIVIDENDS
 
 We have
never paid any dividends on the Common Stock or the Preferred Stock whereas our
VIE Shaanxi Suoang paid $499,590 in 2006 and nil in
2007.  We currently anticipate that any future earnings will be
retained for the development of our business and do not anticipate paying any
dividends in the foreseeable future.
 
 TRANSFER
AGENT
 
 Our
transfer agent is Signature Stock Transfer, Inc., 2301 Ohio Drive - Suite 100,
Plano, Texas 75093.  Their telephone number is (972)
612-4120.
 
 EQUITY
COMPENSATION PLAN INFORMATION
 
 We
currently do not have any effective equity compensation plans.
 
 CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
  None.
 
 RECENT
SALES OF UNREGISTERED SECURITIES
 
 The Company did not have any sales of
unregistered securities during the year ended December 31, 2007.
 
 Pursuant
to the Share Exchange Agreement entered by and among Hangson Limited, a British
Virgin Islands company (“Hangson”), and the stockholders of 100% of Hangson’
common stock (the “Hangson Stockholders”), on the one hand, and the Registrant
and a majority of the Registrant’s stockholders (“ENDO Stockholders”), on the
other hand, the Company issued 26,000,000 shares of the Company’s common stock
(the “ENDO Shares”) to the Hangson Shareholders and to Viking Partners, Inc.
(“Viking”), a consultant in the Share Exchange transaction, in exchange for 100%
of the common stock of Hangson.  The issuance of the Endo Shares to
the Hangson Shareholders and Viking pursuant to the Share Exchange Agreement was
exempt from
registration under the Securities Act pursuant to Section 4(2) and/or Regulation
S thereof. We made this determination based on the representations of the
Hangson Shareholders and Viking which included, in pertinent part, that such
shareholders were either (a) "accredited investors" within the meaning of Rule
501 of Regulation D promulgated under the Securities Act, and/or (b) not a "U.S.
person" as that term is defined in Rule 902(k) of Regulation S under the Act,
and that such shareholders were acquiring our common stock, for investment
purposes for their own respective accounts and not as nominees or agents, and
not with a view to the resale or distribution thereof, and that each member
understood that the shares of our common stock may not be sold or otherwise
disposed of without registration under the Securities Act or an applicable
exemption therefrom.
 
 -9-
 Table of Contents
 On May 2,
2006, we entered into a consulting agreement (the “TriPoint Agreement”) with
TriPoint Capital Advisors, LLC (“TriPoint”), a business consultant, in order to
assist us in our business development, with the structuring of capital
transactions, to provide mergers and acquisition support services, and corporate
compliance support. As consideration for their services under the agreement, we
agreed to issue Tripoint 472,000 shares (94,400 shares after giving effect for
the 5:1 reverse stock split on October 17, 2006) of our common
stock.  Based on the last trading price prior to the issuance of the
stock a non-cash consulting expense of $70,800 was recorded for the issuance of
these shares.  The TriPoint Agreement provided that if a reduction in
shares occurs after the date of the agreement by reason of a reverse stock
split, then the Company is obligated to issue TriPoint a warrant for the
purchase of additional shares of common stock, at the then par value, sufficient
to preserve the original share issuance in the agreement of 472,000 (the
“TriPoint Agreement Anti-Dilution Provision”). The shares were issued pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act for issuances not involving a public offering.
 
 On May 2,
2006, we entered into a consulting agreement (the “Progressive Agreement”) with
Progressive Capital Markets, LLC (“Progressive”), a business consultant, in
order to assist us in our business development, with the structuring of capital
transactions, to provide mergers and acquisition support services, and corporate
compliance support. As consideration for their services under the agreement, we
agreed to issue Progressive 365,000 (73,000 shares after giving effect for the
5:1 reverse stock split on October 17, 2006) shares of our common stock. Based
on the last trading price prior to the issuance of the stock a non-cash
consulting expense of $54,750 was recorded for the issuance of these shares. The
Progressive Agreement provided that if a reduction in shares occurs after the
date of the agreement by reason of a reverse stock split, then the Company is
obligated to issue Progressive a warrant for the purchase of additional shares
of common stock, at the then par value, sufficient to preserve the original
share issuance in the agreement of 365,000 (the “Progressive Agreement
Anti-Dilution Provision”). The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering.
 
 On
October 11, 2006, pursuant to the TriPoint Agreement Anti-Dilution Provision and
because the Company engaged in a 1 for 5 Reverse Stock Split (as discussed more
fully above), the Company issued TriPoint a warrant (the “TriPoint Warrant”) for
the purchase of an additional 377,600 shares of the Company’s common stock with
an exercise price of $.001 per share, so as to preserve the number of shares
held by TriPoint prior to the Reverse Split at 472,000 shares as required under
the TriPoint Agreement. The warrant was issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving a public offering.
 
 On
October 11, 2006, pursuant to the Progressive Agreement Anti-Dilution Provision
and because the Company engaged in a 1 for 5 Reverse Stock Split (as discussed
more fully above), the Company issued Progressive a warrant (the “Progressive
Warrant”) for the purchase of an additional 292,000 shares of the Company’s
common stock with an exercise price of $.001 per share, so as to preserve the
number of shares held by Progressive prior to the Reverse Split at 365,000
shares as required under the Progressive Agreement. The warrant was issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering.
 
 On
October 17, 2006, TriPoint exercised their TriPoint warrant, as described above,
and the Company issued to TriPoint 377,600 shares of the Company’s common stock
at an exercise price of $.001 per share to TriPoint. These shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving a public offering.
 
 On
October 17, 2006, Progressive exercised their Progressive warrant, as described
above, and the Company issued to Progressive 292,000 shares of the Company’s
common stock at an exercise price of $.001 per share to Progressive. These
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving a public
offering.
  During
July 2005, the Company issued 55,000 shares (11,000 shares after giving effect
for the 5:1 reverse stock split on October 17, 2006) of its common stock to
consultants for consulting services valued $0.10 per share or $5,500, which was
the fair value of
common stock on the date issued. These transactions were exempt from
registration requirements in reliance on Section 4(2) of the Securities Act of
1933. There was no form of general solicitation or general advertising
undertaken and the investor is accredited.
 
 -10-
 Table of Contents
 During
July 2004, the Company issued 96,500 (19,300 shares after giving effect for the
5:1 reverse stock split on October 17, 2006) shares of common stock to
consultants for consulting services valued $0.07 per share or $6,755, which was
the fair value of common stock on the date issued. These transactions were
exempt from registration requirements in reliance on Section 4(2) of the
Securities Act of 1933. There was no form of general solicitation or general
advertising undertaken and the investor is accredited.
 ITEM 6.
                  MANAGEMENT'S
      DISCUSSION AND
ANALYSIS
  
 Overview
 
 Sino
Clean Energy Inc. (“SCE” or the “Company”) is engaged in the research,
development, production and sale of its “coal water mixture” product, a fuel
substitute for oil, gas or coal.  The Company was originally
incorporated in Texas as “Discount Mortgage Services, Inc.” on July 11, 2000 and
in September 2001, the Company purchased Endo Networks, Inc., a corporation
incorporated in Ontario, Canada on January 11, 2001 (“Endo
Canada”).  In November 2001, the Company changed its name to Endo
Networks, Inc. and was redomiciled to the State of Nevada in December 2002.
Prior to the Share Exchange transaction described below, the Company conducted
through, and all of the Company’s assets were contained within, Endo Canada, in
which conceptual and software development was ongoing for approximately two
years by the Company founders, through ongoing contract relationships with
software development companies.
 
 On
October 18, 2006, we entered into a definitive Share Exchange Agreement with
Hangson Limited (“Hangson”), whereby we would acquire all of the outstanding
common stock of Hangson in exchange for newly-issued shares of our common stock
to the Hangson shareholders (the “Share Exchange”).  On October 20,
2006 (the “Closing Date”), Hangson became our wholly-owned subsidiary and
Hangson’s shareholders became owners of the majority of our voting
stock.  The acquisition of Hangson by us was accounted for as a
reverse merger because on a post-merger basis, the former shareholders of
Hangson held a majority of our outstanding common stock on a voting and
fully-diluted basis.  As a result, Hangson was deemed to be the
acquirer for accounting purposes.  From and after the Closing Date of
the Share Exchange, the Registrant’s primary operations consisted of the
operations of Hangson.
 
 Additionally,
on August 18, 2006, Hangson entered various agreements Shaanxi Suo’ang
Biological Science & Technology Co., Ltd. (“Shaanxi
Suoang”).  Through these contractual arrangements, we have the ability
to substantially influence Shaanxi Suoang’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring
shareholder approval.  As a result of these contractual arrangements,
which obligate Hangson to absorb a majority of the risk of loss from Shaanxi
Suoang activities, it enables Hangson to control Shaanxi Suoang, and enables
Hangson to receive a majority of Shaanxi Suoang’s expected residual
returns.  Hangson is considered to be the primary beneficiary of
Shaanxi Suoang. Accordingly, we consolidate Shaanxi Suoang’s results, assets and
liabilities in our financial statements. For a description of these contractual
arrangements, see the section titled “Contractual Arrangements with Shaanxi
Suoang and its Shareholders” in the Company’s Annual Report on Form 10-KSB filed
with the SEC on May 3, 2007.  The Company’s consolidated assets do not
include any collateral for Shaanxi Suoang’s obligations. The creditors of
Shaanxi Suoang do not have recourse to the general credit of the
Company.
 
 Effective
January 4, 2007, we changed our name from “Endo Networks, Inc.” to “China West
Coal Energy Inc.” (the “Name Change”) and we increased the number of our
authorized shares of capital stock to 250,000,000 shares, which include
200,000,000 shares of common stock and 50,000,000 shares of preferred stock
(“Authorized Shares Amendment”), by filing a Certificate of Amendment to amend
our Articles of Incorporation. On November 27, 2006, holders of a majority of
our outstanding common stock approved the Name Change and the Authorized Shares
Amendment to our Articles of Incorporation. On December 8, 2006, we filed a
definitive information statement on Schedule 14C with the SEC, which was
delivered to our stockholders of record to notify them that the stockholders had
approved the Name Change and the Authorized Shares Amendment to our Articles of
Incorporation. Further, and as discussed more fully in the Form 8-K Current
Report filed by the Company with the SEC on January 16, 2007, the Company’s
Board of Directors, by unanimous written consent, approved a change of the
Company’s fiscal year. The Company’s new fiscal year begins on January 1st and
ends on December 31st of each year.
  -11-
 Table of Contents
 Our
primary business operations are conducted through our wholly-owned subsidiary
Hangson Limited (“Hangson”). Hangson was incorporated under the laws of the
British Virgin Islands on June 2, 2006. Hangson does not have any substantive operations
of its own and conducts its primary business operations through Shaanxi Suoang,
which through the contractual arrangements described above is deemed Hangson’s
variable interest entity (“VIE”). For the majority of fiscal 2006, Shaanxi
Suoang was engaged in two lines of businesses: the research, development,
production, marketing and sales of coal-polymer (“COPO”) resin products, and
also in the research, development, production and sale of “coal-water mixture,”
fuel substitute product (“CWM Fuel”). However, the Company subsequently decided
to focus on its CWM Fuel product business. Thus, in December 2006, Shaanxi
Suoang ceased operations of the COPO resin products business and is now focused
on its CWM Fuel product business. Shaanxi Suoang conducts its CWM Fuel
operations through its subsidiary, Shaanxi Suoang New Energy Enterprise Company
Ltd. (“Suoang New Energy”). Shaanxi Suoang owns a controlling 80% equity
interest in Suoang New Energy. The Company entered into sales contracts for the
sale of its CWM fuel in early 2007. Construction of the first phase of the
Company’s CWM Fuel production plant was completed in June 2007. The Company’s
CWM Fuel production plant became operational and production of its CWM Fuel
commenced in August 2007.
 
 Effective
on August 15, 2007, the Company merged with its wholly owned subsidiary, Sino
Clean Energy Inc., pursuant to Articles of Merger that the Company filed with
the Nevada Secretary of State. The merger was in the form of a parent/subsidiary
merger, with the Company as the surviving corporation.  In accordance
with Section 92A.180 of the Nevada Revised Statutes, shareholder approval of the
merger was not required. Upon completion of the merger, the Company’s name has
been changed to “Sino Clean Energy Inc.” and the Company’s Articles of
Incorporation have been amended to reflect this name change.  We
changed our name to better reflect the direction and business of the
Company.
  The Board
of Directors of the Company also authorized and approved a 3-for-1 forward stock
split (“Stock Split”) of its issued and outstanding shares of common stock, par
value $0.001 per share (“Common Stock”) by way of share dividend, effective on
August 15, 2007.  To effect the Stock Split, the Company authorized
the issuance of two shares of common stock for each one outstanding share of
common stock held by the shareholders of record on August 15, 2007.
 
 Immediately
prior to the Stock Split, the Company had 28,227,250 shares of common stock
issued and outstanding. After giving effect to the Stock Split, the Company has
approximately 84,681,750 shares of common stock issued and
outstanding.  The Company's common stock was quoted for trading on a
post-split basis on Nasdaq’s Over-the-Counter Bulletin Board under the new
trading symbol “SCLX” on August 21, 2007.
 
 Significant
Accounting Policies
 
 Critical
Accounting Policies and Estimates
 
 Property,
plant and equipment
 
 Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Gains or losses on disposals are reflected as gain or loss in the
year of disposal. The cost of improvements that extend the life of plant,
property and equipment are capitalized. These capitalized costs may include
structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
 
 Depreciation
or amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives.
  Impairment
 
 The
Company accounts for impairment of long-lived assets including property, plant
and equipment, and amortizable intangible assets in accordance with SFAS No.144,
Accounting for the Impairment
or Disposal of Long-Lived Assets, which requires an impairment loss to be
recognized when the carrying amount of a long-lived asset or asset group exceeds
its fair value and is not recoverable (when carrying amount exceeds the gross,
undiscounted cash flows from use and disposition). The impairment loss is
measured as the excess of the carrying amount over the asset’s (or asset
group’s) fair value.
 
 Revenue
recognition
 
 Revenues
of the Company include sales of the Company’s Coal Water Mixture, which have
been classified as continuing operations, and COPO resin product sales, which
have been classified as discontinued operations. Sales are recognized when the
following four revenue criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed or determinable, and
collectibility is reasonably assured. Revenues are presented net of value added
tax (VAT). No return allowance is made as products are normally not returnable
upon acceptance by the customers.
  -12-
 Table of Contents
   Foreign
currency translation
 
 The
reporting currency of the Company is the United States Dollars. All assets and
liabilities accounts have been translated into United States Dollars using the
current exchange rate at the balance sheet date. Capital stock is recorded at
historical rates. Revenue and expenses are translated using the average exchange
rate in the year. The resulting gain and loss has been reported as other
comprehensive income (loss) within the shareholder’s equity.
 
 Use
of estimates
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates. Significant
estimates include estimates of accruals and determination of fair values for
assets disposal.
 
 Restatement
of 2006 Financial Statements
 
 As more
fully discussed in Note 2 to our Financial Statements, the Company has decided
to restate its previously issued financial statements for the year ended
December 31, 2006.  The Company’s determination to restate these
previously issued financial statements arose from the following
adjustments:
 
 The
Company incorrectly classified certain properties that do not meet all of the
criteria for classification as held-for-sale, and do not constitute part of the
discontinued component, as assets of discontinued operations.  Rental
income, net of depreciation and other expenses, related to these properties and
a related provision for income taxes were incorrectly included in the results of
discontinued operations.  The above incorrect classifications resulted
in the incorrect calculation of the earnings (loss) per share from continuing
operations and from discontinued operations, respectively.
 
 In
addition, the Company has also reclassified various amounts to conform to the
proper presentation of the Financial Statements. The Company reclassified
pre-paid land use right from intangible assets.  In addition, the
Company reallocated accounts receivable, other receivable, inventories of
discontinued operations and discontinued operations assets held for sale from
discontinued operations. Accounts payable and taxes payable of discontinued
operation were also reclassified from discontinued operation.
 
 The
Company has also retroactively adjusted the share capital by deeming that the
three for one forward stock split on August 20, 2007 as of the beginning of the
earliest period presented, and has also reclassified bank charges that were
incorrectly classified as finance cost.
 
 The
schedules under Note 2 to our financial statements under Item 7 herein show the
impact of the above adjustments on the relevant captions from the Company’s
consolidated financial statements as of December 31, 2006 and for the year then
ended. The restatement will not affect net income as previously reported in
the Company's 2006 Financial Statements.  Further, the Company expects
that the adjustments referred to herein will not materially affect the Company's
current cash position or financial condition.
 
 RESULT
OF OPERATIONS
 
 Fiscal
year ended December 31, 2007 as compared to fiscal year ended December 31,
2006
 
 REVENUES.  Revenues
from our continuing operations consist of revenues from our CWM Fuel
business.  During the year ended December 31, 2007, we had revenues of
$2,802,750 as compared to nil revenues during the year ended December 31, 2006,
an increase of 100%.  This increase occurred because we commenced the
operation of our CWM Fuel business in the fourth quarter of 2007.
 
 GROSS
PROFIT. Cost of goods sold, which consist of raw materials, direct labor and
manufacturing overhead, were $1,785,601 for the year ended December 31, 2007 as
compared to nil for the year ended December 31, 2006.  Gross profit
was $1,017,149 for the year ended December 31, 2007 as compared to nil for the
year ended December 31, 2006, representing gross margins
of approximately 36% and nil, respectively.  The increase in gross
profit of the Company is attributable to the commencement of our new
CWM Fuel business during the 2007 fiscal year.
 
 -13-
 Table of Contents
 SELLING
EXPENSES. Selling expenses for our continuing operations totaled $46,628 for the
year ended December 31, 2007 as compared to nil for the year ended December 31,
2006, an increase of approximately 100%.  This increase is mainly due
to freight charges and labor costs related to our CWM Fuel business which
commenced in 2007.
 
 GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses for continuing
operations totaled $607,733 for the year ended December 31, 2007 as compared to
$263,256 for the year ended December 31, 2006, an increase of approximately
131%.  This increase is primarily attributable to an increase in staff
costs, entertainment expenses and amortization expenses due to the commencement
of our CWM Fuel business.
 
 OTHER INCOME
(EXPENSES).  Other Income consists primarily of rental income,
interest income, commission income and a government grant, and the Company had
other expenses in 2006 consisting of the Company’s merger costs in
2006.  For the year ended December 31, 2007, other income was $956,713
as compared to other expenses of $184,581.  The $1,114,294 increase in
other income is attributable to commission received by the Company in 2007 for
acting as an agent for a boiler manufacturer and also a government subsidy grant
in relation to the Company’s coal water mixture operation.
 
 NET
INCOME. We had a net income from our continuing operations of $1,259,833
for the year ended December 31, 2007 as compared to a net loss of $535,017
for the year ended December 31, 2006.  The increase in net income was
caused by the commencement of our CWM Fuel business.
 
 LIQUIDITY AND CAPITAL
RESOURCES
 
 For the
year ended December 31, 2007, we generated cash from operating activities of
$349,014, as compared to use of $330,685 for the year ended December 31,
2006.  This increase is due mainly to our net profit and the disposal
of operating assets of our discontinued operation.
  The Company’s expenditure in investing
activities was $2,017,532 for the year ended December 31, 2007 as compared to
$54,150 for the same period in 2006.  On the
other hand, we used $206,439 for financing activities during the year ended
December 31, 2007 (as compared to $3,987,278 generated from financing activities
during the same period in 2006).
 
 As of
December 31, 2007, the Company had cash of $2,832,132.  Our total
current assets were $7,211,926 and our total current liabilities were
$2,581,418, which resulted in a net working capital of $4,630,508.
 
 CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
 
 Contractual
Obligations
 
 We have
certain commitments that include future payments. We have presented below a
summary in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
 
 Payments
      Due by PeriodTotal
              
              Less
      than 1 year
              
              1-3
      Years
              
              3-5
      Years
              
              5
      Years +Contractual
      Obligations:Capital
      Lease Obligations
              
              $
              291,121
              
              291,121
              
              
              --
              
              --
              
              
              --Operating
      Leases
              
              $
              48,312
              
              19,008
              
              
              19,008
              
              10,296
              
              
              --Total
      Contractual Obligations:
              
              $
              339,433
              
              310,129
              
              
              19,008
              
              10,296
              
              
              --
  Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office premises and production plants of Hangson.  The
amounts presented are consistent with contractual terms and are not expected to
differ significantly, unless a substantial change in our headcount needs
requires us to exit an office facility early or expand our occupied
space.
   -14-
 Table of Contents
  Capital
commitments include capital contribution to a subsidiary and purchase of
machines for our production of “coal-water mixture” of Hangson.
 
 Off-Balance
Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.
 
 Related
Party Transactions
 
 For a
description of our related party transactions see Item 12 of this Annual
Report entitled “Certain Relationships and Related Transactions, and Director
Independence.”
 
 Quantitative and Qualitative
Disclosures about Market Risk
 
 Exchange
Rates
 
 Shaanxi
Suoang maintains its books and records in Renminbi (“RMB”), the lawful currency
of the PRC. In general, for consolidation purposes, the Company translates
Shaanxi Suoang’s assets and liabilities into US Dollars using the applicable
exchange rates prevailing at the balance sheet date, and the statement of income
is translated at average exchange rates during the reporting period. Adjustments
resulting from the translation of Shaanxi Suoang’s financial statements are
recorded as accumulated other comprehensive income.
  The
exchange rates used to translate amounts in RMB into US Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in this
MD&A were as follows:
 
 2007
              2006Balance
      sheet items, except for the registered and paid-up capital, as of December
      31
              
              USD0.137:RMB1
              
              USD0.128:RMB1Amounts
      included in the statement of operations, statement of changes in
      stockholders’ equity and statement of cash flows for the years ended
      December 31
              
              USD0.132:RMB1
              
              USD0.126:RMB1
 
  RISK
FACTORS
 
 Factors
Affecting Business, Operating Results and Financial Condition
 
 An
investment in our securities is very speculative and involves a high degree of
risk. You should carefully consider the following risk factors, along with the
other matters referred to in this Annual Report, before you decide to buy our
securities. If you decide to buy our securities, you should be able to afford a
complete loss of your investment.
 
 Risks
Associated With Our Business
 
 FACTORS
THAT MAY AFFECT FUTURE PERFORMANCE
  Before
investing in our common stock you should carefully consider the following risk
factors, the other information included herein and the information included in
our other reports and filings. Our business, financial condition, and the
trading price of our common stock could be adversely affected by these and other
risks.
  Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
  We have a
limited operating history.  Shaanxi Suoang commenced operations in
2002 and first achieved profitability in the year ended
2004.  Accordingly, you should consider our future prospects in light
of the risks and uncertainties experienced by early stage
companies in evolving industries such as the coal products and alternative
energy industry in China. An investor in our securities must consider the risks,
uncertainties and difficulties frequently encountered by companies in new and
rapidly evolving markets. The risks and difficulties we face include challenges
in accurate financial planning as a result of limited historical data and the
uncertainties resulting from having had a relatively limited time period in
which to implement and evaluate our business strategies as compared to older
companies with longer operating histories.
 
 -15-
 Table of Contents
 We
recently ceased operations of our COPO resin product business and the production
and sale of our CWM Fuel product has just commenced.
 
 In
December 2006, we decided to solely focus on the research, development,
production, marketing and sale of our CWM Fuel product and thus, in January
2007, we ceased operations and have phased out our COPO resin product
business.  In early 2007, we entered into contracts for the sale of
our CWM Fuel product.  We completed the first phase of the
construction of our CWM Fuel manufacturing plant in June 2007, and production
and delivery of our CWM Fuel product commenced in August
2007.  However, there can be no assurance that we will be able to
successfully complete the construction of our CWM manufacturing plant in a
timely manner.  Since we have just commenced the production and sale
of our CWM Fuel, we cannot assure you that our operations will be able to
generate sufficient revenue to continue our operations or that our new CWM Fuel
business operations will be profitable.
  We
Must Obtain Additional Financing to Execute Our Business Plan
 
 The
projected revenues from the sale of our CWM Fuel product may not be adequate to
support our expansion and product development programs. We will need substantial
additional funds to build and maintain our new production facilities, pursue
further research and development, obtain regulatory approvals; file, prosecute,
defend and enforce our intellectual property rights and market our products. We
will seek additional funds through public or private equity or debt financing,
strategic transactions and/or from other sources. We could enter into
collaborative arrangements for the development of particular products that would
lead to our relinquishing some or all rights to the related technology or
products.
  There are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer or
cancel development programs, planned initiatives or overhead expenditures, to
the extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.
  Our
business and results of operations are dependent on coal markets, which may be
cyclical.
 
 As the
majority of our revenue will be derived from sales of coal-based
products, our business and operating results are substantially dependent on the
domestic supply for coal. The domestic and international coal markets are
cyclical and exhibit fluctuation in supply and demand from year to year and are
subject to numerous factors beyond our control, including, but not limited to,
the economic conditions in the PRC, the global economic conditions and
fluctuations in industries with high demand for coal, such as the power and
steel industries. Fluctuations in supply and demand for coal have effects on
coal prices which in turn affect our operating and financial performance. We
have experienced substantial price fluctuations in the past and believe that
such fluctuations will continue. The demand for coal is primarily affected by
the overall economic development and the demand for coal from the electricity
generation, steel and construction industries. The supply of coal on the other
hand, is primarily affected by the geographical location of the coal supplies,
the volume of coal produced by the domestic and international coal suppliers,
and the quality and price of competing sources of coal. Alternative fuels such
as natural gas, oil and nuclear power, alternative energy sources such as
hydroelectric power, and international shipping costs also have effects on the
market demand for coal. Excess demand for coal may have an adverse effect on
coal prices which would in turn cause a decline in our profitability. A
significant increase in domestic coal prices could also materially and adversely
affect our business and result of operations.
 
 Our
business relies on our major customers.
  Our
revenues from the sale of the CWM Fuel will be initially derived from sales to 3
major customers, Shanxi Tongchuan Yao Zhou Jian Qin Cement Company Limited,
Xi’an Li Jun Zhi Yao Factory and Shanxi Hua Yuan Paper Industry Company
Limited. Given the large percentage of our revenues to be derived from our
sales to these 3 major customers, any adverse developments to Shanxi Tongchuan
Yao Zhou Jian Qin Cement Company Limited, Xi’an Li Jun Zhi Yao Factory and
Shanxi Hua Yuan Paper Industry Company Limited business operations could have an
adverse impact on our results of operations.
  -16-
 Table of Contents
  Competition
in the PRC and the international coal industry is increasing and our business
and prospects will be adversely affected if we are not able to compete
effectively.
 
 We face
competition in all areas of our business.  Competition in the coal
energy industry is based on many factors, including price, production capacity,
quality and characteristics, transportation capability and costs, blending
capability and brand name.  Our coal-based products business competes
in the domestic market in China and in international markets with other large
domestic coal-based products companies and we will also have to compete with
other competitors in the coal water mixture product industry.  Some of
our competitors may have greater financial, marketing, distribution and other
resources than we do, and more well-known brand names in the
markets.  We currently compete favorably on the quality of our
coal-based products.  However, there can be no assurance that we will
continue to compete favorably due to quality improvements by our competitors and
this may have a material adverse impact on our results of
operations.
 
 We
may suffer losses resulting from industry-related accidents and lack of
insurance.
 
 We
operate manufacturing facilities that may be affected by water, gas, fire or
structural problems. As a result, we, like other coal-based products companies,
may experience accidents that will cause property damage and personal injuries.
Although we have implemented safety measures for our production facilities and
provided on-the-job training for our employees, there can be no assurance that
industry-related accidents will not occur in the future.
 
 We do not
currently maintain fire, casualty or other property insurance covering our
properties, equipment or inventories, other than with respect to vehicles. In
addition, we do not maintain any business interruption insurance or any third
party liability insurance to cover claims in respect of personal injury,
property or environmental damage arising from accidents on our properties, other
than third party liability insurance with respect to vehicles. Any uninsured
losses and liabilities incurred by us could have a material adverse effect on
our financial condition and results of operations.
  Our
business operations may be adversely affected by present or future environmental
regulations.
 
 As a
producer of coal products, we are subject to significant, extensive, and
increasingly stringent environmental protection laws and regulations in China.
These laws and regulations:
 
 ●
              impose
      fees for the discharge of waste
substances;
 
 ●
              require
      the establishment of reserves for reclamation and
      rehabilitation;
 
 ●
              require
      the payment of fines for serious environmental offenses;
    and
 
 ●
              allow
      the PRC Government, at its discretion, to close any facility that fails to
      comply with orders requiring it to correct or stop operations causing
      environmental damage.
 
 Our
operations may produce significant amounts of wastewater, gas and solid waste
materials.  Currently, the PRC Government is moving toward more
rigorous enforcement of applicable laws and regulations as well as the adoption
and enforcement of more stringent environmental standards.  Our
budgeted amounts of capital expenditure for environmental regulatory compliance
may not be sufficient and we may need to allocate additional funds for such
purpose.  If we fail to comply with current or future environmental
laws and regulations, we may be required to pay penalties or fines or take
corrective actions, any of which may have a material adverse effect on our
business operations and financial condition.
 
 In
addition, China is a signatory to the 1992 United Nations Framework Convention
on Climate Change and the 1997 Kyoto Protocol, which are intended to limit
emissions of greenhouse gases.  Efforts to control greenhouse gas
emission in China could result in reduced use of coal if power generators switch
to sources of fuel with lower carbon dioxide emissions, which in turn could
reduce the revenues of our business and have a material adverse effect on
our results of operations.
  Our
operations are subject to a number of risks relating to the PRC.
 
 We are
also subject to a number of risks relating to the PRC, including the
following:
  -17-
 Table of Contents
  The
central and local PRC governments continue to support the development and
operation of coal industry in China. If the PRC Government changes its current
policies that are currently beneficial to us, we may face significant
constraints on our flexibility and ability to expand our business
operations or to maximize our profitability.
 
 ●
              Under
      current PRC regulatory requirements, our projects for the development of
      our coal water mixture fuel substitute require PRC Government approval. If
      any of our important projects required for our growth or cost reduction
      are not approved, or are not approved on a timely basis, our financial
      condition and operating performances could be adversely
      affected.
 
 ●
              The
      PRC Government has been reforming, and is expected to continue to reform
      its economic system. Many of the reforms are unprecedented or
      experimental, and are expected to be refined and improved. Other
      political, economic and social factors can also lead to further
      readjustment of the reform measures. This refining and readjustment
      process may not always have a positive effect on our operations. Our
      operating results may be adversely affected by changes in the PRC’s
      economic and social conditions and by changes in policies of the PRC
      Government such as changes in laws and regulations (or the interpretation
      thereof), imposition of additional restrictions on currency conversion and
      reduction in tariff protection and other import
    restrictions.
 
 ●
              Since
      1994, the conversion of Renminbi into foreign currencies, including Hong
      Kong and U.S. dollars, has been based on rates set by the People’s Bank of
      China, or PBOC, which are set daily based on the previous day’s PRC
      interbank foreign exchange market rate and current exchange rates on the
      world financial markets. Since 1994, the official exchange rate for the
      conversion of Renminbi to U.S. dollars has generally been stable. On
      July 21, 2005, however, PBOC announced a reform of its exchange rate
      system. Under the reform, Renminbi is no longer effectively linked to US
      dollars but instead is allowed to trade in a tight 0.3% band against a
      basket of foreign currencies. Any further appreciation of Renminbi in the
      future will increase the cost of our export sales, reduce our account
      receivables denominated in foreign currencies and adversely affect our
      financial condition and results of operations. On the other hand, any
      devaluation of the Renminbi may adversely affect the value of, and
      dividends payable on our shares we receive our revenues and denominate our
      profits in Renminbi. Our financial condition and operating performance may
      also be affected by changes in the value of certain currencies other than
      Renminbi in which our earnings and obligations are denominated. In
      particular, a devaluation of the Renminbi is likely to increase the
      portion of our cash flow required to satisfy our foreign
      currency-denominated obligations.
 
 ●
              Since
      1997, many new laws and regulations covering general economic matters have
      been promulgated in the PRC. Despite this activity to develop the legal
      system, PRC’s system of laws is not yet complete. Even where adequate law
      exists, enforcement of existing laws or contracts based on existing law
      may be uncertain and sporadic, and it may be difficult to obtain swift and
      equitable enforcement or to obtain enforcement of a judgment by a court of
      another jurisdiction. The relative inexperience of PRC’s judiciary in many
      cases creates additional uncertainty as to the outcome of any litigation.
      In addition, interpretation of statutes and regulations may be subject to
      government policies reflecting domestic political
  changes.
 
 Our
coal water mixture production facilities will be subject to extensive regulation
by the PRC Government and government regulations may limit our activities and
adversely affect our business operations.
 
 Our coal
water mixture operations, like those of other PRC energy companies, is subject
to extensive regulation established by the PRC Government.  Central
governmental authorities, such as the National Development and Reform
Commission, the State Environmental Protection Administration, the Ministry of
Land and Resources, the State Administration of Coal Mine Safety, the and the
State Bureau of Taxation, and provincial and local authorities and agencies
exercise extensive control over various aspects of China’s coal industry and
transportation (including rail and sea
transport).  These controls affect the following material aspects
of our operations:
  -18-
 Table of Contents
   ●
              pricing
      of our transport services;
 
 ●
              industry-specific
      taxes and fees;
 
 ●
              target
      of our capital investments;
 
 ●
              pension
      funds appropriation; and
 
 ●
              environmental
      and safety standards.
  We may
face significant constraints on our ability to implement our business strategies
or to carry out or expand our business operations. Our business may also be
materially and adversely affected by future changes in certain regulations and
policies of the PRC Government in respect of the coal industry. New legislation
or regulations may be adopted that may materially and adversely affect our coal
water mixture operations, our cost structure or the demand for our products. In
addition, new legislation or regulations or different or more stringent
interpretation of existing laws and regulations may also require us to
substantially change our existing operations or incur significant
costs.
 
 The
Profitability of Our Products Depend on Our Ability to Operate Without
Infringing the Proprietary Rights of Others and to Protect Proprietary
Rights
  We must
operate without infringing the proprietary rights of third parties and without
third parties circumventing our rights. The patent positions of coal
and alternative energy enterprises, including ours, are uncertain and
involve complex legal and factual questions for which important legal principles
are largely unresolved.  For example, no consistent policy has emerged
regarding the breadth of energy product patent claims that are granted by the
U.S. Patent and Trademark Office or enforced by the U.S. federal
courts.  In addition, the scope of the originally claimed subject
matter in a patent application can be significantly reduced before a patent is
issued. The biotechnology patent situation outside the U.S. is even more
uncertain and is currently undergoing review and revision in many countries. For
our products, which have or in the future may have, obtained patent protection,
their profitability may depend in part on our ability to obtain and maintain
patents and licenses and preserve trade secrets, and the period our intellectual
property remains exclusive.  Because patent applications are
maintained in secrecy in some cases, we cannot be certain that we or our
licensors are the first creators of inventions described in our pending
patent applications or patents or the first to file patent applications for such
inventions.
  Other
companies may independently develop similar products and design around any
patented products we develop.
 
 We cannot
assure you that:
 
 ●
              any
      of our patent applications will result in the issuance of
      patents;
 
 ●
              we
      will develop patentable products;
 
 ●
              the
      patents which we may be issued will provide us with any competitive
      advantages;
 
 ●
              the
      patents of others will not impede our ability to do business;
      or
 
 ●
              third
      parties will not be able to circumvent any patents we obtain in the
      future.
 
 A number
of coal-based products companies, alternative energy companies, research and
academic companies and institutions have developed technologies, filed patent
applications or received patents on technologies that may relate to our
business. If these technologies, applications or patents conflict with ours, our
ability to sell our products may be curtailed. If patents that cover our
activities are issued to other companies, we may not be able to obtain licenses
at a reasonable cost, or at all. We may also be unable to develop our
technology, or introduce, manufacture or sell current or future products we have
planned.
   -19-
 Table of Contents
  
 Patent
litigation is becoming widespread in the alternative energy industry. Such
litigation may affect our efforts to form collaborations, to conduct research or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would be
held valid or enforceable by a court or that a competitor’s technology or
product would be found to infringe our patents in the event of patent
litigation. Our business could be materially affected by an adverse outcome to
such litigation. We could incur substantial costs and devote significant
management resources to defend our patent position or to seek a declaration that
another company’s patents are invalid.
 
 Much of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may
dispute the ownership of proprietary rights to our technology, for example by
asserting that they developed the technology independently.
 
 We
May Encounter Difficulties in Manufacturing our Products
  Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including production and quality control regulations. If we cannot
arrange for or maintain commercial-scale manufacturing on acceptable terms, or
if there are delays or difficulties in the manufacturing process, we may not be
able to conduct clinical testing, obtain regulatory approval or meet demand for
our products. Production of our products could require raw materials which are
scarce or which can be obtained only from a limited number of sources. If we are
unable to obtain adequate supplies of such raw materials, the development,
regulatory approval and marketing of our products could be delayed.
  We
May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are
Necessary to Commercialize Our Products
 
 The PRC
imposes significant statutory and regulatory obligations upon the manufacture
and sale of our products. Each regulatory authority typically has a lengthy
approval process in which it examines product testing data and the facilities in
which the product is manufactured. Regulatory submissions must meet complex
criteria to demonstrate the safety and efficacy of the ultimate products.
Addressing these criteria requires considerable data collection, verification
and analysis. We may spend time and money preparing regulatory submissions or
applications without assurances as to whether they will be approved on a timely
basis or at all.
  Our
product candidates, some of which are currently in the early stages of
development, will require additional development prior to their
commercialization. These steps and the process of obtaining required approvals
and clearances can be costly and time-consuming. If our potential products are
not successfully developed, cannot be proven to be safe and effective through
product testing, or do not receive applicable regulatory approvals and
clearances, or if there are delays in the process:
 
 ●
              the
      commercialization of our products could be adversely
    affected;
 
 ●
              any
      competitive advantages of the products could be diminished;
      and
 
 ●
              revenues
      or collaborative milestones from the products could be reduced or
      delayed.
 
 Governmental
and regulatory authorities may approve a product candidate for fewer indications
or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a product
receives regulatory approval and clearance, it may later exhibit adverse side
effects that limit or prevent its widespread use or that force us to withdraw
the product from the market.
  Any
marketed product and its manufacturer will continue to be subject to strict
regulation after approval. Results of post-marketing programs may limit or
expand the further marketing of products. Unforeseen problems with an approved
product or any violation of regulations could result in restrictions on the
product, including its withdrawal from the market and possible civil
actions.
  -20-
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   In
manufacturing our products we will be required to comply with applicable good
manufacturing practices regulations, which include requirements relating to
quality control and quality assurance, as well as the maintenance of records and
documentation. if we cannot comply with regulatory requirements, including
applicable good manufacturing practice requirements, we may not be allowed to
develop or market the product candidates. If we or our manufacturers fail to
comply with applicable regulatory requirements at any stage during the
regulatory process, we may be subject to sanctions, including fines, product
recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve applications,
total or partial suspension of production, civil penalties, withdrawals of
previously approved marketing applications and criminal
prosecution.
 
 Competitors
May Develop and Market Products That Are Less Expensive, More Effective or
Safer, Making Our Products Obsolete or Uncompetitive
  Some of
our competitors and potential competitors have greater product development
capabilities and financial, scientific, marketing and human resources than we
do. Technological competition from other alternative energy, and coal-based
product
 companies
is intense and is expected to increase.  Other companies have
developed technologies that could be the basis for competitive products. Some of
these products may be produced with an entirely different approach or may be
manufactured differently than the products we are developing. Alternative
products may be developed that are more effective and are less costly than our
products. Competitors may succeed in developing products earlier than us,
obtaining approvals and clearances for such products more rapidly than us, or
developing products that are more effective than ours. Over time, our technology
or products may become obsolete or uncompetitive.
 
 Our
Products May Not Gain Market Acceptance
  Our
products may not gain market acceptance in the coal-based products and
alternative energy community. The degree of market acceptance of any product
depends on a number of factors, including establishment and demonstration of our
products’ efficacy and safety, cost-effectiveness, advantages over alternative
products, and marketing and distribution support for the products. Limited
information regarding these factors is available in connection with our products
or products that may compete with ours.
  To
directly market and distribute our products, we or our collaborators require a
marketing and sales force with appropriate technical expertise and supporting
distribution capabilities. We may not be able to further establish sales,
marketing and distribution capabilities or enter into arrangements with third
parties on acceptable terms. If we or our partners cannot successfully market
and sell our products, our ability to generate revenue will be
limited.
  Our
Operations and the Use of Our Products Could Subject Us to Damages Relating to
Injuries or Accidental Contamination.
  Our
research and development processes involve the controlled use of hazardous
materials. We are subject to federal, provincial and local PRC laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. The risk of accidental contamination or
injury from handling and disposing of such materials cannot be completely
eliminated. In the event of an accident involving hazardous materials, we could
be held liable for resulting damages. We are not insured with respect to this
liability. Such liability could exceed our resources. In the future we could
incur significant costs to comply with PRC environmental laws and
regulations.
 
 If
We Were Successfully Sued for Product Liability, We Could Face Substantial
liabilities That May Exceed Our Resources.
  We may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. We currently do not have product
liability insurance. We are not insured with respect to this liability. If we
choose to obtain product liability insurance but cannot obtain sufficient
insurance coverage at an acceptable cost or otherwise protect against potential
product liability claims, the commercialization of products that we develop may
be prevented or inhibited. If we are sued for any injury caused by our products,
our liability could exceed our total assets.
   -21-
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 We
Have Limited Business Insurance Coverage.
  The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
 
 Our
Success Depends on Attracting and Retaining Qualified Personnel
  We depend
on a core management and scientific team. The loss of any of these individuals
could prevent us from achieving our business objective of commercializing our
product candidates. Our future success will depend in large part on our
continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in
clinical testing and government regulation. We face competition for personnel
from other companies, universities, public and private research institutions,
government entities and other organizations. If our recruitment and retention
efforts are unsuccessful, our business operations could suffer.
 
 Risk Related to the
Alternative Energy Industry
 
 A
drop in the retail price of conventional energy or other alternative energy may
have a negative effect on our business.
  A
customer's decision to purchase our CWM Fuel product will be primarily driven by
the return on investment resulting from the energy savings from our CWM Fuel
product. Any fluctuations in economic and market conditions that impact the
viability of conventional and other alternative energy sources, such as
decreases in the prices of oil and other fossil fuels could cause the demand
for our CWM Fuel product to decline. Although we believe that current
levels of retail energy prices support a reasonable return on investment for our
CWM Fuel product, there can be no assurance that future retail pricing of
conventional energy and other alternative energy will remain at such
levels.
 
 Existing
regulations and changes to such regulations may present technical, regulatory
and economic barriers to the purchase and use of coal water mixture product,
which may significantly affect the demand for our products.
  Our CWM
Fuel product will be subject to oversight and regulation in accordance with
national and local ordinances or regulations relating to safety, environmental
protection, and related matters. We are responsible for knowing such ordinances
and requirements must design our CWM Fuel product to comply with varying
standards. Any new government regulations or utility policies pertaining to our
products may result in significant additional expenses to us, our resellers and
their customers and, as a result, could cause a significant reduction in demand
for our product.
 
 If our
CWM Fuel product is not suitable for widespread adoption or sufficient demand
for our CWM Fuel product does not develop or takes longer to develop than we
anticipate, our sales would not significantly increase and we would be unable to
achieve or sustain profitability.
  The
market for CWM Fuel products is emerging and rapidly evolving, and its future
success is uncertain. If CWM Fuel and clean coal technology prove unsuitable for
widespread commercial deployment or if demand for our CWM Fuel product fails to
develop sufficiently, we may be unable to generate enough revenues to achieve
and sustain profitability. In addition, demand for CWM Fuel product in the
markets and geographic regions we target may not develop or may develop more
slowly than we anticipate. Many factors will influence the widespread adoption
of coal water mixture technology and demand for our products,
including:
  -22-
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 ●
              cost-effectiveness
      of coal water mixture technologies as compared with conventional and other
      alternative energy technologies;
 
 ●
              performance
      and reliability of our coal water mixture product as compared with
      conventional and other alternative energy
  products;
 
 ●
              capital
      expenditures by customers that tend to decrease if the PRC or global
      economy slows down; and
 
 ●
              availability
      of government subsidies and
incentives.
 
 Risks Related to Our
Corporate Structure
  PRC
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our business.
  There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Shaanxi Suoang, and its
shareholders. We are considered a foreign person or foreign invested enterprise
under PRC law. As a result, we are subject to PRC law limitations on foreign
ownership of Chinese companies. These laws and regulations are relatively new
and may be subject to change, and their official interpretation and enforcement
may involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively.
 
 The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be
 subject
to sanctions, including fines, and could be required to restructure our
operations or cease to provide certain services. Any of these or similar actions
could significantly disrupt our business operations or restrict us from
conducting a substantial portion of our business operations, which could
materially and adversely affect our business, financial condition and results of
operations.
 
 We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of our business and companies, including limitations on our ability
to own key assets.
  The PRC
government regulates the coal and other energy industries including foreign
ownership of, and the licensing and permit requirements pertaining to, companies
in these industry. These laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainty. As a
result, in certain circumstances it may be difficult to determine what
actions or omissions may be deemed to be a violation of applicable laws and
regulations. Issues, risks and uncertainties relating to PRC government
regulation of our industry include the following:
 
 ●
              we
      only have contractual control over Shaanxi Suoang. We do not own it due to
      the restriction of foreign investment in Chinese businesses;
      and
 
 ●
              uncertainties
      relating to the regulation of the coal product and alternative energy
      business in China, including evolving licensing practices, means that
      permits, licenses or operations at our company may be subject to
      challenge. This may disrupt our business, or subject us to sanctions,
      requirements to increase capital or other conditions or enforcement,
      or compromise enforceability of related contractual arrangements, or
      have other harmful effects on us.
 
 The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, alternative energy businesses in
China, including our business.
   -23-
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 In
order to comply with PRC laws limiting foreign ownership of Chinese companies,
we conduct our business through Shaanxi Suoang by means of contractual
arrangements. If the PRC government determines that these contractual
arrangements do not comply with applicable regulations, our business could be
adversely affected.
  The PRC
government restricts foreign investment in businesses in China. Accordingly, we
operate our business in China through Shaanxi Suoang. Shaanxi Suoang holds the
licenses and approvals necessary to operate our coal-based products business in
China. We have contractual arrangements with Shaanxi Suoang and its shareholders
that allow us to substantially control Shaanxi Suoang. We cannot assure you,
however, that we will be able to enforce these contracts.
  Although
we believe we comply with current PRC regulations, we cannot assure you that the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the PRC
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we may
not be able to comply, impose restrictions on our business operations or on our
customers, or take other regulatory or enforcement actions against us that could
be harmful to our business.
  Our
contractual arrangements with Shaanxi Suoang and its shareholders may not be as
effective in providing control over these entities as direct
ownership.
  Since PRC
law limits foreign equity ownership in companies in China, we operate our
business through an affiliated Chinese company, referred to herein as Shaanxi
Suoang. We have no equity ownership interest in Shaanxi Suoang and rely on
contractual arrangements to control and operate such business. These contractual
arrangements may not be as effective in providing control over Shaanxi Suoang as
direct ownership. For example, Shaanxi Suoang could fail to take actions
required for our business despite its contractual obligation to do so. If
Shaanxi Suoang fails to perform under their agreements with us, we may have
to rely on legal remedies under PRC law, which may not be effective. In
addition, we cannot assure you that Shaanxi Suoang’s shareholders would always
act in our best interests.
 
 The
Chairman of the Board of Directors of Shaanxi Suoang has potential conflicts of
interest with us, which may adversely affect our business.
  Mr.
Baowen Ren, our Chief Executive Officer, is also the Chairman of the Board of
Directors of Shaanxi Suoang. Conflicts of interests between his duties to our
company and Shaanxi Suoang may arise.  As Mr. Ren is a director and
executive officer of our Company,
he has a duty of loyalty and care to us under Nevada law when there are any
potential conflicts of interests between our company and Shaanxi
Suoang.  We cannot assure you, however, that when conflicts of
interest arise, Mr. Ren will act completely in our interests or that conflicts
of interests will be resolved in our favor.  In addition, Mr. Ren
could violate his legal duties by diverting business opportunities from us to
others.  If we cannot resolve any conflicts of interest between us and
Mr. Ren, we would have to rely on legal proceedings, which could result in the
disruption of our business.
 
 Risks Related to Doing
Business inChina
  Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
  Substantially
all of our business operations are conducted
in China.  Accordingly, our results of operations, financial
condition and prospects are subject to a significant degree to economic,
political and legal developments in China.  China’s economy differs
from the economies of most developed countries in many respects, including with
respect to the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources.  While
the PRC economy has experienced significant growth in the past 20 years, growth
has been uneven across different regions and among various economic sectors
of China.  The PRC government has implemented various measures to
encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative
effect on us.  For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to
us.  Since early 2004, the PRC government has implemented certain
measures to control the pace of economic growth.  Such measures may
cause a decrease in the level of economic activity in China, which in turn could
adversely affect our results of operations and financial condition.
   -24-
 Table of Contents
  
 If
PRC law were to phase out the preferential tax benefits currently being extended
to foreign invested enterprises and “new or high-technology enterprises” located
in a high-tech zone, we would have to pay more taxes, which could have a
material and adverse effect on our financial condition and results of
operations.
  Under PRC
laws and regulations, an enterprise may enjoy preferential tax benefits if it is
registered in a high-tech zone and also qualifies as “new or high-technology
enterprise”.  As an enterprise as well as a certified “new or
high-technology enterprise” located in a high-tech zone in Xian, Shaanxi Suoang
is entitled to a two-year exemption from enterprise income tax beginning from
its first year of operation, followed by a 15% tax rate so long as it continues
to qualify as a “new or high-technology enterprise.”   Shaanxi
Suoang is currently subject to a 15% enterprise income tax rate for so long as
its status as a “new or high-technology enterprise” remains
unchanged.  If the PRC law were to phase out preferential tax benefits
currently granted to “new or high-technology enterprises” and technology
consulting services, we would be subject to the standard statutory tax rate,
which currently is 33%, and we would be unable to obtain business tax refunds
for our provision of technology consulting services.  Loss of these
preferential tax treatments could have a material and adverse effect on our
financial condition and results of operations.
  Shaanxi
Suoang is subject to restrictions on making payments to us.
  Hangson,
our wholly owned subsidiary, is a holding company incorporated in the British
Virgin Islands and it does not have any assets or conduct any business
operations other than our investments in our variable interest entity
(“VIE”) in China, Shaanxi Suoang.  As a result of our holding
company structure, we rely entirely on payments from Shaanxi Suoang under our
contractual arrangements.  The PRC government also imposes controls on
the conversion of RMB into foreign currencies and the remittance of
currencies out of China. We may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency. (See
the section below titled “Government control of currency conversion may affect
the value of your investment.”)  Furthermore, if our VIE in China
incurs debt on its own in the future, the instruments governing the debt may
restrict its ability to make payments.  If we are unable to receive
all of the revenues from our operations through these contractual or dividend
arrangements, we may be unable to pay dividends on our ordinary
shares.
 
 Uncertainties
with respect to the PRC legal system could adversely affect us.
  We
conduct our business primarily through Hangson and our VIE, Shaanxi
Suoang.  Our operations in China are governed by PRC laws and
regulations.  We are generally subject to laws and regulations in
China.  The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential
value.
  However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China.  In particular, because these laws and
regulations are relatively new, and because
of the limited volume of published decisions and their nonbinding nature, the
interpretation and enforcement of these laws and regulations involve
uncertainties.  In addition, the PRC legal system is based in part on
government policies and internal rules (some of which are not published on a
timely basis or at all) that may have a retroactive effect.  As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation.  In addition, any litigation in China
may be protracted and result in substantial costs and diversion of resources and
management attention.
 
 You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in the
prospectus.
  We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, most of our senior executive
officers reside within China.  As a result, it may not be possible to
effect service of process within the United States or elsewhere outside China
upon our senior executive officers, including with respect to matters arising
under U.S. federal securities laws or applicable state securities
laws.  Moreover, our PRC counsel has advised us that the PRC does not
have treaties with the United States or many other countries providing for the
reciprocal recognition and enforcement of judgment of courts.
  -25-
 Table of Contents
  
 Governmental
control of currency conversion may affect the value of your
investment.
  The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB.  Under our current
structure, our income is primarily derived from payments from Shaanxi Suoang.
Shortages in the availability of foreign currency may restrict the ability of
our PRC subsidiaries and our affiliated entity to remit sufficient foreign
currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency denominated obligations.  Under existing PRC foreign
exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements.  However, approval from appropriate
government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment
of bank loans denominated in foreign currencies.  The PRC government
may also at its discretion restrict access in the future to foreign currencies
for current account transactions.  If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.
  Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
  The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic
conditions.  Our revenues and costs are mostly denominated in RMB,
while a significant portion of our financial assets are denominated in U.S.
dollars.  We rely entirely on fees paid to us by our VIE in China. Any
significant fluctuation in value of RMB may materially and adversely affect our
cash flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our stock in U.S. dollars.  For example, an
appreciation of RMB against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes.  An appreciation of
RMB against the U.S. dollar would also result in foreign currency translation
losses for financial reporting purposes when we translate our U.S. dollar
denominated financial assets into RMB, as RMB is our reporting
currency.
 
 We
face risks related to health epidemics and other outbreaks.
  Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April
2004.  Any prolonged recurrence of SARS or other adverse public health
developments in China may have a material adverse effect on our business
operations.  For instance, health or other government regulations
adopted in response may require temporary closure of our production facilities
or of our offices.  Such closures would severely disrupt our business
operations and adversely affect our results of operations.  We have
not adopted any written preventive measures or contingency plans to combat any
future outbreak of SARS or any other epidemic.
  Risks Related to an
Investment in Our Securities
  To
Date, We Have Not Paid Any Cash Dividends and No Cash Dividends Will be Paid in
the Foreseeable Future.
  We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay
dividends.  Even if the funds are legally available for distribution,
we may nevertheless decide not to pay any dividends.  We intend to
retain all earnings for the company's operations.
 
 The
Application of the "Penny Stock" Rules Could Adversely Affect the Market Price
of Our Common Stock and Increase Your Transaction Costs to Sell Those
Shares.
 
 As long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the "penny stock" rules. The
"penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny
stock market.  The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities.  Finally, monthly
statements must be sent disclosing recent price information on the limited
market in penny stocks.  These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness of
broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
 -26-
 Table of Contents
 
 Our
Common Shares are Thinly Traded and, You May be Unable to Sell at or Near Ask
Prices or at All if You Need to Sell Your Shares to Raise Money or Otherwise
Desire to Liquidate Your Shares.
 
 The
Company cannot predict the extent to which an active public market for its
common stock will develop or be sustained. However, the Company does not rule
out the possibility of applying for listing on the Nasdaq National Market or
other exchanges.
  Our
common shares have historically been sporadically or "thinly-traded" on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
in purchasing our common shares at or near bid prices at any given time may be
relatively small or non-existent.  This situation is attributable to a
number of factors, including the fact that we are a small company which is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company such as ours or
purchase or recommend the purchase of our shares until such time as we became
more seasoned and viable.  As a consequence, there may be periods of
several days or more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without
an adverse effect on share price.  We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that current trading levels will be
sustained.
  The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share
price.   The price at which you purchase our common stock may not
be indicative of the price that will prevail in the trading
market.  You may be unable to sell your common stock at or above your
purchase price if at all, which may result in substantial losses to
you.
 
 The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite
future.  The volatility in our share price is attributable to a number
of factors.  First, as noted above, our common shares are sporadically
and/or thinly traded.  As a consequence of this lack of liquidity, the
trading of relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either
direction.  The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares are sold on
the market without commensurate demand, as compared to a seasoned issuer
which could better absorb those sales without adverse impact on its share
price.  Secondly, we are a speculative or "risky" investment due to
our lack of revenues or profits to date and uncertainty of future market
acceptance for our current and potential products.  As a consequence
of this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly and
at greater discounts than would be the case with the stock of a seasoned
issuer.  The following factors may add to the volatility in the price
of our common shares: actual or anticipated variations in our quarterly or
annual operating results; adverse outcomes; the termination of our contractual
agreements with Shaanxi Suoang; and additions or departures of our key
personnel, as well as other items discussed under this "Risk
Factors" section, as well as elsewhere in this Current Report.
 Many of
these factors are beyond our control and may decrease the market price of our
common shares, regardless of our operating performance.  We cannot
make any predictions or projections as to what the prevailing market price for
our common shares will be at any time, including as to whether our common shares
will sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have on
the prevailing market price.  However, the Company does not rule out
the possibility of applying for listing on the Nasdaq National Market or other
exchanges.
 
 Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses.  Our management is aware of the abuses
that have occurred historically in the penny stock market.  Although
we do not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being
established with respect to our securities.  The occurrence of these
patterns or practices could increase the volatility of our share
price.
  Volatility
in Our Common Share Price May Subject Us to Securities Litigation.
 
 The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite
future.  In the past, plaintiffs have often initiated securities class
action litigation against a company following periods of volatility in the
market price of its securities.  We may, in the future, be the target
of similar litigation. Securities litigation could result in substantial costs
and liabilities and could divert management's attention and
resources.
 
 Our
corporate actions are substantially controlled by our principal
shareholders
and affiliated entities.
 
 Our
principal shareholders and their affiliated entities will own approximately 33%
of our outstanding ordinary shares, representing approximately 33% of our voting
power. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors may be within
the control of these shareholders and their affiliated entities. While all of
our shareholders are entitled to vote on matters submitted to our shareholders
for approval, a large number  of shares and voting control presently
lie with these principal shareholders and their affiliated
entities.  As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management.  There can be
no assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of the
company.
 -27-
 Table of Contents
 
 The
Elimination of Monetary Liability Against our Directors, Officers and Employees
under Nevada law and the Existence of Indemnification Rights to our Directors,
Officers and Employees may Result in Substantial Expenditures by our Company and
may Discourage Lawsuits Against our Directors, Officers and
Employees.
 
 Our
articles of incorporation contains a provision that eliminates the liability of
our directors for monetary damages to our company and shareholders to the extent
allowed under Nevada law and we are prepared to give such indemnification to our
directors and officers to the extent provided by Nevada law.  We may
also have contractual indemnification obligations under our employment
agreements that we enter into with our officers.  The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors
and officers, which we may be unable to recoup.  These provisions and
resultant costs may also discourage our company from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our shareholders against our
directors and officers even though such actions, if successful, might otherwise
benefit our company and shareholders.
  Legislative
Actions, Higher Insurance Costs and Potential New Accounting Pronouncements may
Impact our Future Financial Position and Results of Operations.
  There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations.  The Sarbanes-Oxley Act of 2002 and other rule changes as
well as proposed legislative initiatives following the Enron bankruptcy are
likely to increase general and administrative costs and expenses.  In
addition, insurers are likely to increase premiums as a result of high claims
rates over the past several years, which we expect will increase our premiums
for insurance policies.  Further, there could be changes in certain
accounting rules.  These and other potential changes could materially
increase the expenses we report under generally accepted accounting principles,
and adversely affect our operating results.
 
 Past
Activities Of The Company And Its Affiliates May Lead To Future Liability For
The Company.
 
 Prior to
our entry into the Exchange Agreement with Hangson on October 20, 2006, the
Company engaged in businesses unrelated to its current
operations.  Although the Endo Shareholders are providing certain
indemnifications against any loss, liability, claim, damage or expense arising
out of or based on any breach of or inaccuracy in any of their representations
and warranties made regarding such acquisition, any liabilities relating to such
prior business against which Hangson is not completely indemnified may have a
material adverse effect on the Company.
 
 The
market price for our stock may be volatile.
  The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
  -28-
 Table of Contents
  
 ●
              actual
      or anticipated fluctuations in our quarterly operating
      results;
 
 ●
              changes
      in financial estimates by securities research
  analysts;
 
 ●
              conditions
      in alternative energy and coal-based product
  markets;
 
 ●
              changes
      in the economic performance or market valuations of other alternative
      energy and coal-based products
companies;
 
 ●
              announcements
      by us or our competitors of new products, acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;
 
 ●
              addition
      or departure of key personnel;
 
 ●
              fluctuations
      of exchange rates between RMB and the U.S.
  dollar;
 
 ●
              intellectual
      property litigation; and
 
 ●
              general
      economic or political conditions in
China.
 
 In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
  We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.
  We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from this offering will be sufficient to meet
our anticipated cash needs for the near future.  We may, however,
require additional cash resources due to changed business conditions or other
future developments, including any investments or acquisitions we may decide to
pursue.  If our resources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain
a credit facility.  The sale of additional equity securities could
result in additional dilution to our shareholders.  The incurrence of
indebtedness would result in increased debt service obligations and could result
in operating and financing covenants that would restrict our
operations.  We cannot assure you that financing will be available in
amounts or on terms acceptable to us, if at all.
 
 If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
  We are
subject to reporting obligations under the U.S. securities laws.  The
Securities and Exchange Commission, or the SEC, as required by Section 404 of
the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to
include a management report on such company’s internal controls over
financial reporting in its annual report, which contains management’s assessment
of the effectiveness of the company’s internal controls over financial
reporting.  In addition, an independent registered public accounting
firm will have attest to and report on management’s assessment of the
effectiveness of the company’s internal controls over financial reporting in
future periodic reports. Our management may conclude that our internal controls
over our financial reporting are not effective.  Moreover, even if our
management concludes that our internal controls over financial reporting are
effective, our independent registered public accounting firm may still decline
to attest to our management’s assessment or may issue a report that is qualified
if it is not satisfied with our controls or the level at which our controls are
documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us. Our reporting obligations as a public company
will place a significant strain on our management, operational and financial
resources and systems for the foreseeable future.  Effective internal
controls, particularly those related to revenue recognition, are necessary for
us to produce reliable financial reports and are important to help prevent
fraud.  As a result, our failure to achieve and maintain effective
internal controls over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could
harm our business and negatively impact the trading price of our
stock.  Furthermore, we anticipate
that we will incur considerable costs and use significant management time and
other resources in an effort to comply with Section 404 and other requirements
of the Sarbanes-Oxley Act.
 
 -29-
 Table of Contents
 We
will incur increased costs as a result of being a public company.
  As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company.  In addition, the
Sarbanes-Oxley Act, as well as new rules subsequently implemented by SEC have
required changes in corporate governance practices of public
companies.  We expect these new rules and regulations to increase our
legal, accounting and financial compliance costs and to make certain corporate
activities more time-consuming and costly. In addition, we will incur additional
costs associated with our public company reporting requirements. We are
currently evaluating and monitoring developments with respect to these new
rules, and we cannot predict or estimate the amount of additional costs we may
incur or the timing of such costs.
  ITEM 7.
                  FINANCIAL
      STATEMENTS
  
 The
Company’s Financial Statements commence on the following
page.
 
 
  -30-
 Table of Contents
  
 
 
 
 
 
 
 
 
 
 
 SINO
CLEAN ENERGY INC.
 (FORMERLY
CHINA WEST COAL ENERGY INC.)
 AND
SUBSIDIARIES
 
 Consolidated
Financial Statements
 For
the Years Ended December 31, 2007 and 2006
 
            
 Table of Contents
 
 
 
 SINO
CLEAN ENERGY INC.
 (FORMERLY
CHINA WEST COAL ENERGY INC.)
 AND ITS
SUBSIDIARIES
 
 INDEX TO
FINANCIAL STATEMENTS
 
 PagesReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets
              F-4Consolidated
      Statements of Operations
              F-6Consolidated
      Statements of Changes in Stockholders’ Equity
              F-7Consolidated
      Statements of Cash Flows
              F-8Notes
      to Consolidated Financial Statements
              F-10
 
  F-1
 Table of Contents
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
the Board of Directors and Stockholders of
 Sino
Clean Energy Inc. (formerly known as China West Coal Energy, Inc.)
 
 We
have audited the accompanying balance sheets of Sino Clean Energy Inc. (formerly
known as China West Coal Energy, Inc.) and subsidiaries as of December 31, 2007
and 2006, and the related statements of income and comprehensive income,
stockholders’ equity, and cash flows for the years then ended.  Sino
Clean Energy Inc. (formerly known as China West Coal Energy, Inc.)’s management
is responsible for these financial statements.  Our responsibility is
to express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of
Sino Clean Energy Inc. (formerly known as China West Coal Energy, Inc.) and
subsidiaries as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
 
 As
described in Note 2 to the accompanying consolidated financial statements, the
Company has restated the consolidated balance sheet as of December 31, 2006 and
the related statements of income and comprehensive income, stockholders’ equity,
and cash flows for the year then ended which were previously audited by other
independent accountants, to correct certain accounting errors that were detected
after the original issuance of those consolidated financial
statements.
 
 
 (Signed)
Yu and Associates CPA Corporation
 
 
 
 Arcadia,
California
 March
26, 2008
 
  F-2
 Table of Contents
  
 Sino
      Clean Energy Inc.(Formerly
      China West Coal Energy Inc.) and SubsidiariesConsolidated
      Balance Sheets(Amounts
      expressed in U.S. Dollars)ASSETSDecember
      31,2007
              
              
              2006(As
      restated)Current
      assetsCash
      and cash equivalent
              
              $
              2,832,132
              
              
              $
              4,450,557Accounts
      receivable, net (Note 3(d))
              
              
              1,068,303
              
              
              
              -Amounts
      due from directors (Note 17(a))
              
              
              -
              
              
              
              206,186Deposits
      and prepayments (Note 6)
              
              
              2,542,929
              
              
              
              1,830,769Other
      receivables
              
              
              138,523
              
              
              
              39,071Loan
      to related party (Notes 7 and 17(a))
              
              
              -
              
              
              
              411,970Prepaid
      land use right - current portion (Note 10)
              
              
              36,285
              
              
              
              30,944Government
      grant receivable (Note 8)
              
              
              411,000
              
              
              
              -Assets
      on discontinued operationAccounts
      receivable, net (Note 3(d))
              
              
              -
              
              
              
              750,635Other
      receivable - related (Note 17(c))
              
              
              141,795
              
              
              
              256,200Inventories
              
              
              -
              
              
              
              14,952Others
              
              
              -
              
              
              
              89,670Inventories
              
              
              40,959
              
              
              
              -Total
      current assets
              
              
              7,211,926
              
              
              
              8,080,954Property,
      plant and equipment, net (Note 9)
              
              
              5,435,804
              
              
              
              2,958,868Prepaid
      land use right - non current portion (Note 10)
              
              
              1,718,744
              
              
              
              1,500,773Intangible
      assets, net (Note 11)
              
              
              1,478
              
              
              
              1,632Total
      assets
              
              $
              14,367,952
              
              
              $
              12,542,227
 
 
 
 
 
 
 
 The
accompanying notes are an integral part of these financial
statements.
  F-3
 Table of Contents
 
 Sino
      Clean Energy Inc.(Formerly
      China West Coal Energy Inc.) and SubsidiariesConsolidated
      Balance Sheets(Amounts
      expressed in U.S. Dollars)December
      31,2007
              
              
              2006(As
      restated)LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable - trade
              
              $
              41,827
              
              
              $
              -Accounts
      payable - discontinued operation
              
              
              -
              
              
              
              864,787Accrued
      expenses and other payables (Note 12)
              
              
              893,732
              
              
              
              372,125Amount
      due to a director (Note 17(a))
              
              
              8,527
              
              
              
              20,702Taxes
      payable
              
              
              130,332
              
              
              
              92,744Deposit
      on sales of property (Note 17 (d))
              
              
              1,507,000
              
              
              
              1,409,100Total
      current liabilities
              
              
              2,581,418
              
              
              
              2,759,458Minority
      interest
              
              
              352,789
              
              
              
              94,748Commitments
      and Contingencies (Note 18)Shareholders'
      EquityPreferred
      stock, $0.001 par value,50,000,000
      shares authorized,nil
      issued and outstanding
              
              $
              -
              
              
              $
              -Common
      stock, $0.001 par value,200,000,000
      shares authorized,84,681,750
      issued and outstanding (Note 16)
              
              
              84,682
              
              
              
              84,682Additional
      paid-in capital
              
              
              9,153,174
              
              
              
              9,153,174Retained
      earnings (Accumulated deficits)
              
              
              686,482
              
              
              
              (330,456
              )Statutory
      reserves (Note 13)
              
              
              348,309
              
              
              
              348,309Accumulated
      other comprehensive income
              
              
              1,161,098
              
              
              
              432,312Total
      shareholders' equity
              
              
              11,433,745
              
              
              
              9,688,021Total
      liabilities and shareholders' equity
              
              $
              14,367,952
              
              
              $
              12,542,227
 
 
 The
accompanying notes are an integral part of these financial
statements.
  F-4
 Table of Contents
  
 Sino
      Clean Energy Inc.(Formerly
      China West Coal Energy Inc.) and SubsidiariesConsolidated
      Statements of Income (Operations) and Other Comprehensive
      IncomeFor
      the years ended December 31, 2007 and 2006(Amounts
      expressed in U.S. Dollars)Year
      ended December 31,2007
              
              
              2006(As
      restated)Revenue
              
              $
              2,802,750
              
              
              $
              -Cost
      of goods sold
              
              
              (1,785,601
              )
              
              
              -Gross
      profit
              
              
              1,017,149
              
              
              
              -Selling
      expenses
              
              
              46,628
              
              
              
              -Research
      and development expenses
              
              
              -
              
              
              
              37,718General
      and administrative expenses
              
              
              607,733
              
              
              
              263,256Income
      (loss) from operations
              
              
              362,788
              
              
              
              (300,974
              )Other
      income (expenses)Merger
      cost
              
              
              -
              
              
              
              (575,000
              )Rental
      income, net of outgoings
              
              
              257,462
              
              
              
              329,741Commission
      income
              
              
              281,077
              
              
              
              -Interest
      income
              
              
              16,747
              
              
              
              60,678Other
      income
              
              
              4,426
              
              
              
              -Government
      grant
              
              
              397,001
              
              
              
              -Total
      other income (expenses)
              
              
              956,713
              
              
              
              (184,581
              )Income
      (loss) from continuing operations beforeprovision
      for income taxes and minority interest
              
              
              1,319,501
              
              
              
              (485,555
              )Provision
      for income taxes oncontinuing
      operations(Note 15)
              
              
              59,668
              
              
              
              49,462Net
      income (loss) from continuing operationsbefore
      minority interest
              
              $
              1,259,833
              
              
              $
              (535,017
              )
 The accompanying notes are an integral
part of these financial statements.
  F-5
 Table of Contents
 
 Sino
      Clean Energy Inc.(Formerly
      China West Coal Energy Inc.) and SubsidiariesConsolidated
      Statements of Income (Operations) and Other Comprehensive
      IncomeFor
      the years ended December 31, 2007 and 2006(Amounts
      expressed in U.S. Dollars)Year
      ended December 31,2007
              
              
              2006(As
      restated)Discontinued
      operations (Note 14)Income
      from operations of discontinuedcomponent
              
              
              -
              
              
              
              866,490Loss
      on disposal of discontinuedoperations
      assets
              
              
              -
              
              
              
              (291,266
              )Income
      tax expenses
              
              
              -
              
              
              
              (165,021
              )Net
      income from discontinued operations
              
              
              -
              
              
              
              410,203Net
      income (loss) before minority interest
              
              
              1,259,833
              
              
              
              (124,814
              )Minority
      interest
              
              
              (242,895
              )
              
              
              32,794Net
      income (loss)
              
              
              1,016,938
              
              
              
              (92,020
              )Other
      comprehensive incomeForeign
      currency translation adjustment
              
              
              728,786
              
              
              
              306,718Comprehensive
      income
              
              $
              1,745,724
              
              
              $
              214,698Weight
      average number of shares-
      Basic and diluted
              
              
              84,681,750
              
              
              
              84,681,750Income
      (loss) per common share (Note 16)-
      Basic and diluted-
      From continuing operation
              
              $
              0.012
              
              
              $
              (0.005
              )-
      From discontinuing operation
              
              
              -
              
              
              
              0.004-
      Net income (loss)
              
              $
              0.012
              
              
              $
              (0.001
              )
 
 
 
 
 
 
 The
accompanying notes are an integral part of these financial
statements.
  F-6
 Table of Contents
  
 Sino
      Clean Energy Inc.(Formerly
      China West Coal Energy Inc.) and SubsidiariesConsolidated
      Statements of Shareholders' Equity(Amount
      expressed in U.S. Dollars except number of shares)(Accumulated
              
              
              AccumulatedCommon
      stock (par value $0.1208)
              
              
              Additional
              
              
              Statutory
              
              
              Statutory
              
              
              deficits)
      /
              
              
              otherpaid-in
              
              
              capital
              
              
              welfare
              
              
              Retained
              
              
              comprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              reserves
              
              
              reserves
              
              
              earnings
              
              
              income
              
              
              TotalBalance,
      January 1, 2006
              
              
              39,000,000
              
              
              $
              4,712,137
              
              
              $
              84,759
              
              
              $
              106,247
              
              
              $
              53,124
              
              
              $
              447,982
              
              
              $
              125,594
              
              
              $
              5,529,843Capital
      injection of subsidiaries
              
              
              -
              
              
              
              -
              
              
              
              4,440,960
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,440,960Exchange
      to share prior recapitalization
              
              
              (39,000,000
              )
              
              
              (4,712,137
              )
              
              
              4,712,137
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Acquired
      on capitalization (at par $0.001)
              
              
              2,712,000
              
              
              
              2,712
              
              
              
              (2,712
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancellation
      of share (at par $0.001)
              
              
              (1,154,350
              )
              
              
              (1,154
              )
              
              
              1,154
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Recapitalization
      (at par $0.001)
              
              
              26,669,600
              
              
              
              26,669
              
              
              
              (26,669
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Three
      for one forward stock split
              
              
              56,454,500
              
              
              
              56,455
              
              
              
              (56,455
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (92,020
              )
              
              
              -
              
              
              
              (92,020
              )Transfer
      to reserve
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              123,849
              
              
              
              62,979
              
              
              
              (186,828
              )
              
              
              -
              
              
              
              -Dividend
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (499,590
              )
              
              
              -
              
              
              
              (499,590
              )Foreign
      currency translation gain
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,110
              
              
              
              -
              
              
              
              -
              
              
              
              306,718
              
              
              
              308,828Balance,
      December 31, 2006
              
              
              84,681,750
              
              
              $
              84,682
              
              
              $
              9,153,174
              
              
              $
              232,206
              
              
              $
              116,103
              
              
              $
              (330,456
              )
              
              $
              432,312
              
              
              $
              9,688,021Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,016,938
              
              
              
              -
              
              
              
              1,016,938Foreign
      currency translation gain
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              728,786
              
              
              
              728,786Balance,
      December 31, 2007
              
              
              84,681,750
              
              
              $
              84,682
              
              
              $
              9,153,174
              
              
              $
              232,206
              
              
              $
              116,103
              
              
              $
              686,482
              
              
              $
              1,161,098
              
              
              $
              11,433,745
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 The
accompanying notes are an integral part of these financial
statements.
  F-7
 Table of Contents
  
 Sino
      Clean Energy Inc.(Formerly
      China West Coal Energy Inc.) and SubsidiariesConsolidated
      Statements of Cash Flows(Amounts
      expressed in U.S. Dollars)Year
      ended December 31,2007
              
              
              2006(As
      restated)Cash
      flows from operating activities:Net
      income (loss)
              
              $
              1,016,938
              
              
              $
              (92,020
              )Adjustments
      to reconcile net income (loss) to cashprovided
      by operating activities:Minority
      Interest
              
              
              242,895
              
              
              
              (32,794
              )Depreciation
      and amortization
              
              
              138,130
              
              
              
              289,281Impairment
      of plant and machinery
              
              
              -
              
              
              
              170,166Loss
      on disposal of patent
              
              
              -
              
              
              
              291,265Provision
      for doubtful debts
              
              
              -
              
              
              
              444(Increase)
      decrease in assets:Accounts
      receivable
              
              
              (1,031,916
              )
              
              
              -Deposits
      and prepayments
              
              
              (566,006
              )
              
              
              (1,672,328
              )Other
      receivables
              
              
              (132,839
              )
              
              
              -Assets
      on discontinued operationAccounts
      receivable, net
              
              
              775,444
              
              
              
              (88,721
              )Other
      receivable
              
              
              168,064
              
              
              
              (251,187
              )Inventories
              
              
              14,079
              
              
              
              24,351Others
              
              
              89,670
              
              
              
              (89,670
              )Inventories
              
              
              (38,197
              )
              
              
              -Prepaid
      rental
              
              
              -
              
              
              
              59,520Increase
      (decrease) in liabilities:Accounts
      payable
              
              
              40,403
              
              
              
              -Accounts
      payable - Discontinued operation
              
              
              (893,369
              )
              
              
              784,569Accrued
      expenses and other payable
              
              
              495,634
              
              
              
              186,956Taxes
      payables
              
              
              30,084
              
              
              
              89,483Net
      cash provided (used in) operating activities
              
              
              349,014
              
              
              
              (330,685)
 
 
 
 
 
 
 
 
 
 
 
 The
accompanying notes are an integral part of these financial
statements.
  F-8
 Table of Contents
  
 Sino
      Clean Energy Inc.(Formerly
      China West Coal Energy Inc.) and SubsidiariesConsolidated
      Statements of Cash Flows(Amounts
      expressed in U.S. Dollars)
 
 Cash
      flows from investing activities:Repayment
      of (advance to)loan
      from related party
              
              
              411,970
              
              
              
              (27,206
              )Payment
      for prepaid land use right
              
              
              (112,908
              )
              
              
              (1,506,924
              )Purchase
      of property, plant and equipment
              
              
              (2,316,594
              )
              
              
              (503,772
              )Proceeds
      from disposal of intangible assets
              
              
              -
              
              
              
              251,905Proceeds
      from sale of investments
              
              
              -
              
              
              
              346,369Deposit on sales of property
              
              
              -
              
              
              
              1,385,478Net
      cash used in investing activities
              
              
              (2,017,532
              )
              
              
              (54,150)Cash
      flows from financing activities:Repayment
      from (advance to) a director
              
              
              220,511
              
              
              
              (82,841
              )(Repayment
      to) advance from a director
              
              
              (15,950
              )
              
              
              20,702Dividend
      paid
              
              
              -
              
              
              
              (499,590
              )Government
      grant receivable
              
              
              (411,000
              )
              
              
              -Capital
      contribution by subsidiaries
              
              
              -
              
              
              
              4,549,007Net
      cash (used in) provided by financing activities
              
              
              (206,439
              )
              
              
              3,987,278Effect
      of foreign currency translation
              
              
              256,532
              
              
              
              156,846Net
      (decrease) increase in cash and cash equivalents
              
              
              (1,618,425
              )
              
              
              3,759,289Cash
      and cash equivalents, beginning of year
              
              
              4,450,557
              
              
              
              691,268Cash
      and cash equivalents, end of year
              
              $
              2,832,132
              
              
              $
              4,450,557Interest
      paid
              
              $
              -
              
              
              $
              -Income
      taxes paid
              
              $
              92,654
              
              
              $
              126,119
 
 
 
 
 
 
 
 
 
 
 
 
 
 The
accompanying notes are an integral part of these financial
statements.
  F-9
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  
 1.           CORPORATIONREORGANZATIONAND BUSINESS
ACTIVITIES
 
 Sino
Clean Energy Inc. (the “Company”) was originally incorporated in Texas as
“Discount Mortgage Services, Inc.” on July 11, 2000.  In November
2001, the Company changed its name to Endo Networks, Inc. and was redomiciled to
the State of Nevada in December 2002.  On January 4, 2007, the Company
changed its name to “China West Coal Energy Inc.”  Further on August
15, 2007, the Company changed its name to “Sino Clean Energy Inc.”
  In 2006,
the Company had principally been engaged in production and sales of coal-polymer
(“COPO”) resin products. In December 2006, the Company decided to cease its
operations in COPO products manufacturing and shift all of its resources toward
the production and sale of “coal-water mixture” products.
  
 2.           RESTATEMENT OF 2006
FINANCIAL STATEMENTS
 
 The
Company has restated its previously issued financial statements for the year
ended December 31, 2006.  The Company’s determination to restate these
previously issued financial statements arose from the following
adjustments:
 
 (1)
              The
      Company incorrectly classified certain properties that do not meet all the
      criteria for classifying as held-for-sale, and do not constitute part of
      the discontinued component, as assets of discontinued operations. Rental
      income, net of depreciation and other expenses, related to these
      properties and related provision for income taxes were incorrectly
      included in the results of discontinued
  operations.
 
 (2)
              The
      Company has also reclassified various amounts to conform to the proper
      presentation.
 
 (3)
              The
      Company has retroactively adjusted the common stock by deeming that the
      three for one forward stock split on August 20, 2007 as of the beginning
      of the earliest period presented.
 
 (4)
              The
      Company incorrectly classified bank charges as finance
    cost.
 
 The
following schedules show the impact of the above adjustments on the relevant
captions from the Company’s consolidated financial statements as of December 31,
2006 and for the year then ended.
 
  F-10
 Table of Contents
 CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2006
 As
      previously reported
                
                
                Adjustments
                
                
                As
      restatedAmount
                
                
                No.ASSETSCurrent
      AssetsCash
      and cash equivalent
                
                $
                4,450,557
                
                
                
                
                
                
                
                
                $
                4,450,557Amounts
      due from directors
                
                
                206,186
                
                
                
                
                
                
                
                
                
                206,186Deposits
      and prepayments
                
                
                1,830,769
                
                
                
                
                
                
                
                
                
                1,830,769Other
      receivables
                
                
                -
                
                
                
                39,071
                
                
                
                (3
                )
                
                
                39,071Loan
      to related party
                
                
                411,970
                
                
                
                
                
                
                
                
                
                
                
                411,970Prepaid
      land use right – current portion
                
                
                -
                
                
                
                30,944
                
                
                
                (3
                )
                
                
                30,944Assets
      on discontinued operationAccounts
      receivable
                
                
                -
                
                
                
                750,635
                
                
                
                (3
                )
                
                
                750,635Other
      receivables
                
                
                -
                
                
                
                256,200
                
                
                
                (3
                )
                
                
                256,200Inventories
                
                
                -
                
                
                
                14,952
                
                
                
                (3
                )
                
                
                14,952Others
                
                
                -
                
                
                
                89,670
                
                
                
                (3
                )
                
                
                89,670Discontinued
      operations
                
                
                3,485,462
                
                
                
                (3,485,462
                )
                
                
                (1
                )(3)
                
                
                -Total
      current assets
                
                
                10,384,944
                
                
                
                (2,303,990
                )
                
                
                
                
                
                
                8,080,954Non-current
      AssetsProperty,
      plant and equipment, net
                
                
                623,934
                
                
                
                2,334,934
                
                
                
                (1
                )
                
                
                2,958,868Prepaid
      land use right
                
                
                -
                
                
                
                1,500,773
                
                
                
                (3
                )
                
                
                1,500,773Intangible
      assets, net
                
                
                1,533,349
                
                
                
                (1,531,717
                )
                
                
                (3
                )
                
                
                1,632Total
      Assets
                
                $
                12,542,227
                
                
                
                -
                
                
                
                
                
                
                $
                12,542,227LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable - discontinued operation
                
                
                -
                
                
                
                864,787
                
                
                
                (3
                )
                
                
                864,787Accrued
      expenses and other payables
                
                $
                372,125
                
                
                
                
                
                
                
                
                
                
                
                372,125Amount
      due to a director
                
                
                20,702
                
                
                
                
                
                
                
                
                
                
                
                20,702Deposit
      on sales of property
                
                
                -
                
                
                
                1,409,100
                
                
                
                (1
                )
                
                
                1,409,100Taxes
      payable
                
                
                -
                
                
                
                92,744
                
                
                
                (3
                )
                
                
                92,744Discontinued
      operations
                
                
                2,366,631
                
                
                
                (2,366,631
                )
                
                
                (3
                )
                
                
                -Total
      current liabilities
                
                
                2,759,458
                
                
                
                -
                
                
                
                
                
                
                
                2,759,458Minority
      interest
                
                
                94,748
                
                
                
                
                
                
                
                
                
                
                
                94,748Shareholders’
      equityCommon
      stock
                
                
                28,227
                
                
                
                56,455
                
                
                
                (5
                )
                
                
                84,682Additional
      paid-in capital
                
                
                9,209,629
                
                
                
                (56,455
                )
                
                
                (5
                )
                
                
                9,153,174Statutory
      reserves
                
                
                348,309
                
                
                
                
                
                
                
                
                
                
                
                348,309Accumulated
      other comprehensive income
                
                
                432,312
                
                
                
                
                
                
                
                
                
                
                
                432,312Accumulated
      deficit
                
                
                (330,456
                )
                
                
                
                
                
                
                
                
                
                
                (330,456
                )Total
      shareholders’ equity
                
                
                9,688,021
                
                
                
                
                
                
                
                
                
                
                
                9,688,021Total
      liabilities and shareholders’ equity
                
                $
                12,542,227
                
                
                
                -
                
                
                
                
                
                
                $
                12,542,227
  F-11
 Table of Contents
 CONSOLIDATED
INCOME STATEMENT FOR
THE YEAR ENDED DECEMBER 31, 2006
 As
      previously reported
                  
                  
                  Adjustments
                  
                  
                  As
      restatedAmount
                  
                  
                  No.Revenue
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  -Cost
      of goods sold
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Gross
      profit
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Operating
      expensesResearch
      and development
                  
                  
                  37,718
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  37,718General
      and administrative
                  
                  
                  263,174
                  
                  
                  
                  82
                  
                  
                  
                  (5
                  )
                  
                  
                  263,256Loss
      from operations
                  
                  
                  (300,892
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (300,974
                  )Other
      income (expenses)Merger
      costs
                  
                  
                  (575,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (575,000
                  )Rental
      income, net
                  
                  
                  -
                  
                  
                  
                  329,741
                  
                  
                  
                  (1
                  )
                  
                  
                  329,741Interest
      income
                  
                  
                  60,678
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  60,678Finance
      costs
                  
                  
                  (82
                  )
                  
                  
                  (82
                  )
                  
                  
                  (5
                  )
                  
                  
                  -Total
      other income (expenses)
                  
                  
                  (514,404
                  )
                  
                  
                  329,741
                  
                  
                  
                  
                  
                  
                  
                  (184,581
                  )Loss
      from continuing operations before income taxes
                  
                  
                  (815,296
                  )
                  
                  
                  329,741
                  
                  
                  
                  
                  
                  
                  
                  (485,555
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  (49,462
                  )
                  
                  
                  (1
                  )
                  
                  
                  (49,462
                  )Net
      loss from continuing operations
                  
                  
                  (815,296
                  )
                  
                  
                  280,279
                  
                  
                  
                  
                  
                  
                  
                  (535,017
                  )Income
      from discontinued operations, net of taxes
                  
                  
                  690,482
                  
                  
                  
                  (280,279
                  )
                  
                  
                  (1
                  )
                  
                  
                  410,203Net
      loss before minority interest
                  
                  
                  (124,814
                  )
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  (124,814
                  )Minority
      interest
                  
                  
                  32,794
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  32,794Net
      loss
                  
                  $
                  (92,020
                  )
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  $
                  (92,020
                  )Basic
      and diluted income (loss) per common share:From
      continuing operations
                  
                  $
                  (0.029
                  )
                  
                  $
                  0.024
                  
                  
                  
                  (3
                  )
                  
                  $
                  (0.005
                  )From
      discontinued operations
                  
                  $
                  0.024
                  
                  
                  $
                  (0.020
                  )
                  
                  
                  (3
                  )
                  
                  $
                  0.004Net
      loss
                  
                  $
                  (0.005
                  )
                  
                  $
                  0.004
                  
                  
                  
                  
                  
                  
                  $
                  (0.001
                  )
    
  F-12
 Table of Contents
 
 3.           SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 a.
              Basis of presentation
      and consolidation
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
 
 The
consolidated financial statements include the financial statements of the
Company, Hangson and its variable interest entities and its controlled
subsidiary.  All significant inter-company transactions and balances
among the Company, Hangson and its variable interest entities are eliminated
upon consolidation.
 
 b.
              Use of
      estimates
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.  Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those
estimates.  Significant estimates include estimates of accruals and
determination of fair values for assets disposed.
 
 c.
              Cash and cash
      equivalents
 
 Cash and
cash equivalents consist of cash on hand and bank deposits.
 
 d.
              Accounts
      receivable
 
 Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts.
 
 The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances.  Under the aging
method, bad debts determined by management are based on historical experience as
well as the current economic climate and are applied to customers' balances
categorized by the number of months the underlying invoices have remained
outstanding.  The valuation allowance balance is adjusted to the
amount computed as a result of the aging method.  When facts
subsequently become available to indicate that an adjustment to the allowance
should be made, this is recorded as a change in estimate in the current year. As
of December 31, 2007 and 2006, accounts receivable were net of allowances of
$5,368 and $3,772, respectively
 
 e.
              Inventories
 
 Inventories
are stated at the lower of cost, as determined on a weighted average basis, or
net realizable value.  Costs of inventories include purchase and
related costs incurred in bringing the products to their present location and
condition.
 
 f.
              Property, plant and
      equipment
 
 Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Gains or losses on disposals are reflected as gain or loss in the
year of disposal.  The cost of improvements that extend the life of
plant, property and equipment are capitalized. These capitalized costs may
include structural improvements, equipment and fixtures.  All ordinary
repair and maintenance costs are expensed as incurred.
  F-13
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
   Depreciation
or amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets as
follows:
 
 Buildings
              the
      shorter of the useful life or the lease termLeasehold
      improvements
              the
      shorter of the useful life or the lease termPlant
      and machinery
              10
      yearsOffice
      equipment
              5
      yearsMotor
      vehicles
              3
      years
 
 g.
              Construction in
      progress
 
 Construction
in progress includes direct costs of factory buildings.  Construction
in progress is not depreciated until such time as the assets are completed and
put into operational use.
 
 h.
              Prepaid land use
      rights
 
 Prepaid
land use right is expensed over the term of 50 years.
 
 i.
              Impairment
 
 The
Company accounts for impairment of long-lived assets including property, plant
and equipment, and amortizable intangible assets in accordance with SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which requires
an impairment loss to be recognized when the carrying amount of a long-lived
asset or asset group exceeds its fair value and is not recoverable (when
carrying amount exceeds the gross, undiscounted cash flows from use and
disposition).  The impairment loss is measured as the excess of the
carrying amount over the asset's (or asset group's) fair value.
 
 j.
              Comprehensive
      income
 
 SFAS No.
130, Reporting Comprehensive Income, requires disclosure of all components of
comprehensive income and loss on an annual and interim
basis.  Comprehensive income and loss is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources.  The Company had
other comprehensive income of $728,786 and $306,718 for the years ended December
31, 2007 and 2006, respectively.  The other comprehensive income arose
from the changes in foreign currency exchange rate.
 
 k.
              Fair value of
      financial instruments
 
 The
Company believes that the carrying values of its cash and cash equivalents,
accounts receivable, accounts payable, other receivables and other payables as
of December 31, 2007 and 2006 approximate to their respective fair values due to
the short-term nature of those instruments.
 
 l.
              Revenue
      recognition
 
 Revenues
of the Company include sales of coal water mixture for the year ended December
31, 2007 and COPO resin product sales which have been classified as discontinued
operations for the year ended December 31, 2006.
 
 Sales and
commission income are recognized when the following four revenue criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
selling price is fixed or determinable, and collectibility is reasonably
assured.  Revenues are presented net of value added tax
(VAT).  No return allowance is made as products are normally not
returnable upon acceptance by the customers.
  F-14
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  
 m.
              Advertising
      expenses
 
 Advertising
expenses are expensed to operations in the years incurred.  The
Company incurred advertising expenses of $Nil and $986 for the years ended
December 31, 2007 and 2006, respectively.
 
 n.
              Research and
      development costs
 
 Research
and development costs are expensed to operations as incurred.
 
 o.
              Earnings per
      share
 
 Basic
earnings per share (“EPS”) is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
year.
 
 p.
              Income
      taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years.  Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain.
 
 q.
              Foreign currency
      translation
 
 The
reporting currency of the Company is the United States Dollars.  All
assets and liabilities accounts have been translated into United States Dollars
using the current exchange rate at the balance sheet date. Capital stock is
recorded at historical rates.  Revenue and expenses are translated
using the average exchange rate in the period.  The resulting gain and
loss has been reported as other comprehensive income within the shareholder's
equity.
 
 r.
              Related
      parties
 
 Parties
are considered to be related to the Company if the parties, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company.  Related parties also
include principal owners of the Company, its management, members of the
immediate families of principal owners of the Company and its management and
other parties with which the Company may deal if one party controls or can
significantly influence the management or operating policies of the other to an
extent that one of the transacting parties might be prevented from fully
pursuing its own separate interests.  A party which can significantly
influence the management or operating policies of the transacting parties or if
it has an ownership interest in one of the transacting parties and can
significantly influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own separate
interests is also a related party.
 
 s.
              Recently issued
      accounting pronouncements
 
 In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” (“SFAS 155”).  This Statement amends FASB
Statements No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, and No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities”.  This Statement
resolves issues addressed in Statement 133 Implementation Issue No. D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets.” SFAS No. 155 permits fair value remeasurement 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 133, and 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.  It also
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends
  F-15
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  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.  This Statement is
effective for all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15,
2006.  The Company has determined that the adoption of SFAS No.
155 did not have a material impact on its Consolidated Financial
Statements.
 
 In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”). This Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized servicing
assets and servicing liabilities.  This Statement requires an entity
to recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract in
indicated situations; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
permits an entity to choose relevant subsequent measurement methods for each
class of separately recognized servicing assets and servicing liabilities; at
its initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights,
without calling into question the treatment of other available-for-sale
securities under Statement 115, provided that the available-for-sale securities
are identified in some manner as offsetting the entity's exposure to changes in
fair value of servicing assets or servicing liabilities that a servicer elects
to subsequently measure at fair value; and requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities.  The
Company has determined that the adoption of SFAS No. 156 did not have a material
impact on its Consolidated Financial Statements.
 
 The FASB
issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income
Taxes,” in June 2006.  This interpretation establishes new standards
for the financial statement recognition, measurement and disclosure of uncertain
tax positions taken or expected to be taken in income tax returns. The new rules
will be effective for the Company in the first quarter of 2008.  The
Company anticipates that the adoption of this standard will not
have a material effect on its financial statements.
 
 In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108,
“Considering the Effects of Prior Year Misstatements when quantifying
misstatements in Current Year Financial Statements,” which eliminated the
diversity in practice surrounding the quantification and evaluation of financial
statement errors.  The guidance outlined in SAB 108 is effective for
the Company and is consistent with its historical practices for assessing
such matters when circumstances have required such an
evaluation.  Accordingly, the Company believes that the adoption of
SAB 108 will have no impact on its financial statements.
  In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
157”), to define fair value, establish a framework for measuring fair value in
accordance with generally accepted accounting principles and expand disclosures
about fair value measurements. SFAS 157 requires quantitative disclosures using
a tabular format in all periods (interim and annual) and qualitative
disclosures about the valuation techniques used to measure fair value in all
annual periods. The provisions of this Statement shall be effective for
financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. The Company will be required
to adopt the provisions of this statement as of January 1, 2008.  The
Company is currently evaluating the impact of adopting SFAS 157.
 
 In
September 2006, the FASB issued Statement No. 158, “Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). This Statement enhances
disclosure regarding the funded status of an employer's defined benefit
postretirement plan by (a) requiring companies to include the funding status in
comprehensive income, (b) recognize transactions and events that affect the
funded status in the financial statements in the year in which they occur, and
(c) at a measurement date of the employer's fiscal
year-end.  Statement No. 158 effective for fiscal years ending after
December 15, 2008, and is not expected to apply to the Company.
 
 In
February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115" (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair values. SFAS 159 is effective for
fiscal years after November 15, 2007.  The Company is currently
evaluating the impact that the adoption SFAS 159 would have on its financial
statements.
  F-16
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  On March
19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. "Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance," explained Kevin Stoklosa, project manager. "By requiring
additional information about how and why derivative instruments are being used,
the new standard gives investors better information upon which to base their
decisions." The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. Management is
currently evaluating the effect of this pronouncement on the financial
statements.
 
 4.           CONCENTRATIONOF CREDIT
RISK
 
 a.
              Financial
      instruments that potentially expose the Company to concentrations of
      credit risk, consist of cash and cash equivalents and accounts
      receivable.  The Company performs ongoing evaluations of their
      cash position and credit evaluations to ensure collections and minimize
      losses.
 
 b.
              As
      of December 31, 2007 and 2006, the Company's bank deposits were all placed
      with banks in the PRC where there is currently no rule or regulation in
      place for obligatory insurance of bank
accounts.
 
 c.
              For
      the years ended December 31, 2007 and 2006, all of the Company's sales
      arose in the PRC.  All accounts receivable as of December 31,
      2007 and 2006 also arose in the
PRC.
 
 d.
              Details
      of the customers accounting for 10% or more of the Company’s total sales
      are as follows:
 
 Year
      ended December 31,2007
              
              
              2006Company
      A
              
              $
              -
              
              
              $
              1,252,276Company
      B
              
              
              -
              
              
              
              1,174,336Company
      C
              
              
              -
              
              
              
              1,151,996Company
      D
              
              
              -
              
              
              
              748,503Company
      E
              
              
              865,056
              
              
              
              -Company
      F
              
              
              576,221
              
              
              
              -Company
      G
              
              
              499,252
              
              
              
              -Company
      H
              
              
              361,373
              
              
              
              -Company
      I
              
              
              321,289
              
              
              
              -
 
 The
accounts receivable from the three customers with the largest receivable balance
represents 70% and 50% of the balance of the account at December 31, 2007 and
2006, respectively. Accounts receivable at December 31, 2007 originated from the
coal water mixture business. Accounts receivable originated from the COPO
resin business, which was discontinued in 2007, have been reclassified to
discontinued operations.
 
   F-17
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  CURRENT VULNERABILITY DUE TO
CERTAIN CONCENTRATIONS
 
 The
Company's operations are all carried out in the PRC.  Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC's economy.
 
 The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe.  These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange.  The Company's results may be adversely affected by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
 
 6.           DEPOSITS AND
PREPAYMENTS
 
 Deposits
and prepayments consist of the following,
 
 December
      31,2007
              
              
              2006Prepayment
      for construction in progress and machinery purchases
              
              $
              908,561
              
              
              $
              1,827,932Purchase
      security deposit
              
              
              1,609,750
              
              
              
              -Prepaid
      expenses
              
              
              22,600
              
              
              
              -Rental
      deposit and prepaid
              
              
              -
              
              
              
              1,902Other
              
              
              2,018
              
              
              
              935$
              2,542,929
              
              
              $
              1,830,769
 
 7.           LOAN TO RELATED
PARTY
 
 An
interest-bearing loan has been lent to a related company, Shaanxi Hanzhong New
Century Real Estate Company Limited, which was controlled by a
shareholder.  The loan was lent with a term of five years from
November 5, 2002 to November 5, 2007 and bears interest at 7.2% per annum. A
majority shareholder of the Shaanxi Suo'ang, Shaanxi Hanzhong Blue Tide Costumes
Group Corporation Limited, guaranteed the repayment of this loan with all of its
assets and issued a commitment letter to Shaanxi Suo'ang.  The loan
was repaid in 2007.
 
 8.
              GOVERNMENT GRANT
      RECEIVABLE
 
 The
amount represents a subsidy from the Provincial Government.  The
subsidy is unconditional and was received in the first quarter of
2008.
 
 9.           PROPERTY, PLANT AND
EQUIPMENT
 
 Property,
plant and equipment consists of the following,
 
 December
      31,2007
              
              
              2006(As
      restated)Construction
      in progress
              
              $
              119,169
              
              
              $
              580,614Buildings
              
              
              3,806,628
              
              
              
              2,326,315Leasehold
      improvements
              
              
              232,900
              
              
              
              217,770Plant
      and machinery
              
              
              1,596,161
              
              
              
              -Office
      equipment
              
              
              65,414
              
              
              
              57,771Motor
      vehicles
              
              
              127,935
              
              
              
              119,6245,948,207
              
              
              
              3,302,094Less:
      Accumulated depreciation and amortization
              
              
              (512,403
              )
              
              
              (343,226
              )$
              5,435,804
              
              
              $
              2,958,868
    F-18
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  Construction
in progress included above was the construction of buildings, production lines
and machinery for the “Coal-water mixture” business.
 
 The
depreciation expenses on property, plant and equipment for the year ended
December 31, 2007 and 2006 were $169,177 and $194,633,
respectively.
 
 10.           PREPAID LAND USE
RIGHT
 
 The
Company has recorded as prepaid land use rights the costs paid to acquire a
long-term interest to utilize the land underlying the building and production
facility for its “coal-water mixture” business.  This type of
arrangement is common for the use of land in the PRC.  The
prepaid land use rights are amortized on the straight-line method over the term
of the land use rights of 50 years.
 
 The lease
expenses on prepaid land use right for the years ended December 31, 2007 and
2006 was $36,285 and $15,213, respectively.  The lease expenses of the
prepaid land use rights over each of the next five years and thereafter is
$181,425.
 
 11.           INTANGIBLE
ASSETS
 
 Intangible
assets consist of the following,
 
 December
      31,2007
              
              
              2006(As
      restated)Accounting
      software
              
              $
              1,959
              
              
              $
              1,835Less:
      Accumulated amortization
              
              
              (481
              )
              
              
              (203
              )$
              1,478
              
              
              $
              1,632
 
 The
amortization expenses on intangible assets for the years ended December 31, 2007
and 2006 were $278 and $94,648, respectively.
 
 12.           ACCRUEDEXPENSES ANDOTHER
PAYABLES
 
 Accrued
expenses and other payables consist of the following as of,
 December
      31,2007
              
              
              2006Accrued
      operating expenses
              
              $
              471,988
              
              
              $
              255,082Prepaid
      land use right payable
              
              
              133,731
              
              
              
              -Accrued
      staff welfare
              
              
              71,706
              
              
              
              52,993Construction
      in progress payable
              
              
              90,140
              
              
              
              -Non-interest
      bearing loan
              
              
              68,627
              
              
              
              -Advance
      from customer
              
              
              54,800
              
              
              
              -Other
      payables
              
              
              2,740
              
              
              
              64,050$
              893,732
              
              
              $
              372,125
   F-19
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
 STATUTORY
RESERVES
 
 As
stipulated by the PRC's Company Law, net income after taxation can only be
distributed as dividends after appropriation has been made for the
following:
 
 a.
              Making
      up cumulative prior years' losses, if
any;
 
 b.
              Allocations
      to the “Statutory capital reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered capital. This is restricted to
      set off against losses, expansion of production and operation or increase
      in registered capital; and
 
 c.
              Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company's “Statutory common welfare fund”. This is
      restricted to capital expenditure for the collective benefits of the
      Company's employees; and
 
 d.
              Allocations
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.
 
 Statutory
reserves consist of the following as of,
 December
      31,2007
              
              
              2006Statutory
      capital reserve
              
              $
              232,206
              
              
              $
              232,206Statutory
      common welfare fund
              
              
              116,103
              
              
              
              116,103$
              348,309
              
              
              $
              348,309
  F-20
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  14.           DISCONTINUED
OPERATIONS
  Before
December 2006, the Company had principally been engaged in the research,
development, production, marketing and sales of coal-polymer (“COPO”) resin
products including but not limited to, degradable mulch used for the
conservation of moisture and warmth of soil and protection of the roots of
plants, and materials used for plastic injection molding, electric wire
covering, and garbage bags.  In December 2006, the Company made the
decision to cease its operations in COPO products manufacturing and divert all
its resources to the production and sale of “coal-water mixture”
products.
  Accordingly,
the table below presents the revenue and expenses of the COPO resin products
segment as income from discontinued operations.
  
 December
      31,2007
              
              
              2006Revenue
              
              $
              -
              
              
              $
              7,253,887Cost
      of goods sold
              
              
              -
              
              
              
              5,434,301Gross
      profit
              
              
              -
              
              
              
              1,819,586Operating
      expensesSelling
      expenses
              
              
              -
              
              
              
              285,235General
      and administrative expenses
              
              
              -
              
              
              
              354,161Income
      from operations
              
              
              -
              
              
              
              1,180,190Other
      expensesPlant
      and machinery impairment
              
              
              -
              
              
              
              170,166Loss
      on disposal of patent (Note 17(c))
              
              
              -
              
              
              
              291,266Other
              
              
              -
              
              
              
              143,534Total
      other expenses
              
              
              -
              
              
              
              604,966Income
      from discontinued operations
              
              
              -
              
              
              
              575,224Provision
      for income taxes (Note 15)
              
              
              -
              
              
              
              (165,021
              )Net
      income from discontinued operations
              
              $
              -
              
              
              $
              410,203
 
 15.           INCOME
TAXES
 
 Companies
in the PRC are generally subject to PRC Enterprise Income Taxes at a statutory
rate of 33% (30% of national income tax plus 3% local income tax) on the net
income.  However, the Company’s VIE, Shaanxi Suoang has been approved
as a “high and new technology enterprise” and under PRC Income Tax Laws, it is
entitled to a preferential tax rate of 15% upon expiry of a two years' tax
holiday for 2004 and 2005, within which no income taxes were charged. Shaanxi
Suoang is subject to income tax from 2006.
 
 The
Company and Hangson are not subject to any income taxes as the companies had no
income for fiscal years 2007 and 2006.
 
 The
income tax expense for the years ended December 31, consisted of the
following:
 
 December
      31,2007
              
              
              2006Current
      – PRC Enterprise Income Tax
              
              $
              59,668
              
              
              $
              214,483Deferred
              
              
              -
              
              
              
              -Total
      income tax expenses
              
              
              59,668
              
              
              
              214,483
  F-21
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
  
 Continuing
      operations
              
              $
              59,668
              
              
              
              49,462Discontinued
      operations (Note 14)
              
              
              -
              
              
              
              165,021Total
      income tax expenses
              
              
              59,668
              
              
              
              214,483
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:
 
 December
      31,2007
              
              
              2006U.S.
      statutory rate
              
              
              34
              %
              
              
              34
              %Foreign
      income not recognized in U.S.
              
              
              (34
              %)
              
              
              (34
              %)Non-deductible
      expenses and other
              
              
              -
              
              
              
              224
              %Tax
      holiday
              
              
              (10
              %)
              
              
              -PRC
      preferential income tax rate
              
              
              15
              %
              
              
              15
              %Effective
      tax rate
              
              
              5
              %
              
              
              239
              %
 
 No
significant deferred tax liabilities or assets existed as of either December 31,
2007 or 2006.
 
 16.           EARNINGS PER
SHARE
 
 Basic
earnings per share (EPS) for the years ended December 31, 2007 and 2006 were
determined by dividing net income for the years by the weighted average number
of common shares outstanding.
 
 The
Company has retroactively adjusted the weighted average number of common shares
outstanding by deeming that the three-for-one (3:1) forward stock split on
August 20, 2007 had occurred as of the beginning of the earliest period
presented.
 
 The
Company did not have dilutive securities outstanding as of and during the years
ended December 31, 2007 and 2006.
 
 17.           RELATED PARTY
TRANSACTIONS
 
 a.           Related party receivables
and payables
  Amounts
receivable from a related party and directors as of December 31, are summarized
as follows:
 December
      31,2007
                
                
                2006Loan
      to a related party:Shaanxi
      Hanzhong New Century Real Estate Company Limited (Note 7)Principal
                
                $
                -
                
                
                $
                384,300Interest
      receivable
                
                
                -
                
                
                
                27,670$
                -
                
                
                $
                411,970Amounts
      due from directors:Mr.
      Baowen Ren, also a shareholder of the Company
                
                $
                -
                
                
                $
                144,698Mr.
      Peng Zhou, also a minority shareholder of the Company’s
      subsidiary
                
                
                -
                
                
                
                61,488$
                -
                
                
                $
                206,186
 December
      31,2007
                  
                  
                  2006Amount
      due to a director:Mr.
      Peng Zhou, also a minority shareholder of the Company’s
      subsidiary
                  
                  $
                  8,527
                  
                  
                  $
                  20,702
 
   F-22
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
 
 Balance
with Shaanxi Hanzhong New Century Real Estate Company Limited represented an
interest bearing loan which was fully described in Note 7.
 
 Balances
with Mr. Baowen Ren and Mr. Peng Zhou represent cash advances by the
Company.  These balances are interest free and unsecured and have no
fixed repayment dates.  The balances were repaid in 2007.
 
 b.           Guarantee given by a
shareholder
 
 A
majority shareholder of the Company, Shaanxi Hanzhong Blue Tide Costumes Group
Corporation Limited, has guaranteed the repayment of the long-term interest
bearing loan advanced to a related company, Shaanxi Hanzhong New Century Real
Estate Company Limited, controlled by Mr. Yang Feng as more fully described in
Note 7 and above.
 
 c.Disposal of
patent
 
 In 2006,
the Company disposed of the patent related to the discontinued COPO resin
product operations to a related company for a consideration of
$256,200.  A loss on disposal of $291,266 was recorded (Note 14). The
balance remains outstanding as of December 31, 2007 was $141,795.
 
 d.           Transfer of
property
 
 On June
13, 2006, the Company signed a property transfer agreement with a related
company, HanZhong SiXiong KeChuang Commercial Company Ltd., which is controlled
by the shareholder of the Company, Mr. Yanjun Zhao to dispose of the Company’s
leasehold properties together with the leasehold improvements for an aggregate
cash consideration of approximately $2,450,000.  The agreed price is
$120,000 lower then the evaluated value according to an appraisal report issued
by an independent professional valuer, Xi'An Zheng Heng Assets Valuation Company
Ltd. because the property title did not transfer from the property developer to
the Company as more fully described in note 18(c).  Up to December 31,
2007, amount $1,507,000 was received and recorded as deposit on sale of property
in the balance sheet.
  On March
25, 2007 and June 21, 2007, the Company and the buyer entered into the extension
agreements whereby the Company extended the date for payment of the remaining
balance and transfer of the title of properties to the buyer to on or before May
31, 2007 and October 31, 2007 respectively.  On March 6, 2008, the
Company entered a supplementary agreement whereby the Company agreed to transfer
the title of the properties before May 31, 2008 and the buyer will pay the
Company within one month after the transfer of property title.
 
 18.           COMMITMENTS AND
CONTINGENCIES
 
 a.
              Capital expenditure
      commitments
 
 During
the fiscal year 2007, the Company entered into various contracts for the
construction of a new plant for its coal water mixture
business.  Furthermore, the Company also entered into several
contracts to purchase machinery.
 
 The
Company's commitments for capital expenditure as of December 31, 2007 are as
follows:
 
 Contracted but not
      accrued for:Purchase
      of machinery
              $
              291,121
 
   F-23
 Table of Contents
 Sino
Clean Energy Inc.
 (Formerly
China West Coal Energy Inc.) and Subsidiaries
 Notes to
Consolidated Financial Statements
   b.
              Operating lease
      commitments
  As of
December 31, 2007, the Company’s total future minimum lease payments under
non-cancelable operating leases to be paid in each of the five succeeding years
are as follows:
 
 Periods
      ending December 31,2008
              
              $
              19,0082009
              
              
              19,0082010
              
              
              10,2962011
      and thereafter
              
              
              -Total
      Operating Lease Commitments
              
              $
              48,312
 
 c.
              Real estate title
      certificate of the leasehold
property
  The
Company has not obtained the real estate title certificate for its leasehold
property with a carrying value of $2,234,828 as of December 31, 2007 and located
in the PRC.  As discussed in Note 17(d), the Company has entered into
a signed a property transfer agreement to dispose of this property.
  
 In the
event that the Company fails to transfer the real estate title certificate to
the buyer, there is a risk that the Company might be subject to
penalties.  However, management believes that this possibility is
remote.
 
 d.
              Social insurance of
      Employees
 
 According
to the prevailing laws and regulations of the PRC, the Company is required to
cover its employees with medical, retirement and unemployment insurance
programs.  Management believes that due to the transient nature of its
employees, the Company does not need to provide all employees with such social
insurance.
 
 In the
event that any current or former employee files a complaint with the PRC
government, the Company may be subject to making up the social insurance as well
as administrative fines.  As the Company believes that these fines
would not be material, no provision has been made in this regard.
 
 19.           SUBSEQUENT
EVENT
 
 On March
26, 2008, the Company entered into a purchase agreement with a supplier to
purchase 200,000 tons of coal at a fixed price of approximately RMB510 per
ton.  The total purchase consideration of RMB20,000,000 (approximately
$2,740,000) has to be prepaid by two installments with the last payment on or
before April 30, 2008.
  F-24
 Table of Contents
   ITEM 8.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 None.
 
  ITEM 8A.
              CONTROLS AND
      PROCEDURE
 Evaluation
of Disclosure Controls and Procedures
 
 The term
“disclosure controls and procedures” is defined in Rule 13a-14(c) of the
Securities and Exchange Act of 1934, or the Exchange Act.  This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within required time periods. Our Chief Executive Officer and our Chief
Financial Officer have evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2007, and have concluded that as of that
date, our disclosure controls and procedures were effective at ensuring that
required information will be disclosed on a timely basis in our reports filed
under the Exchange Act.
 
 Management’s
Report on Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rule 13a-15(f) of the Exchange Act.  Under the supervision
and with the participation of our management, i, we conducted an evaluation of
the effectiveness of our internal control over financial reporting based upon
the framework in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).  Based
upon, and as of the date of this evaluation, our management concluded that our
internal control over financial reporting was not effective.
 
 Our
management has identified material weaknesses, as described below, and therefore
has concluded that our internal controls over financial reporting were not
effective as of December 31, 2006 and 2007.  In connection with their
review of our internal controls over financial reporting for the fiscal year
ended December 31, 2007, the Company’s management concluded that the
deficiencies described below resulted in a material weakness in our internal
controls over our ability to produce financial statements free from material
misstatements:
 
 1.
              The
      operation of theChinese subsidiaries
      is in China, hence the presentation of theirfinancial statements
      does not fully comply with the U.S. GAAP.  TheCompany had
      insufficient resources to perform the accounting andfinancial reporting
      functions and such resources lacked theappropriate level of
      accounting knowledge, experience and training in the application of
      accounting principles generally accepted in theUnited States of
      America and were inadequately supervised.  The lack ofsufficient and
      adequately trained accounting and finance personnelresulted in an
      ineffective segregation of duties relative to keyfinancial reporting
      functions; and
 
 2.
              Lack
      of timely identification, research and resolution of accounting issues and
      lack of documentation of consideration of recent accounting
      pronouncements.
 
 The Company's management has identified
the steps necessary to address the material weaknesses existing as of 2006
described above, as follows:
 
 1.
              Hiring additional accounting and
      operations personnel and engaging outside contractors with
      technical accounting expertise to ensure that accounting personnel with
      adequate experience, skills and knowledge relating to complex, non-routine
      transactions are directly involved in the review and accounting
      evaluation of our complex, non-routine transactions;
 
 2.
              Involving both internal
      accounting and operations personnel and outside contractors with
      technical accounting expertise, as needed, early in the evaluation of a
      complex, non-routine transaction to obtain additional guidance as to
      the application of generally accepted accounting principles to such a
      proposed transaction;
 
 3.
              Documenting to standards
      established by senior accounting personnel and the principal accounting
      officer the review, analysis and related conclusions with respect to
      complex, non-routine
transactions;
  4.
              Requiring senior accounting
      personnel and the principal accounting officer to review complex,
      non-routine transactions to evaluate and approve the accounting treatment
      for such transactions.
 
 -31-
 Table of Contents
 The
Company will begin to execute the remediation plans identified above in the
first fiscal quarter of 2008.
 This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual
report.
 
 Changes
in Internal Control Over Financial Reporting
  There were no
changes in out internal controls over financial reporting that occurred during
the year ended December 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
 
 ITEM 8B.
              OTHER
      INFORMATION
   As
discussed more fully above under Item 1. (“Description of Business”), the
Company decided to cease operations of its COPO resin products business and
focus on the Company’s CWM Fuel product business.  Thus, in December
2006, the Company’s patented technology owned through Shaanxi Suoang in
connection with the COPO resin products was sold to HanZhongWeiDa Commercial
Company Limited (“HanZhongWeiDa”), a related company controlled by Leping Yao, a
shareholder of Shaanxi Suoang, for consideration of $256,200.Further, and in
January 2007, we ceased operations at our COPO resin product manufacturing plant
and we sold our COPO resin products’ manufacturing plant machinery to
HanZhongWeiDa Commercial Company Limited for consideration of
$89,670.  The Company obtained an independent appraisal report prior
to the sale of the patent and the COPO plant machinery and the appraised value
for the patent was approximately RMB2,000,000 (approximately $259,538) and the
appraised value of the COPO plant machinery was approximately RMB700,000
(approximately $90,838).  The Company then sought out buyers who would
be interested in purchasing these assets for the highest purchase price and also
considered the recoverability of proceeds from the sale of these
assets.  Of the companies that made an offer for these assets,
HanZhongWeiDa offered the highest price and thus the Company sold these assets
to HanZhongWeiDa.  The Company incurred a loss on the disposal of the
patented technology of $291,266 and incurred an impairment loss of $170,166 in
connection with the disposal of the COPO resin product plant
machinery.
 -32-
 Table of Contents
  PART
III
  ITEM 9.
              DIRECTORS, EXECUTIVE OFFICERS OF
      REGISTRANT
 DIRECTORS
AND EXECUTIVE OFFICERS
 
 Current
Executive Officers and Directors
 
 The
following tables set forth information regarding the Company’s current executive
officers and directors of the Company. The Board of Directors is comprised of
only one class. Except as otherwise described below, all of the directors will
serve until the next annual meeting of stockholders or until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. Also provided herein are brief descriptions of the business
experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the federal securities laws.
 
  Name
              
              Age
              
              PositionsBaowen
      Ren
              
              
              39
              
              CEO,
      President and Chairman of the BoardWenjie
      Zhang
              
              
              36
              
              DirectorPeng
      Zhou
              
              
              40
              
              DirectorCaixia
      Peng
              
              
              30
              
              Chief
      Financial Officer and Treasurer
  Baowen Ren, 39, is the
Director of Hangson Limited and has been Chairman of the Board of Shaanxi
Suo’ang Biological Science & Technology, Co., Ltd. (“Shaanxi Suo’ang”),
Hangson’s Chinese operational variable interest business entity, since January
2003.  Mr. Ren
is a senior economic engineer who graduated from the Business Management
Department of Hanzhong Normal University in 1992.  He had been the
president of Shaanxi Lanchao Group Clothe Group Co. Ltd. from January 2001 to
December 2002 and had been conferred honorable titles of “Pacemaker in the New
Long March”, “Shaanxi Outstanding Young Entrepreneur”, “Shaanxi Top 100
Entrepreneur”, and “National Model Township Entrepreneur of Ministry of
Agriculture”.  Under his leadership, Shaanxi Suo’ang has convened a
batch of excellent management personnel for products technology development,
market strategy and sales, and capital operations for the expansion and
development of Shaanxi Suoang’s business.
 
 Peng Zhou, 40, is the General
Manager of Shaanxi Suo’ang, Hangson’s Chinese operational variable interest
business entity. Mr. Zhou is an accountant who graduated from the Statistics
Department of Shaanxi Institute of Finance in 1992. Mr. Zhou started at Shaanxi
Suo’ang as a Project Manager in May 2002 and was promoted to his current
position as General Manager in May 2005. Mr. Zhou has also been engaged in
industries such as finance, media, foreign trade, real estate and had held the
posts of manager of credit department, editor, financial supervisor, and deputy
manager. From June 1997 until March 2002, Mr. Zhou was the Vice President of
Hanzhong Ruisen Real Estate Company. Mr. Zhou was also in charge of compiling
and reporting work for a number of projects such as Industrial Park Project
of 3,000-thousand Sets of Clothes, New Construction Material Project-Shale Brick
Manufacturing Demonstration Base with Annual Output of 6000-Thousand Pieces, and
Erlang Dam Downstream Hydropower Station Cascade Development
Project.
 
 Wenjie Zhang, 36, has been the General
Manager of Hanzhong Minsheng Guomao Department Store since January 2004. Mr.
Zhang graduated with a degree in administration from the Xi’an Science
Institution in 1995. From January 2001 until December 2003, Mr. Zhang was the
Sales Manager at Shaanxi Jingyi Wood Group Company.
  Caixia Peng, 30, is the
Finance Director of Shaanxi Suo’ang, Hangson’s Chinese operational variable
interest business entity. Ms. Peng started as Shaanxi Suo’ang’s Finance Manager
in April 2005 and has been Shaanxi Suo’ang’s Finance Director since February
2006. Ms. Peng is an accountant who graduated from the Xi’an Finance &
Economy Institution in 1992. From July 2003 until March 2005, Ms. Peng was the
Finance Manager at Yangling Bodisen Co., Ltd. Prior to that, from July 2001
until June 2003, Ms. Peng was the Finance Director at Yangling Tianwei
Pharmaceutical Co., Ltd.
 
 Audit,
Nominating and Compensation Committees
 
 Due to
our lack of operations and size, we have not designated an Audit
Committee.  Furthermore, we are currently quoted on the OTC Bulletin
Board, which is sponsored by NASDAQ, under the symbol “SCLX ” and the OTCBB does
not have any
listing requirements mandating the establishment of any particular
committees.  Our board of directors acts as our Audit Committee and
performs equivalent functions, such as: recommending a firm of independent
certified public accountants to audit the annual financial statements; reviewing
the independent auditors independence, the financial statements and their audit
report; and reviewing management's administration of the system of internal
accounting controls. For these same reasons, we did not have any other
committees during fiscal 2007.
 
 -33-
 Table of Contents
 Our Board
believes that, considering our size and the members of our Board, decisions
relating to director nominations can be made on a case-by-case basis by all
members of the board without the formality of a nominating committee or a
nominating committee charter.  To date, we have not engaged third
parties to identify or evaluate or assist in identifying potential nominees,
although we reserve the right in the future to retain a third party search firm,
if necessary.
 
 The Board
does not have an express policy with regard to the consideration of any director
candidates recommended by shareholders since the Board believes that it can
adequately evaluate any such nominees on a case-by-case basis.  The
Board will evaluate shareholder-recommended candidates under the same criteria
as internally generated candidates. Although the Board does not currently have
any formal minimum criteria for nominees, substantial relevant business and
industry experience would generally be considered important, as would the
ability to attend and prepare for board, committee and shareholder meetings. Any
candidate must state in advance his or her willingness and interest in serving
on the board of directors.
 
 We have
not received any recommendations for a director nominee from any
shareholder.
 
 Code
of Ethics
 
 For the
year ended December 31, 2007, we did not have formal written code of ethics
applicable to our principal executive officer and principal financial officer,
because the board of directors has not determined it to be immediately necessary
from a management perspective to adopt a formal code at this time. However, we
plan to adopt and approve a formal written code of ethics in the near
future.
 
 Family
Relationships
 
 There are
no family relationships between or among any of the current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers.
 
 Involvement
in Certain Legal Proceedings
 
 There are
no orders, judgments, or decrees of any governmental agency or administrator, or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining any
of our officers or directors from engaging in or continuing any conduct,
practice or employment in connection with the purchase or sale of securities, or
convicting such person of any felony or misdemeanor involving a security, or any
aspect of the securities business or of theft or of any felony. Nor are any of
the officers or directors of any corporation or entity affiliated with us so
enjoined.
  Compliance
with Section 16(a) of the Exchange Act
  Section 16(a)
of the Securities Exchange Act of 1934 requires our executive officers and
directors, and persons who own more than ten percent (10%) of our common stock
to file reports of ownership and change in ownership with the Securities and
Exchange Commission and the exchange on which the common stock is listed for
trading. Executive officers, directors and more than ten percent (10%)
stockholders are required by regulations promulgated under the Exchange Act to
furnish us with copies of all Section 16(a) reports filed. To the Company’s
knowledge, based solely on review of the copies of such reports furnished to the
Company and written representation that no other reports were required and
except for a Form 4 filed one day late by director Wenjie Zhang, all of the
Company’s other officers, directors and greater than ten percent (10%)
shareholders complied with all applicable Section 16(a) filing
requirements.
  -34-
 Table of Contents
  ITEM 10.
              EXECUTIVE
      COMPENSATION
  Compensation
Table
  The
following table sets forth all of the compensation awarded to, earned by or paid
to (i) each individual serving as our principal executive officer during the
fiscal year ended December 31, 2007 and (ii) each other individual that
served as an executive
officer at the conclusion of the fiscal year ended December 31, 2007 and
who received in excess of $100,000 in the form of salary and bonus during such
fiscal year (collectively, the “named executive officers”).
 Non-Equity
              
              
              Nonqualified
      DeferredName
      and Principal Positions
              
              Year
              
              
              Salary
              
              
              Bonus
              
              
              Stock
      Awards (1)
              
              
              Incentive
      Plan Compensation
              
              
              Compensation
      Earnings
              
              
              All
      Other Compensation
              
              
              TotalBaowen
      Ren
              
              
              2007
              
              
              $
              5,600
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              $
              5,600Chief
      Executive Officer and Board Chairman
              
              
              2006
              
              
              $
              4,560
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              $
              4,560Peter
      Day
              
              
              2007
              
              
              $
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              $
              -Former
      CEO and CFO (2)
              
              
              2006
              
              
              $
              105,000
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              $
              105,000
 
 (1)
              Salary
      paid to Mr. Ren is expressed in U.S. Dollars based on the interbank
      exchange rate of RMB7.58 for each 1.00 U.S. Dollar, on December 31,
      2007.(2)
              As
      of September 30, 2006, Mr. Day was the Chief Executive Officer, President,
      and Chief Financial Officer of the Company. Mr. Day had not received any
      payment for his position and as a result his salary was accrued as an
      expense. This liability was purchased from the Company by Mr. Day together
      with the assets of Endo Canada pursuant to the June 26, 2006 Asset and
      Share Purchase Agreement. Mr. Day resigned as the Company’s Chief
      Executive Officer, President, and Chief Financial Officer on October 20,
      2006 in connection with the Share Exchange transaction described above
      under the section titled “Item 1. Description of
  Business”.
 
 Employment
Agreement with our Executives
  We
currently do not have any employment agreements with our executive
officers.
 
 Outstanding
Equity Awards at Fiscal Year-End
  None of
our named executive officers held any outstanding equity awards as of
December 31, 2007.
  Severance
and Change of Control Arrangements
  We have
not entered into a severance or change of control provision with any of our
executives.
  Director
Compensation
 
 We
currently we do not have any compensation agreements with the members of our
Board of Directors for their service on the Board, and we did not provide any
director compensation to members of our Board during the last fiscal
year.
 
 Stock or
Option Awards
 
 There
were no stock or option awards issued to any directors and outstanding as of
December 31, 2007.
  -35-
 Table of Contents
  ITEM 11.
              SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND
      MANAGEMENT
  Security
Ownership of Certain Beneficial Owners and Management
 
 The
following table sets forth information regarding the beneficial ownership of our
common stock as of April 11, 2008, for each of the following
persons:
  • each of our directors and named
      executive officers;
  • all directors and named
      executive officers
      as a group; and
 
 • each person who is known by us to
      own beneficially five percent or more of our common
      stock.
  Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the stockholder’s name. Unless
otherwise indicated, the address of each beneficial owner listed below is Room
2205, Suite A, Zhengxin Bldg., No.5, Gaoxin 1st Road, Gao Xin District, Xi’an,
Shaanxi Province, People’s Republic of China. The percentage of class
beneficially owned set forth below is based on 84,681,750 shares of common stock
outstanding on April 11, 2008.
  Named
      executive officers and directors:
              
              Number
      of
                Shares
                beneficially
                owned
              
              
              Percentage
      of
                class
      beneficially
                owned
      (1)Baowen
      Ren, CEO, President, and Chairman
              
              
              27,991,699
              
              
              
              33
              %Wenjie
      Zhang, Director
              
              
              202
              
              
              
              *
              %Peng
      Zhou,
      Director
              
              --
              
              
              --Caixia
      Peng, CFO and Treasurer
              
              
              --
              
              
              
              --All
      directors and executive officers as a group (4 persons)
              
              
              27,991,901
              
              
              
              33
              %
 ____________________
 * less
than 1%
 
 (1)
              Based on 84,681,750 shares
      outstanding as of April 11,
      2008.
  Securities
Authorized for Issuance under Equity Compensation Plan
  We
currently do not have any effective equity compensation plans.
  -36-
 Table of Contents
  ITEM 12.
              CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS, AND DIRECTORINDEPENDENCE
  
 HANGSON’S
CONTRACTUAL ARRANGEMENTS WITH SHAANXI SUOANG AND ITS SHAREHOLDERS
  PRC law
currently limits foreign equity ownership of Chinese companies.  To
comply with these foreign ownership restrictions, we operate our business in
China through a series of contractual arrangements with Shaanxi Suoang and its
majority shareholders that were executed on August 18, 2006.  For a
description of these contractual arrangements, please see the section under Item
1 above titled “Contractual Arrangements with Shaanxi Suoang and Its
Shareholders.”
 
 RELATED
PARTY TRANSACTIONS
 
 Set forth
below are the Company’s related party transactions and the related party
transactions between Shaanxi Suoang’s shareholders, officers and/or
directors, and Shaanxi Suoang, with whom Hangson has contractual arrangements
which give Hangson the ability to substantially influence Shaanxi Suoang’s daily
operations and financial affairs, appoint its senior executives and approve all
matters requiring shareholder approval.
 
 (a)           Related party
receivables and payables
 
 Amounts
receivable from a related party, and due from or due to directors as of December
31 of each year are summarized as follows:
  2007
              
              2006Loan
      to a related party
 Shaanxi
      Hanzhong New Century Real Estate Company Limited (1)
              
              $
              --
              
              
              $
              411,970Amounts
      due from directorsMr.
      Baowen Ren, also a shareholder of the Company (2)
              
              $
              --
              
              
              $
              144,698Mr.
      Peng Zhou, also a minority shareholder of the Company’s subsidiary
      (2)
              
              $
              --
              
              
              $
              61,488Amount
      due to a directorMr.
      Peng Zhou, also a minority shareholder of the Company’s subsidiary
              
              $
              8,527
              
              
              $
              20,702
  (1)
              Balance
      with Shaanxi Hanzhong New Century Real Estate Company Limited represents a
      long-term interest bearing loan of $384,300 paid and interest
      receivable of $57,670 to a company, Shaanxi Hanzhong New Century Real
      Estate Company Limited is controlled by the shareholder, Mr. Yang Feng.
      The loan is for a term of five years from November 5, 2002 to November 5,
      2007 and bears interest at 7.2% per annum. A majority shareholder of the
      Shaanxi Suoang, Shaanxi Hanzhong Blue Tide Costumes Group Corporation
      Limited, guarantees the repayment of this loan. In accordance with a
      supplemental agreement signed between both parties and witnessed by a
      PRC lawyer, the loan has been repaid in
2007.
 
 (2)
              The
      balances with Mr. Baowen Ren and Mr. Peng Zhou represent cash advances by
      the Company. This balance is interest free and unsecured and has no fixed
      repayment date. The balances have been repaid in
  2007.
  (b)           Guarantee
given by a shareholder
 
 A
majority shareholder of the Shaanxi Suoang, Shaanxi Hanzhong Blue Tide Costumes
Group Corporation Limited, guarantees the repayment of a long-term interest
bearing loan advanced to a company, Shaanxi Hanzhong New Century Real Estate
Company Limited, controlled by Mr. Yang Feng.
 
 (c)           Disposal
of patent
 
 In 2006,
the Company disposed of the patent related to the discontinued COPO resin
product operations to a related company for a consideration of
$256,200.  A loss on disposal of $291,266 was recorded.  The
balance which remained outstanding as of December 31, 2007 was
$141,795.
  (d)           Transfer of
property
 
 On June
13, 2006, Shaanxi Suoang entered into a property transfer agreement with
Hanzhong Sixiong Kechuang Commercial Company Limited (“Buyer”), a company
controlled by Mr. Yanjun Zhao, a Company shareholder to dispose of the Company’s
leasehold property in Hangzhong City, China together with the leasehold
improvement therein in exchange for cash consideration of approximately
$2,450,000.  The title of the property will not be transferred until
the Company receives payment of 95% of the cash consideration.  On
March 6, 2008, the Company entered into a supplementary agreement with the Buyer
whereby the Company agreed to transfer the title of the properties before May
31, 2008 and the Buyer will pay the Company within one month after the transfer
of property title.
 
 DIRECTOR
INDEPENDENCE
 
 The
Company does not have a separately designated audit, compensation or nominating
committee of our Board, as it is not required to, and the functions customarily
delegated to these committees are performed by the full Board.  We
have determined, however, that none of our directors is “independent” as that
term is defined in Section 4200 of the NASD Marketplace Rule.
  -37-
 Table of Contents
  
 ITEM 13.
              EXHIBITS AND REPORTS ON FORM
      8-K
  (a) Exhibits to the Form
10-KSB:
 
 Exhibit
      Number
              
              Description
 
 2.1
              
              Share
      Exchange Agreement between Endo Networks, Inc., Endo Majority
      Shareholders, Hangson Ltd. and the Hangson Shareholders dated October 18,
      2006 (1)3.1
              
              Articles
      of Incorporation of Endo Networks, Inc., a Nevada corporation, as amended.
      (3)3.2
              
              Bylaws
      of Endo Networks, Inc. (3)3.3
              
              Text
      of Amendment to our Bylaws (4)3.4
              
              Articles
      of Merger filed with the Secretary of State of Nevada with an effective
      date of August 15, 2007 (6)10.1
              
              Asset
      and Share Purchase Agreement between Registrant and Peter B. Day (for Endo
      Canada) (2)10.2
              
              Contract
      for Technology Transfer between Shaanxi Suo’ang Biological Science &
      Technology Co., Ltd. and HanZhongWeiDa Commercial Company Limited dated
      December 25, 2006 (5)10.3
              
              Contract
      for Technology Transfer between Shaanxi Suo’ang Biological Science &
      Technology Co., Ltd. and HanZhongWeiDa Commercial Company Limited dated
      January 10, 2007 (5)21
              
              List
      of Subsidiaries (7)31.1
              
              Section
      302 Certification by the Corporation’s Chief Executive Officer
      *31.2
              
              Section
      302 Certification by the Corporation’s Chief Financial Officer
      *32.1
              
              Section
      906 Certification by the Corporation’s Chief Executive Officer
      *32.2
              
              Section
      906 Certification by the Corporation’s Chief Financial Officer
      *99.1
              
              Consulting
      Services Agreement by and between Hangson Limited and Shaanxi Suo’ang
      Biological Science & Technology Co., Ltd. dated August 18, 2006
      (3)99.2
              
              Equity
      Pledge Agreement by and between Hangson Limited and Shaanxi Suo’ang
      Biological Science & Technology Co., Ltd. (“Shaanxi Suoang”) and
      Shaanxi Suoang’s Majority Shareholders dated August 18, 2006
      (3)99.3
              
              Operating
      Agreement by and between Hangson Limited and Shaanxi Suo’ang Biological
      Science & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
      Majority Shareholders dated August 18, 2006 (3)99.4
              
              Proxy
      Agreement by and between Hangson Limited and Shaanxi Suo’ang Biological
      Science & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
      Majority Shareholders dated August 18, 2006 (3)99.5
              
              Option
      Agreement between Hangson Limited and Shaanxi Suo’ang Biological Science
      & Technology Co., Ltd. (“Shaanxi Suoang”) and Shaanxi Suoang’s
      Majority Shareholders dated August 18, 2006 (3)99.6
              
              Agreement
      by and between ShaanxiSuo’ang Biological
      Science and Technology Co. Ltd. and Hanzhong Si Xiong Ke Chuang Business
      Co. Ltd. (3)99.7
              
              Supplementary
      Agreement by and between ShaanxiSuo’ang Biological
      Science and Technology Co. Ltd. and Hanzhong Si Xiong Ke Chuang Business
      Co. Ltd. dated March 25, 2007 (5)
   
  (1)
              Filed
      as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
      the SEC on October 18, 2006 and incorporated herein by
      reference.(2)
              Filed
      as Exhibit A of Registrant’s Schedule 14A filed with the SEC on August 8,
      2006 and incorporated herein by reference.(3)
              Filed
      as Exhibits to the Registrant’s Current Report on Form 8-K filed with the
      SEC on October 26, 2006 and incorporated herein by
    reference.(4)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on November 17, 2006 and incorporated herein by
      reference.(5)
              Filed
      as Exhibits to the Registrant’s Annual Report on Form 10-KSB filed with
      the SEC on May 3, 2007 and incorporated herein by
    reference.(6)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on August 17, 2007 and incorporated herein by
      reference.(7)
              Filed
      as an Exhibit to the Registrant’s Annual Report on Form 10-KSB filed with
      the SEC on May 3, 2007 and incorporated herein by
    reference.
   -38-
 Table of Contents
 ITEM
      14.
              PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
  
 AUDIT
FEES
 
 The
aggregate fees billed by Yu & Associates CPA Corporation for
professional services rendered for the audit of the Company’s annual
consolidated financial statements for the fiscal years ended December 31, 2006
and December 31, 2007 and for review of financial
statements included in the Company’s quarterly reports on Form 10-QSB for those
fiscal years were $40,000 and $125,000, respectively.
 
 The
aggregate fees billed by Schwartz Levitsky Feldman LLP for professional services
rendered for the audit of the Company’s annual consolidated financial statements
for the fiscal year ended December 31, 2006 and for review of financial
statements included in the Company’s quarterly reports on Form 10-QSB for that
fiscal year was $110,000.
 
 AUDIT
RELATED FEES
 
 For both
fiscal years ended December 31, 2006 and December 31, 2007, the Company incurred
no fees for services reasonably related to the performance of the audit or
review of the financial statements outside of those fees disclosed above under
“Audit Fees”.
 
 TAX
FEES
 
 For both
fiscal years ended December 31, 2007 and December 31, 2006, the Company incurred
no fees for services for tax compliance, tax advice and tax planning
work.
 
 ALL OTHER
FEES
 
 There
were no other fees billed by Yu & Associates or SLF during the last two
fiscal years for products and services provided by Yu & Associates or
SLF.
 
 PRE-APPROVAL
POLICIES AND PROCEDURES
 
 Prior to
engaging its accountants to perform particular services, our board of directors
obtains an estimate for the service to be performed.  All of the
services described above were approved by the board of directors in accordance
with its procedure.
 
  
 [SIGNATURES
PAGE FOLLOWS]
 
 
  -39-
 Table of Contents
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Dated:
      April 15, 2008
              
              
              SINO
      CLEAN ENERGY INC.
                (Registrant)By:
              /s/
      Baowen RenBaowen
      Ren
                Chief
      Executive Officer
 
 
 KNOW ALL
THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Baowen Ren and Caixia Peng, and each of them, jointly
and severally, his attorneys in fact, each with full power of substitution, for
him in any and all capacities, to sign any and all amendments to this Report on
Form 10-KSB, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorneys-in-fact or his substitute
or substitutes, may do or cause to be done by virtue hereof.
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
  Signature
              
              Title
              
              Date/s/
      Baowen Ren
              
              Chief
      Executive Officer, President and Chairman of the Board
              
              April
      15, 2008Baowen
      Ren/s/
      Caixia Peng
              
              Chief
      Financial Officer and
                Treasurer
              
              April
      15, 2008Caixia
      Peng/s/
      Wenjie Zhang
              
              Director
              
              April
      15, 2008Wenjie
      Zhang/s/
      Peng Zhou
              
              Director
              
              April
      15, 2008Peng
      Zhou






















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