UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K/A





x
            ANNUAL
      REPORT UNDER PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934




FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2008





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR THE
TRANSITION PERIOD FROM ______________ TO ______________





Commission
file number: 000-12561




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


(Exact
name of Registrant as Specified in Its Charter)




Nevada
                        
                        95-3819300(State or Other Jurisdiction
                          of Incorporation or Organization)
                        
                        (I.R.S. Employer
                          Identification No.)3/F
      West Wing Dingheng Plaza,
                          45A
      North Fengtai Road,
                          Beijing,
      China
                        
                        100071(Address of principal executive offices)
                        
                        (Zip Code)





Registrant’s
telephone number, including area code: (86) 10-63860500




Securities
registered pursuant to Section 12(b) of the Exchange
Act:  None




Securities
registered pursuant to Section 12(g) of the Exchange Act:




Common Stock, $0.001 par
value


(Title of
Class)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES  ̈NO x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈     No x





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
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes  ̈ No  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference Part III of this Form 10-K or
any amendment to this Form 10-K.   x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
      accelerated filer
                 ̈
                Accelerated
      filer
                 ̈Non-accelerated
      filer
                  (Do
      not check if a smaller reporting company)
                 ̈
                Smaller
      reporting company
                x





The
aggregate market value of the 11,342,439 shares of common stock, par value
$0.001 per share, of the registrant held by non-affiliates on June 30, 2008
was $15,879,415, which was computed upon the basis of the closing price $1.40 on
that date.




There
were 16,173,016 shares of common stock of the registrant outstanding as of April
12, 2009.





Documents
Incorporated by Reference: None.





EXPLANATORY
NOTE





The
undersigned Registrant hereby amends Item 7 and 8 of Part II of the Registrant’s
annual report on Form 10-K for the year ended December 31, 2008, for the purpose
of amending its revenue recognition as described in the current report Form 8-K
and its amendment filed on March 30, 2010 and April 9, 2010.





Except as
described above, no other changes have been made to the original report and have
not been included in this amendment. In addition, as required by Rule 12b-15
under the Securities Exchange Act of 1934, new certifications by our Principal
Executive Officer and Principal Financial Officer are filed as exhibits to this
amendment.


2





ITEM
      7.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





FORWARD-LOOKING
INFORMATION - Management's Discussion and Analysis or Plan of Operation
("MD&A") includes "forward-looking statements". All statements, other than
statements of historical facts, included in this report regarding the Company's
financial position, business strategy and plans and objectives of management of
the Company for future operations are forward-looking statements. These
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside of the Company's control that could cause actual results to
materially differ from such statements. While the Company believes that the
assumptions concerning future events are reasonable, it cautions that there are
inherent difficulties in predicting certain important factors, especially,
the prospects for future acquisitions; the competition in the solar hot water
product market, the competition in the solar water heaters and boilers industry
and the impact of such competition on pricing, revenues and margins; and
the cost of attracting and retaining highly skilled personnel.





Overview




We are
engaged in the solar and renewable energy business in the People's Republic of
China (“PRC”).  Our business is conducted through our wholly owned PRC
based operating subsidiaries, Bazhou Deli Solar, BeijingDeli Solar, and our
indirect subsidiaries Tianjin Huaneng (majority owned) and SZPSP.





The
Company has four reportable segment: solar heater/biomass stove/boiler related
products, heat pipe related products, energy-saving projects and other products,
which includes heat exchangers and other products that fall outside of the first
three segments.




Bazhou
Deli Solar designs, manufactures and sells renewable energy systems to produce
hot water and for space heating in the PRC. Bazhou Deli Solar’s principal
products are solar hot water heaters and multifunctional space heaters,
including coal-fired boilers for residential use. Bazhou Deli Solar also sells
component parts for its products and provides after-sales maintenance and repair
services.





Beijing
Deli Solar is principally engaged in the installation of large solar water
heaters in construction projects in major cities in the PRC, including Beijing.
However, so far there is no revenue derived from Beijing Deli
Solar.





Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.





SZPSP is
principally engaged in the manufacture of solar hot water systems for commercial
use. Its customers include factories, hospitals, schools and hotels. SZPSP’s
solar energy products include flat plate solar collectors, solar water heater
systems, central solar water heater system and solar energy photovoltaic
technology.  Our customers include factories, hospitals, schools and
hotels. SZPSP’s solar energy products include flat plate solar collectors, solar
water heater systems, central solar water heater system and solar energy
photovoltaic technology, etc.




Approximately
46.8% of our sales revenues for the fiscal year ended December 31, 2008 were
derived from sales of our solar water heaters/biomass stove/boiler related
products, 30.8% derived from sales of heat pipe related product 16.9% derived
from sales of our energy saving projects, and 5.5% derived from sales of others.
Approximately 76% of our sales revenues for the fiscal year ended December 31,
2008 were derived from sales made to PRC based customers, with the remaining 24%
from the international market.




Recent
Developments





In 2008,
the Company’s wholly owned subsidiary Deli Solar Holding Ltd. entered into an
agreement with Shenzhen Fuwaysun Technology Co., Ltd. (“Fuwaysun”) pursuant to
which Deli Solar Holding acquired the outstanding shares of Fuwaysun. Deli Solar
Holding loaned $3,000,000 to Fuwaysun, which amount will automatically become
part of the purchase price in the event both parties complete the share transfer
and investment plan agreed on between the parties within six months from the
date of execution of the agreement.  In the event the parties do not
complete the share transfer and investment plan within six months from the date
of execution of the agreement Fuwaysun will return the principal amount of the
loan plus interest to Deli Solar Holding.  In the event the parties do
not complete the share transfer and investment plan within six months from the
date of execution of the agreement Fuwaysun shall return the principal amount of
the loan plus interest to Deli Solar Holding.  On April 9, 2009, the
Board approved an amendment to the Fuwaysun agreement to extend the period of
time for the consummation of the Fuwaysun Acquisition until June 30,
2009.


3





On
September 6, 2006, the Company entered into an Agreement of Intent on Share
Transfer (“Xiongri Agreement”) to acquire 60% of the outstanding equity interest
of Shenzhen Xiongri Solar Energy Heating Co., Ltd. (“Xiongri”) from its sole
shareholder (“Xiongri Acquisition”). Among other things,  pursuant to
the Xiongri Agreement, the Company agreed to loan to the shareholder of Xiongri
two loans in the aggregate amount of RMB 10,000,000, which loans would serve as
a purchase price payment in the Xiongri Acquisition if Xiongri reached certain
net profits in 2006, as specified in the Xiongri Agreement.  On April
9, 2009, the Board approved an amendment to the Xiongri Agreement to extend the
time period for the consummation of the Xiongri Acquisition, including all
closing conditions to be performed as set forth in the Xiongri Agreement,
to June 30, 2009.





Critical
Accounting Policies and Estimates





The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles requires us to make judgments,
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Note 2 to the consolidated
financial statements describe the significant accounting policies and methods
used in the preparation of the consolidated financial statements. The areas
described below are affected by critical accounting estimates and are impacted
significantly by judgments and assumptions in the preparation of the
consolidated financial statements. Actual results could differ materially from
the amounts reported based on these critical accounting estimates.





Revenue
Recognition





Product
sales are recognized when the products are delivered to and inspected by
customers and title has passed. Bazhou Deli Solar provides a three-year standard
warranty on all of the products it manufactures. Under this standard warranty
program, repair and replacement of defective component parts are free of any
charge during the first year following the purchase. In the second and third
year, replacement parts must be paid for by the customer but not the labor. Most
of our warranty services are performed by our independent sales agents and
distributors in return for a 1-2% discount of the purchase price they pay for
our products. Accordingly, we have recorded no liability for warranty reserve.
We also allow our sales agents and distributors to return any defective product
for exchange.





Sales-type
leases





The
Company engages in installing energy-saving facilities and leases the equipment
to customers. The Company will transfer all benefits, risks and ownership of the
leased property to the customers at the end of the lease term. The Company's
investment cost in these projects is recorded as Sales-type leases in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 13,
“Accountingfor Leases
" and its various amendments and interpretations. The sales and cost of goods
sold is recognized at the point of sales. The investment in sales-type lease
consists of the sum of the total minimum lease payments receivable less unearned
interest income. Unearned interest income is amortized to income over the lease
term as to produce a constant periodic rate of return on the net investment in
the lease. The gross investment on sales-type lease is recorded as net of
unearned interest Income.





Sales-type
leases are generally placed in a non-accrual status (i.e., no revenue is
recognized) when payments are more than 90 days past due. Additionally,
management periodically reviews the credit worthiness of all sales-type lessees
with payments outstanding less than 90 days. Based upon management's judgment,
sales-type lessees with balances less than 90 days delinquent may be placed in a
non-accrual status. Leases placed on non-accrual status are only returned to an
accrual status when the account has been brought current and management believes
recovery of the remaining unpaid lease payments is probable.




Allowance
for Doubtful Accounts





Our
business operations are conducted in the PRC. We extend unsecured trade credit
to our relatively large customers according to their sales volume and historical
payment records. The allowance for doubtful accounts is established through
charges to the provision for bad debts. We regularly evaluate the adequacy of
the allowance for doubtful accounts based on historical trends in collections
and write-offs, our judgment as to the probability of collecting accounts and
our evaluation of business risk. This evaluation is inherently subjective, as it
requires estimates that are susceptible to revision as more information becomes
available. Accounts are determined to be uncollectible when the debt is deemed
to be worthless or only recoverable in part and are written off at that time
through a charge against the allowance.





Property,
Plant and Equipment





Building,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded utilizing the
straight-line method over the estimated original useful lives of the assets.
Amortization of leasehold improvements is calculated on a straight-line basis
over the life of the asset or the term of the lease, whichever is shorter. Major
renewals and betterments are capitalized and depreciated; maintenance and
repairs that do not extend the life of the respective assets are charged to
expense as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income. Depreciation related to property and equipment used in production is
reported in cost of sales.


4





Long-term
assets of the Company are reviewed annually as to whether their carrying value
has become impaired. We consider assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. We also
re-evaluate the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. As of December 31,
2008, we expect these assets to be fully recoverable.




Business
Combinations, Goodwill and intangible assets.




We
account for business combinations in accordance with SFAS No. 141,Business Combinations, which
requires that the purchase method of accounting be used for all business
combinations. SFAS 141 requires intangible assets acquired in a business
combination to be recognized and reported separately from goodwill.




Goodwill
represents the cost of the acquired businesses in excess of the fair value of
identifiable tangible and intangible net assets purchased. We generally seek the
assistance of independent valuation experts in determining the fair value of the
identifiable tangible and intangible net assets of the acquired business. We
assign all the assets and liabilities of the acquired business, including
goodwill, to reporting units in accordance with SFAS No. 142,Goodwill and Other IntangibleAssets.




We test
goodwill for impairment on an annual basis. In this process, we rely on a number
of factors including operating results, business plans and future cash flows.
Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of the fair value of a reporting unit with its carrying
value. If the carrying amount of the reporting unit exceeds its fair value, the
second step of the process involves a comparison of the fair value and carrying
value of the goodwill of that reporting unit. If the carrying value of the
goodwill of a reporting unit exceeds the fair value of that goodwill, an
impairment loss is recognized in an amount equal to the excess. Goodwill of a
reporting unit will be tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of the reporting unit below its carrying amount.




We
evaluate intangible assets for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted net cash flows expected
to be generated by the asset. If these assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
value of the assets exceeds the fair value of the assets.




Impairment
of long-lived assets





In
accordance with SFAS No. 144,“Accounting for the
Impairment or Disposal of Long-Lived Assets” , a long-lived assets and
certain identifiable intangible assets held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is evaluated by a comparison of the carrying amount of assets
to estimated undiscounted net cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets exceed the
fair value of the assets.





Key
Items in 2008





Significant
financial items during 2008 include:




·
            Increase
      by us of ownership in Tianjin Huaneng from 51% to 91.82% through purchase
      of additional equity interests from minority shareholders and additional
      contribution to Tianjin Huaneng’s registered capital;
  and





·
            Acquisition
      of SZPSP.





RESULTS
OF OPERATIONS




Years
ended December 31, 2008 and December 31, 2007





Sales
Revenues




The
following table sets forth a breakdown of our net revenues for the periods
indicated:


5





Revenue:
                  
                  2008
                  
                  
                  2007Solar
      Heater/Biomass Stove/Boiler related products
                  
                  $
                  25,098,563
                  
                  
                  $
                  26,693,850Heat
      Pipe related products
                  
                  
                  14,369,716
                  
                  
                  
                  7,002,015Energy-saving
      projects
                  
                  
                  9,078,203
                  
                  
                  
                  3,376,481Solar
      Heat collector and others
                  
                  
                  2,952,514
                  
                  
                  
                  —Total
                  
                  
                  51,498,996
                  
                  
                  $
                  37,072,346




Overall:
Sales increased to $51,498,996 for 2008 as compared to $37,072,346 for 2007, an
increase of approximately $14,426,650 or 38.9%. This increase was primarily due
to increased sales by Tianjin Huaneng and SZPSP. We acquired Tianjin Huaneng and
commenced selling heat pipe related products on July 1, 2007. We acquired the
entire equity interest in SZPSP in March 2008.





Solar Water
Heater/Biomass Stove/Boiler Related Products:
Sales revenues of this product segment decreased to $25,098,563 for 2008 from
$26,693,850 for 2007, a decrease of $1,595,287 or 6.0%. The decrease in
sales of these products was primarily because we added a fourth segment—solar
heat collectors and others—and accounted for the sales revenue of certain
products under this fourth segment instead of the solar water heater/biomass
stove/boiler related products segment as we did in 2007. To a lesser extent,
this decline was also due to a decrease in the selling prices of our solar water
heaters and boiler related products, which constituted the vast majority of our
total sales of this segment. The prices of our solar water heaters and boiler
related products have been declining due to increased competition.





Heat Pipe Related
Products: Sales revenues increased to $14,369,716 in 2008 from $7,002,015
in 2007, an increase of $7,367,701 or 105.2%. This increase was mainly due to
the fact that we did not begin to sell heat pipe related products until we
acquired Tianjin Huaneng on July 1, 2007.





Energy-saving
projects: Sales revenues increased to $9,078,203 for 2008 from $3,376,481
for 2007, an increase of $5,701,722 or168.9%. This increase was mainly due
to our acquisition of SZPSP in March 2008.





Solar Heat
collectors and
others: Sales revenues were $2,952,514 for 2008 as compared to none for
2007. We did not account for these products as a separate segment prior to 2008.
We added this segment in 2008 after we acquired SZPSP and had more sales of
these products.





Cost
of Revenue





The
following table sets forth a breakdown of our cost of revenue for the periods
indicated:




Cost
      of revenue:
                  
                  2008
                  
                  
                  2007Solar
      Heater/Biomass Stove/Boiler related products
                  
                  $
                  20,741,274
                  
                  
                  $
                  21,021,407Heat
      Pipe related products
                  
                  
                  12,618,787
                  
                  
                  
                  5,181,491Energy-saving
      projects
                  
                  
                  7,502,163
                  
                  
                  
                  2,569,180Solar
      Heat collectors and others
                  
                  
                  2,439,936
                  
                  
                  
                  —Total
                  
                  $
                  43,302,160
                  
                  
                  $
                  28,772,078





Overall: Cost of revenue was
$43,302,160 for 2008, an increase of $14,530,082 or 50.5% from $28,772,078 for
2007. This increase was primarily attributable to an increase in our material
costs, generally in line with our increased sales revenues.





Solar Water
Heaters/Biomass Stove/Boiler RelatedProducts:
Cost of revenue decreased $280,133, or 1.3%, to $20,741,274 for 2008 from
$21,021,407 for 2007, mainly because we accounted for certain products under the
solar heat collector and others segment in 2008 instead of this segment as we
did in 2007.





Heat Pipe Related
Products: Cost of revenue increased to $12, 618,787 for 2008, an increase
of $7,437,296 or 143.5% from $5,181,491 for the prior year. This increase was
primarily attributable to the increased cost of steel during the first nine
months of 2008.





Energy-saving
projects: Cost of revenue increased to $7,502,163 for 2008, an increase
of $4,932,983 or 192.1% from $2,569,180 for the prior year. This increase was in
line with the increase in our sales of such products in 2008.





Solar Heat
collectors and
others: Cost of revenues was $2,439,936 for 2008 as compared to none for
2007 as we commenced sales of these products in 2008. We did not account for
these products as a separate segment prior to 2008.


6





Gross
Profit





The
following table sets forth a breakdown of our gross profit for the periods
indicated:




Gross profit:
                  
                  2008
                  
                  
                  2007Solar
      Heater/Boiler related products
                  
                  $
                  4,357,289
                  
                  
                  $
                  5,672,443Heat
      Pipe related products
                  
                  
                  1,750,929
                  
                  
                  
                  1,820,524Energy-saving
      projects
                  
                  
                  1,576,040
                  
                  
                  
                  807,301Solar
      Heat collector and others
                  
                  
                  512,578
                  
                  
                  
                  —Total
                  
                  
                  8,196,836
                  
                  
                  $
                  8,300,268




Overall:
As a result of the foregoing, gross profit for 2008 was $8,196,836, compared to
$8,300,268 for 2007, a decrease of $103,432 or 1.2%.





Gross
margin (gross profit as a percentage of sales) in 2008 was approximately 15.9%
compared to approximately 22.4% in 2007. Our profit margin decreased in 2008
primarily because a decrease in the selling prices of our products as we faced
increased competition in the industry.





Solar
Heater/Biomass Stove/Boiler Related Products: Gross profit from this
segment decreased to $4,357,289 in 2008 from approximately $5,672,443 for 2007,
or a decrease of $1,315,154 or 23.2%. The decrease in gross profit is due
primarily to two factors. First, we accounted for certain products under the
solar heat collector and others segment in 2008 instead of this segment as we
did in 2007. Second, the selling prices were lower in 2008 as we faced increased
competition from our competitors. Accordingly, our gross margin for this segment
also decreased in 2008 to 18.4% as compared to 21.2% in 2007.





Heat Pipe Related
Products: Gross profit on the sale of heat pipe related products
decreased by $ 69,595, or 3.8%, to $1,750,929 for 2008 from $1,820,524 for 2007.
Gross margin (gross profit as a percentage of sales of these products) decreased
to 12.2% in 2008 from approximately 26.0% for 2007.





Energy-saving
projects: Gross profit increased to $1,576,040 for 2008 from
$807,300 for 2007, reflecting an increase of $768,740 or 95.2%. This
increase was mainly due to the fact that we acquired SZPSP in March 2008. Gross
margin (gross profit as a percentage of sales of these products), however,
decreased to 17.4% in 2008 from approximately 23.9% for 2007.





Solar Heat
collector and others: Gross profit was $ 512,578 for 2008 since
we did not account for these products as a separate segment prior to
2008.





Operating
Expenses





Operating
expenses increased to $9,294,723 for 2008 as compared to $5,114,634 for 2007.
This represented an increase of $4,180,089 or about 81.7%.





Depreciation
and amortization increased by $889,432, or 314.5%, to $1,172,254 for 2008 from
$282,822 for 2007, mainly due to our depreciation and amortization by Tianjin
Huaneng and SZPSP.





Selling
and distribution expenses increased to $3,995,401 for 2008 from $827,839 for
2007, representing an increase of $3,167,562, or 382.6%, due to increases in
marketing and promotional expenses by our sales force, and in salary and
benefits associated with the expansion of our sales force, including through our
acquisition of Tianjin Huaneng and SZPSP.





General
and administrative expenses increased by $123,096, or 3.1%, to $4,127,069 for
2008 from $4,003,973 for 2007. This increase included liquidated damages of
approximately $523,026 paid to certain investors due to our delay in effecting a
registration pursuant to our registration rights agreement with such investors
in our February 2008 private placement. The increase was also attributable to
the consolidation of SZPSP and expenses such as legal fees related to our
February 2008 private placement.




Income
(loss) from Operations:





As a
result of the foregoing, income from operations for 2008 was -$1,097,887, as
compared to $3,185,634, representing a decrease of $4,283,521 or
134.5%.


7





Total
Other Income (Expenses)





Total
other expenses were $3,392,972 in 2008, as compared to total other income of
$154,576 for 2007. Total other expenses comprised mostly losses on non-recurring
items of $3,012,488.12, including goodwill impairment of $2,314,389 related to
our acquisition of SZPSP and inventory write-downs by Tianjin Huaneng of
$101,799 (RMB695753) and Deli Solar (Bazhou) of $71,544 (RMB488,975) for
obsolete inventories.





Income
Taxes





Our
income taxes decreased to $193,418 in 2008 from $615,325 in 2007, primarily due
to reduced income by certain of our PRC subsidiaries.





Minority
Interest





Minority
Interests were $818,893 for 2008 as compared to $199,744 for 2007 due to share
of profits by minority interests from consolidation with Tianjin
Huaneng.





Net
Income (Loss)





As a
result of the foregoing, we incurred a net loss of $5,503,170 in 2008, as
compared to net income of $2,525,141 for 2007.





LIQUIDITY
AND CAPITAL RESOURCES




Net cash
used in our operating activities was $4,637,112 for 2008, as compared to net
cash provided by operations of $4,673,831 for 2007. This was mainly due to an
increase in inventories, an increase in payments made in advance to suppliers,
and our increased production costs for energy saving projects.




Net cash
used in investing activities was $9,007,996 for 2008, as compared to $5,419,926
for 2007. The increase was due to acquisition of SZPSP, purchase of additional
equity interests from Tianjin Huaneng minority shareholders and contribution to
additional registered capital of Tianjin Huaneng, and the purchase of new
facilities and assembly lines in connection with the SZPSP
acquisition.





Net cash
provided by financing activities was $10,102,656 for 2008, as compared to
$2,400,306 for 2007. The increase was primarily due to the purchase of 4,691,499
shares of common stock by the investors in our February 2008 private placement
and the exercise of 75,000 warrants.





We
believe that current cash will be sufficient to meet anticipated working capital
and capital expenditures. However, we need to require additional cash resources
for future developments of business, including any investments we may decide to
pursue.





Cash





Cash and
cash equivalents decreased to $2,404,996 at December 31, 2008 from $5,466,637 at
December 31, 2007. This was primarily due to two loans we made to Shenzhen
Fuwaysun Technology Co., Ltd. in the amount of $3,000,000 and RMB3,000,000
($424,352) and our increased spending on working capital and capital
expenditures, partially offset by the net proceeds of $9,995,156 we received
from the sale of stock to investors in February 2008. While we anticipate that
our cash flow will be sufficient to support our operations for the next 12
months, we will need to raise additional equity capital to make further
acquisitions. There can be no assurance that financing will be available to us,
or that if available, that it will be available on satisfactory
terms.





Accounts
Receivable





During
2008, accounts receivable, net decreased by 18.9% to $ 6,040,065 from $7,453,009
at the end of 2007, primarily due to our acquisition of Tianjin Huaneng and
SZPSP. Tianjin Huaneng and SZPSP both have a large balance of accounts
receivable. SZPSP engages in installing energy-saving facilities and leasing the
equipment facilities to customers.





We
evaluate the need for an allowance for doubtful accounts based on specifically
identified amounts that we believe to be uncollectible. If actual collections
experience changes, revisions to the allowance may be required. Based upon the
aforementioned criteria, the allowances for doubtful accounts for 2008 were
$845,034, as compared to $766,795 for 2007.


8





Inventory





Inventories
as of December 31, 2008 increased by 113.8% to $ 8,285,521 from $3,875,658 as of
December 31, 2007, primarily due to the acquisition of Tianjin Huaneng and
SZPSP. The inventory mainly consists of finished goods waiting for
transportation or installation and unfinished energy saving
projects.





Other
receivables and prepayments





Other
receivables and prepayments as of December 31, 2008 increased to $7,870,575 from
$1,637,948 as of December 31, 2007, primarily due to our loan agreements to
Fuwaysun and loan agreements to Xiongri. Other receivables and prepayments
mainly consist of advances to suppliers, prepaid expenses and customers’
deposits.




Property,
plant and equipment





Property,
plant and equipment as of December 31, 2008 increased to $15,149,198 from
$8,819,216 as of December 31, 2007 primarily due to our acquisition of Tianjin
Huaneng and SZPSP. The increase is mainly contributable to an increase in
buildings, plant and machinery and office equipment.





Goodwill





We
recorded goodwill of $2,340,512 as of December 31, 2008, compared with
$1,789,324 as of December 31, 2007. The increase was primarily due to our
increased shareholding of Tianjin Huaneng and acquisition of SZPSP.





Intangible
assets





Intangible
assets refer to land use rights of the Company. The amount increased from
$1,597,921 as of December 31, 2007 to $1,709,184 as of December 31, 2008
primarily due to our acquisition of Tianjin Huaneng and SZPSP. All of the
Company’s land purchases in the PRC are considered to be leasehold land and are
stated at cost less accumulated amortization and any recognized impairment loss.
Amortization is provided over the term of the land use right agreement which is
50 years, on a straight-line basis.





Accounts
payable





Account
payable as of December 31, 2008 increased to $5,301,349 as of December 31, 2008
from $$2,111,028 as of December 31, 2007.





Income
tax payables





Income
tax payable of $ 1,818,488 decreased as of December 31, 2008 primarily due
to our reduced income.




Other
payables and accrued liabilities





Other
payables and accrued liabilities as of December 31, 2008 increased to
$11,190,000 from $8,552,452 as of December 31, 2007 primarily due to
consolidation with SZPSP and acquisition minority interests of Tianjin. The
increase mainly comprised of increases in accrued expenses, customer deposits,
other payable, and deferred revenue.





Off-Balance
Sheet Arrangements





We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, result of
operations, liquidity or capital expenditures.





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The
Company’s consolidated audited financial statements for the fiscal years ended
December 31, 2008 and 2007, together with the report of the independent
certified public accounting firms thereon and the notes thereto, are presented
beginning at page F-1.


9


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors and stockholders of


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.




We have
audited the accompanying consolidated balance sheet of China Solar & Clean
Energy Solutions, Inc. (the “Company”) as of December 31, 2008 and 2007 and the
related consolidated statements of income, cash flows and changes in
stockholders’ equity and comprehensive income for the years ended December 31,
2008 and 2007. These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.




We
conducted our audit 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
consolidated 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 audits include 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 consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007 and the results of their operations and their cash flows for
the years ended December 31, 2008 and 2007 in conformity with accounting
principles generally accepted in the United States of America.




As
discussed in Note 19 to the consolidated financial statements, the Company has
restated its 2008 consolidated financial statements.





/s/ Cordovano and Honeck
LLPEnglewood,
      Colorado USAApril
      15, 2009, except for Note 4 and Note 19which
      are dated April 12, 2010




F-1


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


CONSOLIDATED  BALANCE SHEETS


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)





As of December 31,2008
                  Restated
                
                
                2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                2,404,996
                
                
                $
                5,466,637Accounts
      receivable, net
                
                
                6,040,065
                
                
                
                7,453,009Inventories
                
                
                8,285,521
                
                
                
                3,875,658Other
      receivables and prepayments
                
                
                7,870,575
                
                
                
                1,637,948Lease
      receivables, current
                
                
                156,579
                
                
                
                -Total
      current assets
                
                
                24,757,736
                
                
                
                18,433,252Property,
      plant and equipment, net
                
                
                15,149,198
                
                
                
                8,819,216Goodwill
                
                
                2,340,512
                
                
                
                1,789,324Intangible
      assets, net
                
                
                1,709,184
                
                
                
                1,597,921Customer
      relationships, net
                
                
                1,017,500
                
                
                
                -Intellectual
      property – unpatented technology, net
                
                
                869,500
                
                
                
                -Lease
      receivables, non current
                
                
                654,578
                
                
                
                -TOTAL
      ASSETS
                
                $
                46,498,208
                
                
                $
                30,639,713LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable, trade
                
                $
                5,301,349
                
                
                $
                2,111,028Income
      tax payables
                
                
                1,818,488
                
                
                
                1,108,433Other
      payables and accrued liabilities
                
                
                11,190,000
                
                
                
                8,552,452Total
      current liabilities
                
                
                18,309,837
                
                
                
                11,771,913Deferred
      tax liability
                
                
                15,779
                
                
                
                -Long-term
      liability
                
                
                286,483
                
                
                
                -Total
      liabilities
                
                
                18,612,099
                
                
                
                11,771,913Minority
      interests
                
                
                194,542
                
                
                
                935,825Stockholders’
      equity:Convertible
      preferred stock: par value $0.001; 25,000,000 shares authorized, 373,000
      and 1,774,194 shares issued and outstanding, respectively
                
                
                373
                
                
                
                1,774Common
      stock, $0.001 par value; 66,666,667 shares authorized; 13,799,450 and
      6,205,690 shares issued and outstanding, respectively
                
                
                13,799
                
                
                
                6,205Additional
      paid-in capital
                
                
                23,073,258
                
                
                
                9,260,607Accumulated
      other comprehensive income
                
                
                1,615,081
                
                
                
                1,134,270Retained
      earnings
                
                
                2,025,950
                
                
                
                7,529,119Profit
      earning reserves
                
                
                963,106
                
                
                
                -Total
      stockholders’ equity
                
                
                27,691,567
                
                
                
                17,931,975TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                46,498,20823
                
                
                $
                30,639,713





See
accompanying notes to consolidated financial statements.


F-2


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


CONSOLIDATED STATEMENTS OF
INCOME


(Currency
expressed in United States Dollars (“US$”))




Years
      ended December 31,2008
                    
                    
                    2007Restated
                    
                    
                    As adjusted and
                      restatedRevenue,
      net
                    
                    $
                    51,498,996
                    
                    
                    $
                    37,072,346Cost
      of revenue
                    
                    
                    43,302,160
                    
                    
                    
                    28,772,078Gross
      profit
                    
                    
                    8,196,836
                    
                    
                    
                    8,300,268Operating
      expenses:Depreciation
      and amortization
                    
                    
                    1,172,253
                    
                    
                    
                    282,822Selling
      and distribution
                    
                    
                    3,995,401
                    
                    
                    
                    827,839General
      and administrative
                    
                    
                    4,127,069
                    
                    
                    
                    4,003,973Total
      operating expenses
                    
                    
                    9,294,723
                    
                    
                    
                    5,114,634Income
      from operations
                    
                    
                    (1,097,887
                    )
                    
                    
                    3,185,634Other
      income (expenses):Other
      income
                    
                    
                    197,155
                    
                    
                    
                    220,057Interest
      income
                    
                    
                    262,233
                    
                    
                    
                    -Other
      expense
                    
                    
                    (547,705
                    )
                    
                    
                    -Interest
      expense
                    
                    
                    (292,167
                    )
                    
                    
                    (65,481
                    )Loss
      on nonrecurring items
                    
                    
                    (3,012,488
                    )
                    
                    
                    -Total
      other income (expenses)
                    
                    
                    (3,392,972
                    )
                    
                    
                    154,576Income
      before income taxes
                    
                    
                    (4,490,859
                    )
                    
                    
                    3,340,210Income
      tax expense
                    
                    
                    (193,418
                    )
                    
                    
                    (615,325
                    )Minority
      interests
                    
                    
                    (818,893
                    )
                    
                    
                    (199,744
                    )NET
      INCOME
                    
                    
                    (5,503,170
                    )
                    
                    
                    2,525,141NET
      INCOME AVAILABLE TO COMMON STOCKHOLDERS
                    
                    $
                    (5,503,170
                    )
                    
                    $
                    1,549,334Net
      income per share – basic
                    
                    $
                    (0.45
                    )
                    
                    $
                    0.25Net
      income per share – diluted
                    
                    $
                    (0.45
                    )
                    
                    $
                    0.24Weighted
      average shares outstanding - basic
                    
                    
                    12,158,482
                    
                    
                    
                    6,205,290Weighted
      average shares outstanding - diluted
                    
                    
                    12,158,482
                    
                    
                    
                    6,396,697




See
accompanying notes to consolidated financial statements.


F-3





CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Currency
expressed in United States Dollars)





Years
      ended December 31,2008
                    Restated
                  
                  
                  2007Cash
      flows from operating activities:Net
      income
                  
                  $
                  (5,503,170
                  )
                  
                  $
                  2,525,141Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  1,497,240
                  
                  
                  
                  324,157Impairment
      for goodwill,inventory
                  
                  
                  2,702,487
                  
                  
                  
                  -Provision
      for allowance on accounts receivable
                  
                  
                  978,006
                  
                  
                  
                  650,432Changes
      in operating assets and liabilities:Accounts
      receivable, trade
                  
                  
                  278,359
                  
                  
                  
                  (7,232,995
                  )Inventories
                  
                  
                  (4,648,079
                  )
                  
                  
                  (3,559,893
                  )Other
      receivables and prepayments
                  
                  
                  (6,232,627
                  )
                  
                  
                  (250,037
                  )Accounts
      payable, trade
                  
                  
                  3,190,321
                  
                  
                  
                  1,963,127Income
      tax payable
                  
                  
                  710,055
                  
                  
                  
                  1,108,433Other
      payables and accrued liabilities
                  
                  
                  1,571,403
                  
                  
                  
                  8,209,641Minority
      interest
                  
                  
                  818,893
                  
                  
                  
                  935,825Net
      cash provided by operating activities
                  
                  
                  (4,637,112
                  )
                  
                  
                  4,673,831Cash
      flows from investing activities:Acquisition
      of a subsidiary
                  
                  
                  (662,491
                  )
                  
                  
                  (489,459
                  )Purchase
      of intangible assets
                  
                  
                  (981,283
                  )
                  
                  
                  (635,726
                  )Purchase
      of property, plant and equipment
                  
                  
                  (7,364,222
                  )
                  
                  
                  (4,294,741
                  )Net
      cash used in investing activities
                  
                  
                  (9,007,996
                  )
                  
                  
                  (5,419,926
                  )Cash
      flows from financing activities:proceeds
      from warrants exercised
                  
                  
                  107,500
                  
                  
                  
                  (180,694
                  )Capital
      contribution received from shareholders
                  
                  
                  9,995,156
                  
                  
                  
                  -Proceeds
      from issuance of preferred stock (net of offering costs of $169,000 paid
      in cash)
                  
                  
                  -
                  
                  
                  
                  2,581,000Net
      cash (used in) provided by financing activities
                  
                  
                  10,102,656
                  
                  
                  
                  2,400,306Foreign
      currency translation adjustment
                  
                  
                  480,812
                  
                  
                  
                  600,361NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                  
                  
                  (3,061,641
                  )
                  
                  
                  2,254,572CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                  
                  
                  5,466,637
                  
                  
                  
                  3,212,065CASH
      AND CASH EQUIVALENTS, END OF YEAR
                  
                  $
                  2,404,996
                  
                  
                  $
                  5,466,637SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for income taxes
                  
                  $
                  538,332
                  
                  
                  $
                  939,798Cash
      paid for interest expenses
                  
                  $
                  302,961
                  
                  
                  $
                  95,446SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONSWarrant
      shares granted for offering costs
                  
                  $
                  541,695
                  
                  
                  $
                  138,338Issuance
      of common stock for acquisitions of SZPSP
                  
                  $
                  2,839,458
                  
                  
                  $
                  -Issuance
      of warrants for the acquisitions of SZPSP
                  
                  $
                  92,193
                  
                  
                  $
                  -Preferred
      share converted
                  
                  $
                  1,401
                  
                  
                  $
                  -





See
accompanying notes to consolidated financial statements.


F-4


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)




Preferred stock
                                                  
                                                  
                                                  Common stock
                                                  
                                                  
                                                  Additional
                                                  
                                                  
                                                  Accumulated
                                                    Other
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Total
                                                    stockholders’No. of
                                                  
                                                  
                                                  Par
                                                  
                                                  
                                                  No. of
                                                  
                                                  
                                                  Par
                                                  
                                                  
                                                  paid-in
                                                  
                                                  
                                                  comprehensive
                                                  
                                                  
                                                  Retained
                                                  
                                                  
                                                  Earning
                                                  
                                                  Earningshares
                                                  
                                                  
                                                  value
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Value
                                                  
                                                  
                                                  capital
                                                  
                                                  
                                                  income
                                                  
                                                  
                                                  earnings
                                                  
                                                  
                                                  reserve
                                                  
                                                  reserve equityBalance
      as of December 31, 2007
                                                  
                                                  
                                                  1,774,194
                                                  
                                                  
                                                  $
                                                  1,774
                                                  
                                                  
                                                  
                                                  6,205,290
                                                  
                                                  
                                                  $
                                                  6,205
                                                  
                                                  
                                                  $
                                                  9,260,607
                                                  
                                                  
                                                  $
                                                  1,134,270
                                                  
                                                  
                                                  $
                                                  7,529,119
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  17,931,975Shares
      issued for private placement, net of offering costs of $1,264,451 in cash
      and $541,695 in warrants.
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  4,691,499
                                                  
                                                  
                                                  
                                                  4,691
                                                  
                                                  
                                                  
                                                  9,990,465
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  9,995,156Shares
      and warrants issued for the acquisition of subsidiary at fair
      value
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,419,729
                                                  
                                                  
                                                  
                                                  1,420
                                                  
                                                  
                                                  
                                                  2,930,231
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2,931,651Shares
      issued for services
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  7,304
                                                  
                                                  
                                                  
                                                  7
                                                  
                                                  
                                                  
                                                  15,185
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  15,192Warrant
      exercised
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  75,000
                                                  
                                                  
                                                  
                                                  75
                                                  
                                                  
                                                  
                                                  107,425
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  107,500Preferred
      share converted
                                                  
                                                  
                                                  -1,400,628
                                                  
                                                  
                                                  
                                                  -1,401
                                                  
                                                  
                                                  
                                                  1,400,628
                                                  
                                                  
                                                  
                                                  1,401
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -Minority
      share purchased
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  769,345
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  769,345Comprehensive
      income:Net
      income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -5,503,170
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -5,503,170Foreign
      currency translation adjustment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  480,811
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  480,812Profit
      earning reserves
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  963,106
                                                  
                                                  
                                                  963,106Balance
      as of December 31, 2008
                                                  
                                                  
                                                  373,566
                                                  
                                                  
                                                  $
                                                  373
                                                  
                                                  
                                                  
                                                  13,799,450
                                                  
                                                  
                                                  $
                                                  13,799
                                                  
                                                  
                                                  $
                                                  23,073,258
                                                  
                                                  
                                                  $
                                                  1,615,081
                                                  
                                                  
                                                  $
                                                  2,025,950
                                                  
                                                  
                                                  $
                                                  963,106
                                                  
                                                  
                                                  27,691,567





See
accompanying notes to consolidated financial statements.


F-5




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))


1.
              ORGANIZATION
      AND BUSINESS BACKGROUND





China
Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as Deli
Solar (USA) Inc. was incorporated in the State of Nevada on March 21, 1983 as
Meditech Pharmaceuticals, Inc. (“Meditech”). In late 2004, the Board of
Directors of Meditech contemplated a strategic reorganization with Deli Solar
Holding Ltd., a corporation organized in the British Virgin Islands (“Deli Solar
(BVI)”). In contemplation of the reorganization, the Board of Directors resolved
to spin off Meditech's drug development business to the shareholders of Meditech
of record on February 17, 2005, through a pro rata distribution in the form of a
stock dividend. The spin-off was completed on August 29, 2005. The acquisition
of Deli Solar (BVI) was accounted for as a recapitalization of Deli Solar
(BVI).





Deli
Solar (BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI)
purchased Bazhou Deli Solar Energy Heating Co., Ltd. (“Deli Solar (Bazhou)”), a
corporation duly organized under the laws of the People’s Republic of China
(“PRC”) from Messrs. Deli Du, Xiao'er Du, and Xiaosan Du for RMB 6,800,000. As a
result of this transaction, Deli Solar (Bazhou) became a wholly-foreign owned
enterprise ("WFOE") under PRC law on March 30, 2005. This acquisition was
accounted for as a transfer of entities under common control.





Deli
Solar (Bazhou) was incorporated on August 19, 1997 under the laws of the PRC. In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United
States (“US”).





The
result of the above transactions is that Deli Solar (BVI) is now our direct,
wholly-owned subsidiary and Deli Solar (Bazhou) remains a wholly-owned
subsidiary of Deli Solar (BVI).





On
November 21, 2005 Deli Solar (Bazhou) acquired Ailiyang Solar Energy Technology
Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Deli
Solar (Bazhou). The transaction was accounted for as a transfer of entities
under common control.





Beijing
Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”) was founded
in 2006 and is principally engaged in solar power heater integrated construction
projects in major cities in the PRC.





During
2007, the Company set up a branch sales office in the cities of Lian Yun Gang
and the City of Bazhou to provide sales support in those cities as
sole-proprietorship of its chief executive officer and president, Mr. Deli Du.
The sole proprietorships are considered variable interest entities because they
(1) lack equity sufficient to finance their activities without additional
subordinated financial support and (2) the Company, and not Mr. Deli Du, absorbs
the losses or receives the gains.





Based
upon a review of the provisions of FIN 46R, the structure of the agreements
and activities of the entities described above, the Company determined that it
is the primary beneficiary of the sole proprietorships at December 31, 2007. If
the facts and circumstances change in the future, the Company could determine
that it is no longer the primary beneficiary, which would require China
Solar to de-consolidate the sole-proprietorships. The Company's investment in
the sole-proprietorships was immaterial as of December 31, 2007.





On July
1, 2007, Deli Solar (Beijing) acquired 51% of Tianjin Hua Neng Energy Equipment
Company (“Tianjin Huaneng”), which manufactures energy saving boilers and
environmental protection equipment for industrial customers. The transaction was
accounted for under the purchase method. See Note 2.





On April
1, 2008, Beijing Deli Solar Technology Development Co., Ltd (“Deli Solar
(Beijing)”) acquired 100% of Shenzhen Pengsangpu Solar Industrial Products
Corporation (“SZPSP”), which is engaged in the re-sale of energy-saving related
heating products such as heat pipes, heat exchangers, pressure water boilers,
solar energy heaters and raditors. The transaction was accounted for under the
purchase method. See Note 2.





On
October 27, 2008, Deli Solar (Beijing), entered into an agreement to acquire
approximately 29.97% of the outstanding equity interest of Tianjin Huaneng, from
the minority shareholders of Tianjin Huaneng.


As a
result of the consummation of the agreement and the additional capital
contribution, the Company owns approximately 91.82% of the equity interest in
Tianjin Huaneng.





China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng, SZPSP are hereinafter referred to as (“the
Company”).


F-6





CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





Basis of
presentation





These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).





Basis of
consolidation





The
consolidated financial statements include the financial statements of China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng, Shenzhen Pengsangpu and the VIE.





The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN
46R”). The sole-proprietorship business in the name of Mr. Deli Du is regarded a
VIE of the Company and is consolidated in the Company’s financial statements.
The Company evaluates its relationship with other entities to identify whether
they are variable interest entities, as defined by Financial Accounting
Standards Board (FASB) Interpretation No. 46 (revised), "Consolidation of
Variable Interest Entities" (FIN 46R), and assesses whether it is the
primary beneficiary of such entities. If the determination is made that the
Company is the primary beneficiary, then that entity is included in the
Company's Consolidated Financial Statements in accordance with
FIN 46R.





All
significant intercompany balances and transactions within the Company have been
eliminated upon consolidation.





Use of
estimates





In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the years reported. Actual results may differ
from these estimates.





Cash and
cash equivalents





The
Company considers all highly liquid securities with original maturities of three
months or less when acquired to be cash equivalents. At December 31, 2008 and
2007, the Company had $2,404,996 and $5,466,637, respectively, in cash
equivalents.





Accounts
receivable and allowance for doubtful accounts





Accounts
receivable consists of amounts due from customers. The Company extends unsecured
credit to its customers in the ordinary course of business but mitigates the
associated risks by performing credit checks and actively pursuing past due
accounts. An allowance for doubtful accounts is established and determined based
on management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic
environment.





Inventories





Inventories
include direct materials, labor and factory overhead and are stated at lower of
cost or market value, cost being determined on a first-in, first-out basis. The
Company periodically reviews historical sales activity to determine excess, slow
moving items and potentially obsolete items and also evaluates the impact of any
anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer
demand. As of December 31, 2008, and 2007, the Company recorded $246,408 and $0
in write-offs.


F-7





CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Property,
plant and equipment





Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values. Property, plant and equipment are depreciated over
their estimated useful lives as follows:




Depreciable life
                    
                    Residual valueBuildings
                    
                    6-50
      years
                    
                    
                    3~5
                    %Plant
      and machinery
                    
                    10
      years
                    
                    
                    3~5
                    %Office
      equipments
                    
                    7
      years
                    
                    
                    3~5
                    %Motor
      vehicles
                    
                    7
      years
                    
                    
                    3~5
                    %Computer
      equipment
                    
                    3
      years
                    
                    
                    3~5
                    %





Construction-in-progress





All
facilities purchased for installation, self-made or subcontracted are accounted
for under construction-in-progress. Construction-in-progress is recorded at
acquisition cost, including cost of facilities, installation expenses and the
interest capitalized during the course of construction for the purpose of
financing the project. Upon completion and readiness for use of the project, the
cost of construction-in-progress is to be transferred to fixed
assets.





Goodwill
and intangible assets




We
account for business combinations in accordance with SFAS No. 141,Business Combinations, which
requires that the purchase method of accounting be used for all business
combinations. SFAS 141 requires intangible assets acquired in a business
combination to be recognized and reported separately from goodwill.




Goodwill
represents the cost of the acquired businesses in excess of the fair value of
identifiable tangible and intangible net assets purchased. We generally seek the
assistance of independent valuation experts in determining the fair value of the
identifiable tangible and intangible net assets of the acquired business. We
assign all the assets and liabilities of the acquired business, including
goodwill, to reporting units in accordance with SFAS No. 142,Goodwill and Other Intangible
Assets.




We test
goodwill for impairment on an annual basis. In this process, we rely on a number
of factors including operating results, business plans and future cash flows.
Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of the fair value of a reporting unit with its carrying
value. If the carrying amount of the reporting unit exceeds its fair value,
the second step of the process involves a comparison of the fair value and
carrying value of the goodwill of that reporting unit. If the carrying value of
the goodwill of a reporting unit exceeds the fair value of that goodwill, an
impairment loss is recognized in an amount equal to the excess. Goodwill of a
reporting unit will be tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of the reporting unit below its carrying amount. During the year ended
December 31, 2008, we incurred a goodwill impairment charge of RMB16.8
million ($2.4 million). This impairment charge relates to our acquisition for SZPSP as our
management has significantly adjusted downward our cash flow forecast for next
five years because of the business model of the reporting unit.




We
evaluate intangible assets for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted net cash flows expected
to be generated by the asset. If these assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
value of the assets exceeds the fair value of the assets.





Furthermore,
SFAS No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite. Purchased intangible assets are carried at cost less accumulated
amortization. No impairment of intangibles has been identified since the date of
acquisition. All lands in the PRC are owned by the PRC government.
The government in the PRC, according to the relevant PRC law, may sell the
right to use the land for a specified period of time. Thus, all of the Company’s
land purchases in the PRC are considered to be leasehold land and are stated at
amortized cost. Amortization is provided over the term of the land use right
agreements on a straight-line basis, which is 50 years and they will expire in
2048, 2051 and 2054.





Impairment
of long-lived assets





In
accordance with SFAS No. 144,“Accounting for the
Impairment or Disposal
of Long-Lived Assets” , a long-lived assets and certain identifiable
intangible assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
evaluated by a comparison of the carrying amount of assets to estimated
undiscounted net cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets exceed the
fair value of the assets. There has been no impairment as of December 31, 2008
and 2007.




F-8




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Revenue
recognition




The
Company’s sales include furnishing solar equipment to end users, installing and
testing the equipment and providing maintenance.  Revenue is
recognized after testing  and acceptance by the customer if a formal
relationship exists, the price is fixed or determinable, no other significant
obligations of the Company exists and collectability is reasonably
assured.




The
Company provides equipment purchasers with a maintenance warranty ranging from
one year to eighteen months. The Company accrues expected warranty costs at the
time the related sales revenue is recognized. Warranty reserves have been
established by charging cost of sales and recording a warranty provision. The
reserves are estimated by management to be adequate to cover expected warranty
related costs under unexpired warranty periods.





Revenue
from the provision of energy-saving projects are recognized when persuasive
evidence of an arrangement exists, transfer of title has occurred or services
have been rendered, the selling price is fixed or determinable and
collectability is reasonably assured.





Project
revenue under sales-type leases





In
accordance with SFAS No. 13,"Accounting forLeases", the Company recognizes interest income over the lease term so as
to produce a constant rate of return on the net investment in the lease using
effective interest method.





Under
sales-type leases, the Company also recognizes a profit (or loss) at the
beginning of the lease term.


Sales
revenue should be recorded for the fair value of the leased asset, or, if lower,
the present value of the minimum lease payments, computed using the interest
rate implicit in the lease. Cost of sales should be recorded for the carrying
amount of the leased asset, less the present value of the unguaranteed residual
value.





The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the rate of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export
sales.





Cost of
revenue





Cost of
revenue consists primarily of material costs, direct labor, inbound freight
charges, depreciation and manufacturing overheads, which are directly
attributable to the manufactured products and the provision of the energy-saving
projects. Additionally, costs of revenue includes purchasing, and receiving
costs, inspection costs, warehousing costs and costs associated with
distribution networks.





Operating
expenses





Selling
and distribution expenses consist primarily of non-cash sales promotions,
outbound distribution, traveling and transportation expenses, and agency
administration expenses. The nature of outbound distribution, traveling, and
transportation expenses includes outbound shipping and handling costs related to
the sale of our products. It is our Company’s accounting policy to
differentiate outbound shipping costs from inbound shipping costs. Inbound
shipping costs are capitalized in inventory and charged to costs of sales at the
time revenue is recognized. Outbound shipping and handling costs recorded in
selling and distribution expense totaled $515,363 and $177,413, for the years
ended December 31, 2008 and 2007, respectively. General and administrative
expenses include advertising expenses and salaries and benefits.





Advertising
expenses





Advertising
costs are expensed as incurred in accordance with the American Institute of
Certified Public Accountants (“AICPA”) Statement of Position 93-7,“Reporting for Advertising
Costs” . Advertising expenses for the years ended December 31, 2008 and
2007 were $1,423,914 and $1,415,493, respectively.





Retirement
plan costs





Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operations as the related employee service is provided.





Comprehensive
income





SFAS No.
130,“Reporting Comprehensive
Income”,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during a period from non-owner sources. Accumulated other
comprehensive income, as presented in the accompanying statement of changes in
owners’ equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.




F-9




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Income
taxes





The
Company accounts for income tax using SFAS No. 109“Accounting for Income Taxes”
, which requires the asset and liability approach for financial accounting and
reporting for income taxes. Under this approach, deferred income taxes are
provided for the estimated future tax effects attributable to temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax
assets and liabilities are measured using the enacted tax rates expected in the
years of recovery or reversal and the effect from a change in tax rates is
recognized in the statement of operations and comprehensive (loss) income in the
period of enactment. A valuation allowance is provided to reduce the amount of
deferred tax assets if it is considered more likely than not that some portion
of, or all of the deferred tax assets will not be realized.





Net
income per share





The
Company calculates net income per share in accordance with SFAS
No. 128,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.





Foreign
currency translation





The
reporting currency of the Company is United States dollar (“US$”). Transactions
denominated in currency other than US$ are translated into US$ at the average
rate for the period. Monetary assets and liabilities denominated in currency
other than US$ are translated into US$ at the rates of exchange ruling at the
balance sheet date. The resulting exchange differences are recorded in other
expenses in the accompanying statements of operations.





The
financial records of the Company’s operating subsidiaries are maintained in
their local currency, the Renminbi (“RMB”), which is the functional currency.
Assets and liabilities are translated at the exchange rates at the balance sheet
date, equity accounts are translated at historical exchange rates, and income
and expenses items are translated using the average rate for the period. The
translation adjustments are recorded in accumulated other comprehensive income
in the statements of changes in stockholders’ equity and comprehensive
income.





Stock
based compensation





Prior to
January 1, 2006, we accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Bulletin
No. 25,Accounting for Stock
Issued to Employees , or APB No. 25 and related interpretations.
Compensation expense for stock options was recognized ratably over the vesting
period.




F-10




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Effective
January 1, 2006, we adopted the fair value recognition provisions of
Financial Accounting Standards Board, or FASB, Statement of Financial Accounting
Standards,Share-Based
Payment, or SFAS
No. 123(R) using the modified prospective application method. Under
SFAS No. 123R, stock-based compensation expense is measured at the
grant date based on the value of the option or restricted stock and is
recognized as expense, less expected forfeitures, over the requisite service
period.




Product
Warranty





The
Company provides a three-year standard warranty to all Deli Solar (Bazhou)
manufactured products. Repair and replacement of defective component parts
during the first year following purchase are covered under the standard warranty
program. In the second and third year, repair services are covered under the
warranty program but customers pay for the purchase of the replacement parts.
Warranty services are performed by our independent sales agents and distributors
in return for a 1%-2% discount of the purchase price they pay for our products.
No discount is provided to independent sales agents and distributors unless and
until warranty services are provided to the Company. The Company has not
experienced any material returns and therefore has not provided any discount to
independent sales agents and distributors for warranty services.





Under the
terms of the contracts for energy-saving projects, the Company provides a
product warranty on the equipment sold to its customers for a period of twelve
months upon the completion of installation at the Company’s
expense.





The
Company has not experienced any material returns where it was under obligation
to honor this standard warranty provision. As such, no reserve for product
warranty has been provided in the statements of operations for the years ended
December 31, 2008 and 2007, respectively.





Segment
reporting





SFAS No.
131“Disclosures about Segments of an
Enterprise and Related Information” establishes standards for reporting
information about operating segments on a basis consistent with the Company’s
internal organization structure as well as information about geographical areas,
business segments and major customers in financial statements. The Company
operates in four principal reportable segments: Sales of solar heater or boiler
related products, heat pipe related products, Energy-saving projects, and Solar
heater collector and others.





Fair
value of financial instruments





The
Company values its financial instruments as required by SFAS No. 107,“Disclosures about Fair Value of
Financial Instruments” . The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. The estimates presented herein are not necessarily
indicative of amounts that the Company could realize in a current market
exchange.





The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, other receivables and prepayments, accounts payable, other
payables and accrued liabilities. As of the balance sheet date, the estimated
fair values of financial instruments were not materially different from their
carrying values as presented due to short maturities of these
instruments.




F-11




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Registration
payment arrangements





The
Company accounts for registration payment arrangement in accordance with FASB
Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements
("FSP EITF 00-19-2") which provides guidance on the accounting for registration
payment arrangements. FSP EITF 00-19-2 specifies that the contingent obligation
to make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies. A registration payment arrangement is defined in FSP EITF 00-19-2
as an arrangement with both of the following characteristics: (1) the
arrangement specifies that the issuer will endeavor (a) to file a
registration statement for the resale of specified financial instruments and/or
for the resale of equity shares that are issuable upon exercise or conversion of
specified financial instruments and for that registration statement to be
declared effective by the Securities and Exchange Commission within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and(2) the
arrangement requires the issuer to transfer consideration to the counterparty if
the registration statement for the resale of the financial instrument or
instruments subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not maintained.





Uncertain
tax positions





The
Company adopted Financial Accounting Standards Board Interpretation
No. 48,“Accounting for Uncertainty in Income
Taxes” (“FIN 48”), on January 1, 2007. FIN 48 prescribes a more
likely than not threshold for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition of income tax assets and
liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods, and income tax
disclosures.





The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and foreign jurisdictions, principally the PRC. With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations by tax authorities for years prior to the
reverse merger on March 31, 2005. The Internal Revenue Service (IRS) has not
commenced any examinations of the Company's U.S. income tax returns for the year
2005, of which reverse merger taking place, through 2008.





The
Company did not have any adjustment to the opening balance of retained earnings
as of January 1, 2007 as a result of the implementation of FIN 48. As of
December 31, 2008, the Company did not have any significant liability for
unrecognized tax benefits. For the year ended December 31, 2008, the
Company did not have any interest accrued related to unrecognized tax benefits
in interest expense and penalties in operating expenses.





3.           RECENTLY
ISSUED ACCOUNTING STANDARDS





In 2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.”  Under these rules, a "Smaller Reporting
Company" is a company with a public floats less than $75,000,000 (measured at
end of Q2).  Companies that meet this definition are able to elect "scaled
disclosure standards" on an item-by-item or "a-la-carte" basis.  With this
change, the SEC has streamlined and simplified reporting for many companies, and
has not added any significant disclosure requirements.





In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159,“The Fair Value Option for Financial
Assets and Financial Liabilities”, or SFAS 159. SFAS 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value. It is expected to expand the use of fair value measurements
which is consistent with the Financial Accounting Standards Board’s long-term
measurement objectives for accounting for financial instruments. SFAS 159 is
effective for our first fiscal year that begins after November 15, 2007, which
is our fiscal year 2008 that begins in January 2008. The Company is currently
evaluating the impact of this statement to its financial position and results of
operations.




F-12




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),‘’Business Combinations’’, or SFAS No. 141R. SFAS
No. 141R will change the accounting for business combinations. Under SFAS No.
141R, an acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS No. 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Accordingly, any business combinations we engage in
will be recorded and disclosed following existing GAAP until January 1, 2009. We
expect SFAS No. 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that time. We are
still assessing the impact of this pronouncement.





In
December 2007, the FASB issued SFAS No. 160,"Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No.
51’’, or SFAS
No. 160. SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We believe that SFAS 160 should not have a material impact on
our financial position or results of operations.




4.           ACQUISITION





On May
18, 2007, the Company’s wholly owned subsidiary, Beijing Deli Solar Technology
Development Co., Ltd. entered into a purchase agreement to acquire 51% equity
interest in Tianjin Huaneng, to expand market share, held by Tianjin Municipal
Ji County State-owned Assets Administration Commission for a total purchase
price of $3,149,147. By supplemental agreement dated August 8, 2007, the
purchase price was reduced to approximately $1,689,741. The Company also
incurred additional cost of $769,418 related to finder’s fee, which has been
included in the total cost of the acquisition of $2,459,159. The finder’s fee
was paid to Tianjin Wangshitong Corporate Consulting Co, Ltd., an unrelated
third party. As of December 31, 2007, the Company paid approximately $2,345,018
of the purchase price and the finder’s fee. The remaining balance as of the date
of this report was $114,141. In addition, the Company agreed to provide working
capital of approximately $2.6 million to Tianjin Huaneng. The accounting date of
the acquisition was July 1, 2007 and was accounted for under the purchase
method. Tianjin Huaneng results of operations have been included in our
consolidated financial statements since the date of acquisition. Tianjin Huaneng
is principally engaged in the design, development and manufacturing and
marketing of energy-saving related heating products such as heat pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. These products are distributed in the PRC and Southeast
Asia. Goodwill recorded as part of the purchase price allocation was $1,708,665.
Identifiable intangible assets acquired as part of the acquisition included
definite-lived intangibles such as land use rights which totaled $256,157, with
a weighted average amortization period of approximately 50 years.





The
aggregate purchase price was $2,459,159, including $1,689,741 of cash and costs
related to the acquisition of $769,418. Below is a summary of the total purchase
price:




Cash
                  
                  $
                  1,689,741Direct
      acquisition costs
                  
                  
                  769,418Total
      purchase price
                  
                  $
                  2,459,159




In June
2008, the purchase price allocation was finalized which resulted to no
adjustment to the fair value of assets acquired and liabilities assumed. The
following table represents the final purchase price allocation to the estimated
fair value of the assets acquired and liabilities assumed:




As of July 1,
                      2007Cash
      and cash equivalents
                    
                    $
                    196,150Accounts
      receivable
                    
                    
                    2,362,792Inventories
                    
                    
                    1,665,617Prepayments
      and other receivables
                    
                    
                    441,882Property,
      plant and equipment
                    
                    
                    589,985Land
      use rights
                    
                    
                    256,157Goodwill
                    
                    
                    1,789,324Total
      assets acquired
                    
                    $
                    7,301,907Short-term
      bank loan
                    
                    $
                    588,899Accounts
      payable
                    
                    
                    573,479Deferred
      revenue
                    
                    
                    340,856Advances
      from customers
                    
                    
                    1,326,665Value-added
      tax payable
                    
                    
                    440,207Income
      taxes payable
                    
                    
                    458,705Deferred
      tax liabilities
                    
                    
                    16,059Accrued
      liabilities and other payables
                    
                    
                    716,188Long-term
      payables
                    
                    
                    381,690Total
      liabilities assumed
                    
                    
                    4,842,748Net
      assets acquired
                    
                    $
                    2,459,159




On
October 27, 2008, Deli Solar (Beijing), entered into an agreement to acquire
approximately 29.97% of the outstanding equity interest of Tianjin Huaneng, from
the minority shareholders of Tianjin Huaneng.





Cash Purchase Price: Under
the agreement, Deli Solar (Beijing) agreed to pay to the Tianjin Huaneng
shareholders RMB 10.68 million ($1,557,578 US Dollars) payable in cash within
seven days of the execution of the agreement. But, of this aggregate amount, RMB
3.56 million ($515,026) was actually paid at the completion of the acquisition,
the remaining RMB 7.12 million ($1,047,611) was not be paid as of December 31,
2008, and included other payable in the balance sheet for December 31, 2008. In
addition, the Company agreed to pay to the Tianjin Huaneng shareholders RMB
2.848 million ($416,703) payable in cash in three installments, which will be
respectively RMB890, 000, RMB890, 000 and RMB1, 068, 000 in the first year, in
the second year and the third year at the completion of the
acquisition.





Warrants Purchase Price: In
addition to the cash purchase price, the Company also agreed to issue to the
Tianjin Huaneng shareholders a total of 1,000,000 five year warrants to purchase
the Company’s common stock at an exercise price of $1.10 per share, please refer
note 11, as this is where the valuation information is reported.





In
addition, the Company decided to increase its equity interest in Tianjin
Huaneng by contributing an additional RMB 15,740,000 ($2,295,531 US Dollars)
to the registered capital of Tianjin Huaneng.





As a
result of the consummation of the agreement and the additional capital
contribution, the Company owns approximately 91.82% of the equity interest in
Tianjin Huaneng.




F-13




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





The
$1,789,324 of goodwill was assigned to the heat solar and related products
segment. The company does not expect goodwill to be tax deductible in the
PRC.




The
following unaudited pro forma financial information for the Company gives effect
to the 2007 acquisition as if they had occurred on January 1, 2007. These
pro forma results do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on such date or
to project the Company’s results of operations for any future
period.




Years ended December 31,2008
                  
                  
                  2007Pro
      forma net sales
                  
                  $
                  53,683,651
                  
                  
                  $
                  46,937,497Pro
      forma net income
                  
                  
                  (4,163,332
                  )
                  
                  
                  2,480,272Pro
      forma earnings per common share — net incomeBasic
                  
                  $
                  (0.34
                  )
                  
                  $
                  0.20Diluted
                  
                  $
                  (0.34
                  )
                  
                  $
                  0.20Weighted
      average common shares outstandingBasic
                  
                  
                  12,158,482
                  
                  
                  
                  12,316,518Diluted
                  
                  
                  12,158,482
                  
                  
                  
                  12,699,332





On
January 9, 2008 and March 25, 2008 Beijing Deli Solar Technology Development
Co., Ltd., the Company’s wholly-owned subsidiary (“Deli Solar (Beijing)”),
entered into an Equity Purchase Agreement, a Complementary Agreement and a
Supplementary, with Shenzhen PengSangPu Solar Industrial Products Corporation
(“SZPSP”) and its shareholders to acquire 100% of the outstanding equity
interests of SZPSP from its three current shareholders. The closing will be
effective March 31, 2008.




Under the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest of
SZPSP from its current three shareholders.  Part of the consideration of
the transaction is RMB 28.8 million ($4,087,832) payable in cash. This purchase
price is based on an appraisal of SZPSP. The three shareholders of SZPSP agreed
to loan the cash proceeds back to SZPSP interest free to be used for working
capital. Fifty (50%) of the principal amount of the loan is required to be paid
prior to March 31, 2009 and the remaining 50% balance is required to be
paid prior to March 31, 2010.





In
addition to the payment of the cash purchase price under the Complementary
Agreement the parties agreed to an appraisal value of RMB 20 million of SZPSP’s
intangible assets which was paid in 1,419,729 shares of common stock. Provided
that if on the first anniversary of the closing the common stock price is lower
than $2, the Company will pay the difference. Fifty percent (50%) of these
shares shall be transferable and unrestricted within one year after the Closing
and the remaining Fifty percent (50%) transferable within two years. The
shares shall be transferred to SZPSP within 180 days of the closing.  In
addition, as part of the purchase price, the shareholders of SZPSP will receive
five years warrants to purchase a total of 141,973 shares of common stock
at an exercise price of $2.5 per share subject to future adjustments such as
stock splits and transactions similar in nature.





SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue is less
than RMB 99 million (approximately $13,670,068) with an after-tax net profit of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it does not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), the differential part that has not achieved the profit for the year
specified will be paid by reducing the amount payable on the shareholders’
loan. If the shareholders’ loan is not sufficient to pay the difference, the
common shares held by SZPSP will be returned to us to the extent necessary for
the remaining balance. For the year ended December 31, 2008, RMB 7 million
(approximately $1,029,336) has been accrued to reduce the amount payable on the
shareholders’ loan.




F-14




The
current shareholders of SZPSP, being the management of SZPSP, will enter into
employment contracts with the Company for a term of three years to remain in
their current managing positions of SZPSP, subject to further amendments of such
employment arrangement.





After the
Closing, Deli Solar (Beijing) has the right to a majority of the board seats of
SZPSP.




The
accounting date of the acquisition was April 1, 2008 and was accounted for under
the purchase method. SZPSP results of operations for the nine months ended
December 31, 2008 have been included in consolidated financial statements. The
acquisition of SZPSP will enable the Company to immediately begin leveraging its
technology and engineering capabilities and expertise, and will significantly
expand China Solar’s customer base and present a commercial and industrial
market opportunity for solar water heaters in southern China.





The
estimated aggregate purchase price was $7,019,483. Below is a summary of the
total purchase price:





Cash
                  
                  
                  4,087,832Fair
      value of 1,419,729 common stock
                  
                  
                  2,839,458Fair
      value of 141,973 warrants
                  
                  
                  92,193Total
      purchase price
                  
                  
                  7,019,483





Our
purchase price allocation for the SZPSP acquisition was finalized on June 30,
2008. The following table represents the final purchase price allocation to the
estimated fair value of the assets acquired and liabilities
assumed:





As of April 1,
                      2008(Unaudited)Cash
      and cash equivalents
                    
                    
                    87,316Restricted
      cash
                    
                    
                    84,304Accounts
      receivable, net
                    
                    $
                    510,269Inventories
                    
                    
                    325,429Net
      investment in sales-type leases
                    
                    
                    966,806Prepayments
      and other receivables
                    
                    
                    217,606Property,
      plant and equipment
                    
                    
                    1,275,287Customer
      relationships
                    
                    
                    1,100,000Intellectual
      property
                    
                    
                    1,250,000Goodwill
                    
                    
                    3,055,769Total
      assets acquired
                    
                    $
                    8,872,786Short-team
      bank loan
                    
                    
                    710,668Accounts
      payable
                    
                    
                    908,124Deferred
      revenue
                    
                    
                    23,217Accrued
      liabilities and other payables
                    
                    
                    211,294Total
      liabilities assumed
                    
                    
                    1,853,303Net
      assets acquired
                    
                    $
                    7,019,483




The
$3,055,769 of goodwill was expected to be assigned to the solar heater/boiler
related products segment and a new segment of energy-saving projects. The
Company does not expect goodwill to be tax deductible in the PRC. Of the
$2,350,000 of acquired intangible assets, $310,000 was assigned to in-process
research and development which was written off during the nine months ended
December 31, 2008, $940,000 was assigned to existing intellectual property, and
$1,100,000 was assigned to customer relationships. The acquired identifiable
intangibles assets have a weighted-average amortization period totaling
approximately 10 years and residual value totaling approximately
$0.





The fair
value of the IPRD was derived using a discounted cash flow method. Management
analyzed expected future revenues from product sales and thereafter based on the
research and development being underway at the date of acquisition. Technology
feasibility was determined based on management review of the product life spans
and also the rate of change in the industry. Based on the analysis management
made assumptions as to the portion of product revenue going forward which would
be derived from products based on current research and development. The
significant assumptions with respect to the percentage of revenues going forward
from products based on IPRD are as outlined in the following
table:




F-15




2008
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012Break
      down of Revenue - IPRD versus products
                    
                    
                    90
                    %
                    
                    
                    80
                    %
                    
                    
                    75
                    %
                    
                    
                    70
                    %
                    
                    
                    65
                    %Existing
      products
                    
                    
                    10
                    %
                    
                    
                    20
                    %
                    
                    
                    25
                    %
                    
                    
                    30
                    %
                    
                    
                    35
                    %IPRD
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %





Upon
further review, certain R&D underway was later determined to not warrant
completion and that future products based on the R&D were discontinued given
the demand in the market.





Our
internal technology specialists did a scientific and technological evaluation of
the research expenditures of Shenzen Pengsangpu Solar Industrial Products
Corporation. Our evaluation was based on a number of factors,
including,





1)          Commercial
viability of products being researched and developed





2)          Anticipated
level of patent protection




3)          Competitive
environment for products being researched and developed





At the
date of acquisition, the technology feasibility has not been established and
there is no alternative future use. Through this evaluation we determined that
$310,000 of expenditures had no future value and accordingly should be written
off  immediately.





The
property, plant and equipment acquired consists of plant machinery and
equipment, motor vehicles and leasehold improvements with estimated depreciable
lives of 5 years and residual value is 10% of the cost of assets.





The
following unaudited pro forma financial information gives effect to the
acquisition of Shenzhen PengSangPu Solar Industrial Products Corporation as if
the acquisition occurred on January 1, 2008. These pro forma results do not
purport to be indicative of the results of operations which actually would have
resulted had the acquisitions occurred on such date or to project the Company’s
results of operations for any future period.





For the Year
                      EndedDecember 31,
                      2008(Unaudited)Pro
      forma revenues
                    
                    $
                    54,077,571Pro
      forma net loss
                    
                    $
                    (4,163,333
                    )Pro
      forma loss per common shareBasic
      and diluted
                    
                    $
                    (0.34
                    )Weighted
      average common shares outstanding
                    
                    
                    12,158,482




5.         ACCOUNTS
RECEIVABLE, NET





The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required.




As of December 31,2008
                    
                    
                    2007Accounts
      receivable, cost
                    
                    $
                    6,885,099
                    
                    
                    $
                    8,219,804Less:
      allowance for doubtful accounts
                    
                    
                    (845,034
                    )
                    
                    
                    (766,795
                    )Accounts
      receivable, net
                    
                    $
                    6,040,065
                    
                    
                    $
                    7,453,009





For the
year ended December 31, 2008, there is no recorded reversal of the allowance for
doubtful accounts.  For the year ended December 31, 2008, the Company
recorded allowance for doubtful accounts of $ 845,034.




F-16




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





6.          INVENTORIES





Inventories
consisted of the following:





As of December 31,2008
                    
                    
                    2007Raw
      materials
                    
                    $
                    1,443,266
                    
                    
                    $
                    656,605Consumables
                    
                    
                    4,320
                    
                    
                    
                    5,359Work-in-process
                    
                    
                    21,269
                    
                    
                    
                    2,464,441Finished
      goods
                    
                    
                    6,816,666
                    
                    
                    
                    749,253Inventories
                    
                    $
                    8,285,521
                    
                    
                    $
                    3,875,658




During
the year 2008, we make impairment test for inventory,
and recognized impairment loss for Bazhou and Tianjin Huaneng
respectively for: $71,544 and $174,864.





7.         OTHER
RECEIVABLES AND PREPAYMENTS





Other
receivables and prepayments consisted of the following:





As of December 31,2008
                    
                    
                    2007Advance
      to suppliers
                    
                    $
                    1,389,998
                    
                    
                    $
                    493,421Notes
      receivable
                    
                    
                    727,175
                    
                    
                    
                    -Prepaid
      expenses
                    
                    
                    159,089
                    
                    
                    
                    249,598Income
      tax receivable
                    
                    
                    195,549
                    
                    
                    
                    894,268Other
      receivables
                    
                    
                    5,398,764
                    
                    
                    
                    661Other
      receivables and prepayments
                    
                    $
                    7,870,575
                    
                    
                    $
                    1,637,948




During
the year ended December 31, 2006, the Company received the amount of $82,639
being the settlement of related party receivables for an advance to one of the
Company’s directors. Related party receivable as of December 31, 2008 and 2007
were in the amounts of $-0- and $-0- respectively.





Following
please find the detail information for other receivables:




F-17




Shenzhen
Fuwaysun Technology Co., Ltd.





On
January 21, 2008, we entered into a letter of intent (“LOI”) with Mr. Caowei
Liang, Ms. Xuemei Mo and Mr. Huafeng Mo (the “Fuwaysun Shareholders”), the three
shareholders holding the entire equity interests of Shengzhen Fuwaysun
Technology Co., Ltd. (“Fuwaysun”), a PRC company primarily engaged in the
development and production of solar pest killing lamps and transportable solar
generators. Pursuant to the LOI, we will acquire 60% of Fuwaysun’s entire equity
interests (the “Acquisition”) from the Fuwaysun Shareholders at a purchase
price equal to 60% of Fuwaysun’s audited net assets as of January 30, 2008 (the
“Purchase Price”). We will pay the purchase price with cash and our shares as to
be agreed by the parties.




In April,
2008, we entered into two loan agreements with Fuwaysun (the “Loan Agreements”),
pursuant to which we made two loans to Fuwaysun as working capital for six
months, one for $3,000,000 and the other for RMB3,000,000 ($424,352) (the
“Loans”), respectively. The Loan Agreements are substantially identical, except
for the amounts of the loans. Pursuant to the Loan Agreements, if we complete
the Acquisition within six months, we will cancel the Loans to offset the
Purchase Price; if we cannot complete the Acquisition within six months,
Fuwaysun must repay the Loans with 30 days after the expiration of the six
months plus interest on the Loans at a rate of 12% per annum. However, if
Fuwaysun refuses to our Acquisition, Fuwaysun shall repay the Loans plus accrued
interest at a rate of 20% per annum within 30 days thereafter and pay us
liquidated damages equal to 5% of the Purchase Price. If Fuwaysun fails to repay
either Loan pursuant to the applicable Loan Agreement, it shall pay us
additional interest on such Loan at a rate of 0.5% per day. We has
increased loan to Fuwaysun to RMB 6.45 million at December 31, 2008
(approximately $943,728).





On April
9, 2009, we entered into a supplement agreement with the Fuwaysun Shareholders
and Fuwaysun (the “Supplement Agreement”) and extended both the date for the
parties to complete the Acquisition and the maturity date of the Loans to June
30, 2009 and otherwise retained the terms of the LOI and the Loan
Agreements.





Shenzhen
Xiongri Solar Co., Ltd.





In 2006,
we entered into a series of agreements with the three shareholders of Shenzhen
Xiongri Solar Co., Ltd. (“Xiongri”) to purchase 60% of the entire equity
interests of Xiongri for RMB2,000,000 ($282,901). The three shareholders agreed
to loan RMB2, 000,000 to Xiongri as working capital. We have not complete the
transfer of the 60% equity interests. On April 9, 2009, the parties entered into
a supplement agreement and agreed to complete the transfer of the 60% equity
interests by June 30, 2009。





Investment
in Sales-type Leases





The
Company engages in installing energy-saving facilities and leasing the equipment
facilities to customers under sales-type leasing arrangement.





As of
December 31, 2008, the future minimum rentals to be received on non-cancelable
sales-type leases are as follows:





Years
      ending December 31,2009
                  
                  
                  147,2512010
                  
                  
                  147,2512011
                  
                  
                  147,2512012
                  
                  
                  147,2512013
                  
                  
                  147,251Thereafter
                  
                  
                  1,138,228$
                  1,874,483





8.          PROPERTY,
PLANT AND EQUIPMENT, NET





Property,
plant and equipment, net, consisted of the following:





As of December 31,2008
                    
                    
                    2007Buildings
                    
                    $
                    9,122,488
                    
                    
                    $
                    5,573,982Plant
      and machinery
                    
                    
                    3,498,396
                    
                    
                    
                    1,836,914Office
      equipments
                    
                    
                    242,497
                    
                    
                    
                    1,004,118Motor
      vehicles
                    
                    
                    737,009
                    
                    
                    
                    81,497Computer
      equipment
                    
                    
                    239,309
                    
                    
                    
                    13,507Construction
      in progress
                    
                    
                    4,263,517
                    
                    
                    
                    2,118,61518,103,216
                    
                    
                    
                    10,628,633Less:
      accumulated depreciation
                    
                    
                    (2,954,018
                    )
                    
                    
                    (1,809,417
                    )Property,
      plant and equipment, net
                    
                    $
                    15,149,198
                    
                    
                    $
                    8,819,216




F-18




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Depreciation
expenses for the years ended December 31, 2008 and 2007 were $955,443 and
$282,822, respectively.




9.          INTANGIBLE
ASSETS, NET





Intangible
assets consisted of the following:





As of December 31,2008
                    
                    2007Land
      use rights, at cost
                    
                    $
                    1,827,990
                    
                    
                    $
                    1,654,998Less:
      accumulated amortization
                    
                    
                    (118,806
                    )
                    
                    
                    (57,077
                    )Land
      use rights, net
                    
                    $
                    1,709,184
                    
                    
                    $
                    1,597,921





All lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over
the term of the land use right agreement which is 50 years, on a straight-line
basis. Amortization expenses for the years ended December 31, 2008 and 2007 were
$61,729 and $41,335, respectively.




Customer
relationships and intellectual property – unpatented consisted of the
following:





As of December 31,2008
                    
                    2007Customer
      relationships
                    
                    $
                    1,100,000
                    
                    
                    $
                    0Less:
      accumulated amortization
                    
                    
                    (82,500
                    )
                    
                    
                    0Intellectual
      property - unpatented
                    
                    $
                    940,000
                    
                    
                    $
                    0Less:
      accumulated amortization
                    
                    
                    (70,500
                    )
                    
                    
                    0Customer
      relationships and intellectual property – unpatented, net
                    
                    $
                    1,887,000
                    
                    
                    $
                    0





Customer
relationships and intellectual property – unpatented were obtained from SZPSP
acquisition. The estimated amortization period is 10 years.





10.       OTHER
PAYABLES AND ACCRUED LIABILITIES





Other
payables and accrued liabilities consisted of the following:





As of December 31,2008
                    
                    
                    2007Accrued
      expenses
                    
                    
                    738,898
                    
                    
                    
                    608,315Customer
      deposits
                    
                    
                    4,479,768
                    
                    
                    
                    2,281,909Other
      payables
                    
                    
                    1,403,293
                    
                    
                    
                    3,508,066Taxes
      payables
                    
                    
                    2,236,298
                    
                    
                    
                    1,359,140Investment
      payable
                    
                    
                    1,171,978Deferred
      revenue
                    
                    
                    1,159,765
                    
                    
                    
                    795,022$
                    11,190,000
                    
                    
                    $
                    8,552,452





During
the year ended December 31, 2007, the Company repaid Mr. Deli Du the amount of
$22,528. Related party payable to Mr. Deli Du as of December 31, 2007 and
2008was in the amount of $-0-.





11.       STOCK
HOLDERS’ EQUITY





Authorized
Capital





The
Company’s authorized capital stock consists of 66,666,667 shares of $0.001 par
value per share common stock and 25,000,000 shares of $0.001 par value per share
preferred stock




F-19




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Class
A Preferred stock





The
Company has designated 3,500,000 of its Preferred Shares as Class A Convertible
Preferred Shares. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, Class A Convertible Preferred
Shareholders shall be entitled to receive out of the assets of the Corporation,
an amount equal to $1.55 per share. Each share of Series A Preferred Stock shall
be initially convertible into one (1) share of Common Stock subject to
adjustment for stock dividend and stock splits, sale or issuance of common stock
at a price which is less than $1.55, at the option of the investors, at any time
after the original issue date.





The Class
A Convertible Preferred Shares contain a beneficial conversion feature in favor
of the holder. The beneficial conversion feature was measured at its intrinsic
value at the date of issuance of the shares and is recognized immediately as a
return to the preferred shareholders through a charge to retained earnings,
since the conversion feature is immediately exercisable by the holders. Although
there is no impact on net income, the charge to retained earnings affects the
computation of both basic and diluted EPS for US GAAP in the same way that
dividends on the preferred shares do. The charge during the year of 2008 and
2007 was $0 and $975,807.





Sale
of Units





On June
13, 2007, the Company entered into a Securities Purchase Agreement with Barron
Partners L.P., and two accredited investors in a private placement (“Private
Placement) providing for the sale of: (i) 1,774,194 shares of our Series A
Convertible Preferred Stock; (ii) stock purchase warrants to purchase an
aggregate of 1,774,194 shares of common stock at a price of $1.90 per share; and
(iii) stock purchase warrants to purchase an aggregate of 1,774,194 shares of
common stock at a price of $2.40 per share. In connection with the Private
Placement, the Company deposited 900,000 shares of Series A Convertible
Preferred Stock into escrow as security in the event (i) the earnings target for
2007 is not met and (ii) the earnings target for 2008 is not met. The 900,000
shares held in escrow were not included in the diluted earnings per share
calculation as the earnings target for 2007 was met and the fulfillment of
earnings target for 2008 has not been determined. Net proceeds of $2,581,000
were used to finance business acquisitions.





During
the year of 2008, 1,400,628 shares of preferred stock were converted to the same
number of shares of common stock.





Registration
Rights




In
connection with the private placement on June 13, 2007, the Company deposited
900,000 shares of Series A Convertible Preferred Stock into escrow as security.
If the Company’s consolidated pre-tax income for the year ended December 31,
2007 was less than $3,000,000 (or pretax income per share of $0.22 on a fully
diluted basis), the Company was required to deliver to the investors (pro rata
according to the relative size of their investment) a number of the escrow
shares to be determined based on the shortfall by which the Company failed to
achieve the 2007 earnings target. If the Company’s consolidated pre-tax
income for the year ending December 31, 2008 is less than $5,500,000 (or pretax
income per share of $0.40 on a fully diluted basis) the investors were entitled
to receive (pro rata according to the relative size of their investment) a
number of the remaining escrow shares to be determined based on the shortfall by
which the Company failed to achieve 2008 earnings target. The agreement with the
investors further provided that the investors will not be entitled to any of the
remaining escrow shares and all remaining escrow shares shall be returned to the
Company if the Company did not receive at least $4,000,000 from the investors,
either through the exercise of warrants, or additional equity financing, within
90 days after the effectiveness of the first registration statement filed
pursuant to a certain registration rights agreement entered into with the
investors concurrently. The registration statement in question was declared
effective on February 7, 2008 The earnings target for the year ended December
31, 007 was met, thus 900,000 escrow shares remained in escrow at the beginning
of the year ending December 31, 2008. However, the 900,000 shares held in escrow
were not included in the diluted earnings per share calculation for the
twelve months ended December 31, 2008 as the escrow shares were to be returned
to the Company since the investors did not provide at least $4,000,000 in
additional equity financing within 90 days after the effectiveness of the first
registration statement and the diluted earnings per share were the same as basic
earnings per share due to the net loss result in 2008.




F-20


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





Common
stock





On March
30, 2005, the Company issued 4,067,968 shares of its common stock in the
recapitalization transaction with Deli Solar (BVI).





On March
30, 2005, the Company issued 1,714,290 shares of its common stock at $3.50 per
share in a private placement transaction along with five year warrants to
purchase 1,714,290 additional common shares at $3.85 per share. Gross proceeds
to the Company totaled $6,000,015 and costs of issuance totaled
$1,348,626.





On August
15, 2005 the Company affected a 1:6 reverse stock split. Fractional shares were
rounded up to the nearest whole share. These financial statements have been
retroactively restated to give effect to the reverse split for all periods
presented. Immediately prior to the reverse stock split there were 36,850,379
common shares outstanding and following the split there were 6,145,290 shares
outstanding.





In
October 2005, the Company issued 60,000 shares of its common stock in exercise
of warrants.





On
February 29, 2008, the Company completed a private placement of 4,691,499 shares
of common stock for an aggregate purchase price of approximately $11,300,000.
The Company received $9,995,156 as net proceeds from this
financing.





During
the twelve months ended December 31, 2008, the Company issued 1,400,628 shares
of common stock as part of the conversion of Series A Preferred
Stock.





During
the twelve months ended December 31, 2008, certain investors exercised their
warrants to purchase an aggregate of 75,000 shares of common stock totaling
$107,500.





During
the twelve months ended December 31, 2008, the Company granted 7,304 shares of
common stock to a former Board member in exchange for services. The shares were
valued at $2.08 per share or an aggregate total of $15,192.





Common
Stocks Held in Escrow





In
connection with the private placement on February 29, 2008, the Company
deposited 2,000,000 shares of common stock (“Make Good Shares”) into escrow and
we are required to deliver (i) 1,000,000 of the Make Good Shares to the
investors on a pro rata basis for no additional consideration in the event that
the Company’s after-tax net income for the fiscal year ending December 31, 2008
is less than $4.8 million; and (ii) 1,000,000 of the Make Good Shares to the
investors on a pro rata basis for no additional consideration in the event that
the Company’s after-tax net income for the fiscal year ending December 31, 2009
is less than $8 million. As of December 31, 2008, the after-tax net income
target of $4.8 million has not been met.





Warrants
for services





In
connection with the Private Placement on June 13, 2007, the Board of Directors
granted to consultants and agents warrants to purchase an aggregate of 181,452
shares of the Company’s common stock, of which 75,000 warrants are exercisable
at US$2.90 per share and 106,452 warrants are exercisable at US$2.71 per share,
or on a cashless exercise basis. The warrants vested immediately and expire on
June 13, 2012. The market price of the stock was US$2.10 per share on the grant
date. The Company valued the 75,000 warrants at US$0.74 per share and the
106,452 warrants at US$0.78 per share, or $138,338 in aggregate in accordance
with SFAS 123R, which were recorded as offering cost in additional paid-in
capital in the accompanying consolidated financial statements for the year ended
December 31, 2007.





The fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:





Risk
      free interest rate (%)
                  
                  
                  5.00
                  %Dividend
      yield (%)
                  
                  
                  0.00
                  %Expected
      life of warrant grants (years)
                  
                  5
      yearsExpected
      volatility of warrant grants (%)
                  
                  
                  43.79
                  %




F-21




On March
30, 2005, in conjunction with a private placement sale of common stock the
Company issued five year warrants to purchase 1,714,290 shares of common stock
at a price of $3.85 per share to investors. Concurrently, the Company issued
five year warrants to purchase 171,429 common shares at $3.85 per share to
financial advisers and others. No share-based compensation expense was recorded,
as management determined this transaction to be a cost of issuance.




The
Company issued a warrant (the "Warrant") to its placement agent in connection
with its private placement in February 2008. The Warrant authorizes the agent to
purchase 469,150 shares of its common stock at a fixed price ($2.88 per share),
for a five-year period. The Warrant contains a cashless exercise provision which
permits the placement agent, at its option, to exercise the Warrant without
tendering the exercise price, in exchange for a reduced number of shares. The
number of shares will be calculated according to a formula should the placement
agent decide to opt to exercise the Warrant under the cashless provision. If the
Company is sold during the exercise period (referred to as a "fundamental
transaction" in the Warrant), the placement agent has the right to exercise its
Warrant and thus participate in the proceeds from the sale to the same extent as
any other shareholder. These warrants are immediately exerciseable. The fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model. In calculating the fair value of the warrants, management
used the closing price of the common stock on February 29, 2008, of $2.71 per
share, plus the following assumptions:





Risk
      fee interest rate (%)
                  
                  
                  5
                  %Dividend
      yield (%)
                  
                  
                  0.00
                  %Expected
      life of warrant grants (years)
                  
                  5
      yearsExpected
      volatility of warrant grants (%)
                  
                  
                  43.79
                  %





The
Company valued the warrants at US$1.155 per share, or $541,695 in aggregate, in
accordance with SFAS 123R, which were recorded as offering costs which offset
additional paid-in capital in the accompanying consolidated financial statements
for the twelve months ended December 31, 2008.





The
Company issued a warrant (the "Warrant") to minority shareholder of Tianjin in
connection with acquisition on October 27, 2008. The Warrant authorizes the
minority shareholder to purchase 1,000,000 shares of its common stock at a fixed
price ($1.10 per share), for a five-year period. These warrants are immediately
exercisable. The fair value of the warrants was estimated at the date of grant
using the Black-Scholes option-pricing model. In calculating the fair value of
the warrants, management used the closing price of the common stock on
October 27, 2008, of $1.10 per share, plus the following
assumptions:





Risk
      free interest rate (%)
                                  
                                  
                                  1.15
                                  %Dividend
      yield (%)
                                  
                                  
                                  0.00
                                  %Expected
      life of warrant grants (years)
                                  
                                  5
      yearsExpected
      volatility of warrant grants (%)
                                  
                                  
                                  98.26
                                  %





The
Company valued the warrants at US$0.77 per share, or $766,038 in aggregate, in
accordance with SFAS 123R, which were recorded as investment cost which offset
additional paid-in capital in the accompanying consolidated financial statements
for the twelve months ended December 31, 2008.





A summary
of the status of the Company’s outstanding common stock warrants as of December
31, 2008 and 2007:





Number of
                          Shares
                        
                        
                        Weighted-
                          Average
                          Exercise Price
                        
                        
                        Weighted-
                          average
                          Remaining
                          Contractual
                          Term
                        
                        
                        Aggregate
                          Intrinsic
                          ValueOutstanding at December
      31, 2005
                        
                        
                        1,825,719
                        
                        
                        $
                        3.85
                        
                        
                        
                        —
                        
                        
                        $
                        —Granted
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Forfeited
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Expired
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Outstanding
      at December 31, 2006
                        
                        
                        1,825,719
                        
                        
                        
                        3.85
                        
                        
                        2.25
      years
                        
                        
                        
                        —Granted
                        
                        
                        3,729,840
                        
                        
                        
                        2.18
                        
                        
                        4.50
      years
                        
                        
                        
                        354,839Exercised
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Forfeited
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Expired
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Outstanding
      and Exercisable at December 31, 2007
                        
                        
                        5,555,559
                        
                        
                        $
                        2.73
                        
                        
                        3.76
      years
                        
                        
                        $
                        354,839Granted
                        
                        
                        1,611,123
                        
                        
                        
                        1.74
                        
                        
                        4.75
      years
                        
                        
                        
                        633,888Exercised
                        
                        
                        (75,000
                        )
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Expired
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      and Exercisable at December 31, 2008
                        
                        
                        7,091,682
                        
                        
                        $
                        2.76
                        
                        
                        3.53
      years
                        
                        
                        $
                        988,727





Registration
Rights Agreement





In
connection with the private placement, the Company entered into a registration
rights agreement with the investors on February 25, 2008 which requires us to
file with the SEC a “resale” registration statement providing for the resale of
(i) all of the 4,691,499 shares of common stock sold to the investors, (ii) the
2,000,000 “make good shares” and (iii) the 469,150 shares underlying the
placement agent warrants (collectively, the “registrable securities”) for an
offering to be made on a continuous basis pursuant to Rule 415 of the Securities
Act of 1933, as amended.





The
Company agreed, among other things, to prepare and file an initial registration
statement within 45 days of the closing date (i.e. April 14, 2008) to register
for resale part of the registrable securities (other than the 2,000,000 make
good shares and the 469,150 shares underlying the placement agent warrants) and
to cause that registration statement to be declared effective by July 28,
2008.





The
Company is required to file additional registration statements covering all of
the remaining registrable securities (or such lesser number as the SEC deems
appropriate) if any registrable securities could not be registered in the
initial registration statement, by the 15th day following the date on which we
are able to effect the registration of such securities in accordance with any
SEC restrictions.





The
Company’s failure to meet this schedule and other timetables provided in the
registration rights agreement could result in the imposition of liquidated
damages. No liquidated damages will accrue in respect of any registrable
securities which the SEC has requested (due to the application of Rule 415)
the Company to remove from the registration statement and the required
effectiveness date for such registrable securities will be tolled until such
time as the Company is able to effect the registration of those securities in
accordance with any SEC restrictions.





On
February 29, 2008, the Company completed a private placement of 4,691,499 shares
of the common stock at a price per share of $2.40 for an aggregate purchase
price of approximately $11,300,000. The Company received $9,995,156 as net
proceeds from this financing.





On July
28, 2008, the Company incurred liquidated damages equal to $112,596 which
represents 1% of $11,259,587 (the aggregate of investment amount by the
investors) due to the fact that the Company failed to have the registration
statement declared effective on or prior to that date. The liquidated damages
continue to accrue per diem with respect to all investors at the monthly rate of
1% and pro rated for partial months. The registration statement did not go
effective until December 17, 2008. Accordingly, as of December 17, 2008, the
Company had incurred $523,026 in liquidated damages for failing to have the
registration statement declared effective by July 28, 2008.


F-22


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))




12.
            INCOME
      TAXES





The
Company is registered in the United States of America and has operations in
three tax jurisdictions: the United States of America, British Virgin Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes. The
Company generated substantially its net income from the operation of its
subsidiary in the PRC and subject to the PRC tax jurisdiction. The Company has
recorded income tax provision for the years ended December 31, 2008 and
2007.





The
components of (loss) income before income taxes separating U.S., BVI and PRC tax
jurisdictions are as follows:




Years ended December 31,2008
                      
                      2007Tax
      jurisdictions from:Loss
      subject to U.S.
                      
                      $
                      (493,890
                      )
                      
                      
                      (461,433Loss
      subject to BVI
                      
                      
                      (1,157,723
                      )
                      
                      
                      (184,056Income
      subject to the PRC
                      
                      
                      (2,839,246
                      )
                      
                      
                      3,985,699Income
      before income taxes
                      
                      $
                      (4,490,859
                      )
                      
                      
                      3,340,210





United
States of America





China
Solar is registered in the State of Nevada and is subject to the tax laws of
United States of America.





As of
December 31, 2008, the operation in the United States of America incurred
$493,890 of net operating losses available for federal tax purposes, which are
available to offset future taxable income. The net operating loss carry forwards
will to expire through 2028, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $493,890 on the expected
future tax benefits from the net operating loss carry forwards as the management
believes it is more likely than not that these assets will not be realized in
the future.


F-23


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





British
Virgin Island





Under the
current BVI law, the Company is not subject to tax on income.





The
PRC





The
Company's subsidiary operating in the PRC, Ailiyang and Tianjin Huaneng are
domestically owned and subject to the Corporate Income Tax governed by the
Income Tax Law of the People’s Republic of China, at a statutory rate of 33%,
which is comprised of a 30% national income tax and 3% local income
tax.





In March
2005, the Deli Solar (Bazhou) became a foreign investment enterprise. Hence,
effective from the year ended 2005, Deli Solar (Bazhou) is entitled to a
two-year exemption from enterprise income tax and a reduced enterprise income
tax rate of 15% for the following three years.





In
September 2006, the Deli Solar (Beijing) was founded as a foreign investment
enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing) is
entitled to a two-year exemption from enterprise income tax and a reduced
enterprise income tax rate of 15% for the following three years.





On March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. Deli Solar
(Bazhou) and Deli Solar (Beijing) are considered a foreign invested enterprise
and its ultimate applicable effective tax rate in 2008 and beyond will depend on
many factors, including but not limited to whether certain of its legal entity
will be subject to a transitional policy under the Corporate Income Tax Law,
whether Deli Solar (Bazhou) and Deli Solar (Beijing) can continue to enjoy the
unexpired tax holidays.





The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes stated in the statements of operations for the years
ended December 31, 2008 and 2007 is as follows:




Years ended December 31,2008
                  
                  
                  2007Income
      before income taxes
                  
                  $
                  (4,490,859
                  )
                  
                  $
                  3,340,210Statutory
      income tax rate
                  
                  
                  15
                  %
                  
                  
                  33
                  %0
                  
                  
                  
                  1,102,269Less:
      items not subject to taxesEffect
      for tax holiday
                  
                  
                  193,418
                  
                  
                  
                  (486,944
                  )Income
      tax expenses
                  
                  $
                  193,418
                  
                  
                  $
                  615,325


F-24


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of December 31, 2008 and 2007:





As of December 31,2008
                  
                  
                  2007Deferred tax
      assets:-
      Net operating loss carried forward
                  
                  $
                  0
                  
                  
                  
                  1,432,326Less:
      valuation allowance
                  
                  
                  0
                  )
                  
                  
                  (1,432,326
                  )Deferred
      tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





13.
            NET
      INCOME PER SHARE





Basic net
income per share is computed using the weighted average number of the ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year less number of warrants issued during
the year in note 10.





The
following table sets forth the computation of basic and diluted net income per
share for the years ended December 31, 2008 and 2007:




Years ended December 31,2008
                    
                    
                    2007As adjusted and
                      restated
                      (Note 19)Basic
      and diluted net income per share calculationNumerator:Net
      income
                    
                    $
                    (5,503,170
                    )
                    
                    
                    2,525,141Less:
      Preferred stock dividends
                    
                    
                    
                    
                    
                    
                    (975,807
                    )Net
      income available to common stockholders in computing basic and diluted net
      income per share
                    
                    $
                    (5,503,170
                    )
                    
                    $
                    1,549,334Denominator:
      - Weighted average ordinary shares outstanding
                    
                    
                    12,158,482
                    
                    
                    
                    6,205,290-
      Weighted average preferred stock outstanding
                    
                    
                    
                    
                    
                    
                    --
      Weighted average warrant shares outstanding
                    
                    
                    
                    
                    
                    
                    191,407- Weighted
      average contingent shares outstanding12,158,482
                    
                    
                    
                    6,396,697Basic
      net income per share
                    
                    $
                    (0.45
                    )
                    
                    $
                    0.25Diluted
      net income per share
                    
                    $
                    (0.45
                    )
                    
                    $
                    0.24





For the
year ended December 31, 2008, warrants have been excluded from the diluted
earnings per share calculation as they are antidilutive.





For the
year ended December 31, 2007, warrants to purchase 2,007,171 shares of common
stock have been excluded from the diluted earnings per share calculation as the
average market price of the common stock was less than the exercise price
of the warrants, thereby making the warrants antidilutive under the treasury
method. Convertible preferred stocks were also excluded from the denominator and
the associated beneficial conversion was excluded from the numerator as the
assumed conversion had an antidilutive effect.


F-25


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))




14.
            SEGMENT
      REPORTING, GEOGRAPHICAL INFORMATION




(a)
            Business
      information





The
Company has four reportable segments namely solar heater/boiler related
products, heat pipe related products, Energy-saving projects and Solar Heat
collector and others for the two year ended December 31, 2008 and 2007. The
solar heater/boiler related products are mainly under the management of
Deli Solar (Bazhou) while the heat pipe related products under the management of
Tianjin Huaneng, and energy-savings projects under the management of Shenzhen
PengSangPu.





An
analysis of the Company’s revenue and total assets are as follows:




Years ended December 31,2008
                    
                    2007Revenue:Solar
      Heater/Biomass Stove/Boiler related products
                    
                    $
                    25,098,563
                    
                    
                    $
                    26,693,850Heat
      Pipe related products
                    
                    
                    14,369,716
                    
                    
                    
                    7,002,015Energy-saving
      projects
                    
                    
                    9,078,203
                    
                    
                    
                    3,376,481Solar
      Heat collector and others
                    
                    
                    2,952,514
                    
                    
                    
                    -$
                    51,498,996
                    
                    
                    $
                    37,072,346




Years ended December 31,2008
                    
                    2007Gross profit:Solar
      Heater/Biomass Stove/Boiler related products
                    
                    $
                    4,357,289
                    
                    
                    $
                    5,672,443Heat
      Pipe related products
                    
                    
                    1,750,929
                    
                    
                    
                    1,820,524Energy-saving
      projects
                    
                    
                    1,576,041
                    
                    
                    
                    807,301Solar
      Heat collector and others
                    
                    
                    512,577
                    
                    
                    
                    -$
                    8,196,836
                    
                    
                    $
                    8,300,268




As of December31,2008
                  
                  
                  2007Total
      assets:Solar
      Heater/Biomass Stove/Boiler related products
                  
                  $
                  21,038,061
                  
                  
                  $
                  18,690,225Heat
      Pipe related products
                  
                  
                  15,214,984
                  
                  
                  
                  9,029,994Energy-saving
      projects
                  
                  
                  7,916,717
                  
                  
                  
                  2,919,494Solar
      Heat collector and others
                  
                  
                  2,328,446
                  
                  
                  
                  -$
                  46,498,208
                  
                  
                  $
                  30,639,713Total
      goodwill:Solar
      Heater/Biomass Stove/Boiler related products
                  
                  $
                  -
                  
                  
                  $
                  -Heat
      Pipe related products
                  
                  
                  1,705,430
                  
                  
                  
                  1,789,324Energy-saving
      projects
                  
                  
                  635,082
                  
                  
                  
                  -$
                  2,340,512
                  
                  
                  $
                  1,789,324





Other
segment in total revenue, gross profit, and assets refers to solar lighting
products and sales of spare parts/components. The amount of other segment
revenue, gross profit, and assets are less than 10% in each category and
disclosed as an “all other” category in accordance with paragraph 21 of SFAS
131. There was no elimination or reversal of transactions between reportable
segments.


F-26


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))


(b)
            Geographic
      information





The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC.   In respect of geographical segment reporting, sales
are based on the country in which the customer is located and total assets and
capital expenditure are based on the country where the assets are
located.





The
Company’s operations are located in PRC, which is the main geographical area.
The Company’s sales and total assets by geographical market are analyzed as
follows:




Years ended December 31,2008
                      
                      
                      2007Revenue:PRC
                      
                      $
                      38,614,920
                      
                      
                      $
                      32,623,664Others
                      
                      
                      12,884,076
                      
                      
                      
                      4,448,682$
                      51,498,996
                      
                      
                      $
                      37,072,346




Years ended December 31,2008
                    
                    
                    2007Gross profit:PRC
                    
                    $
                    5,960,069
                    
                    
                    $
                    6,806,220Others
                    
                    
                    2,236,767
                    
                    
                    
                    1,494,048$
                    8,196,836
                    
                    
                    $
                    8,300,268




As of December 31,2008
                    
                    
                    2007Total
      assets:PRC
                    
                    $
                    35,321,666
                    
                    
                    $
                    29,107,727Others
                    
                    
                    11,176,542
                    
                    
                    
                    1,531,986$
                    46,498,208
                    
                    
                    $
                    30,639,713




15.
            CHINA
      CONTRIBUTION PLAN





Under the
PRC Law, full-time employees of the Company’s subsidiaries, Deli Solar (Bazhou),
Ailiyang, Deli Solar (Beijing) and Tianjin Huaneng are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits based on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $603,996 and $327,257 for the years ended December
31, 2008 and 2007, respectively.


F-27


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))




16.
            CONCENTRATION
       OF
      RISK





(a)
            Major
      customers





No
revenue from customers that individually represent greater than 10% of the total
revenue for each of the years ended December 31, 2008 and 2007.




(b)
            Major
      vendors





The
following is a table summarizing the purchases from vendors that individually
represent greater than 10% of the total purchases for each of the years ended
December 31, 2008 and 2007 and their outstanding balances as at year-end
date:




Year endedDecember 31, 2008Vendor
                    
                    Purchases
                    
                    
                    Percentage of
                      total purchases
                    
                    
                    Accounts
                      payable, tradeVendor A
                    
                    $
                    12,729,348
                    
                    
                    
                    55
                    %
                    
                    
                    437,756




Year ended December 31, 2007Vendor
                    
                    Purchases
                    
                    
                    Percentage of
                      total purchases
                    
                    
                    Accounts
                      payable,tradeVendor A
                    
                    $
                    5,475,372
                    
                    
                    
                    50.4
                    %
                    
                    $
                    667,718





(c)
            Credit
      risks




Financial
instruments that are potentially subject to credit risk consist principally of
cash and trade receivables. All cash held in financial institutions are not
insured and therefore subject to credit risk. The Company believes the
concentration of credit risk in its trade receivables is substantially mitigated
by its ongoing credit evaluation process and relatively short collection terms.
The Company does not generally require collateral from customers. The
Company evaluates the need for an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.




(d)
            Interest
      rate risk





As the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.





The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at floating rates expose the Company to cash flow and fair value
interest-rate risk. Company policy is to maintain approximately all of its
borrowings in floating rate instruments. At the year end, all of borrowings were
at floating rates.


F-28


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))




17.
            COMMITMENTS
      AND CONTINGENCIES





(a)
            Operating
      lease commitment




The
Company leases land and buildings under non-cancelable operating lease
agreements. Based on the current rental lease agreements, the future minimum
rental payments required for the coming years are as follows:




Years
      ending December 31:2008
                    
                    $
                    20,0152009
                    
                    
                    20,0152010
                    
                    
                    20,0152011
                    
                    
                    20,015Total
      future minimum operating lease payments
                    
                    $
                    80,059





For the
years ended December 31, 2008 and 2007, rental expenses were $74,693 and
$101,780, respectively.




18.
            SUBSEQUENT
      EVENTS





(a)
            Postponement
      of Acquisition of Shenzhen Fuwaysun Technology Co.,
  Ltd.





On
January 21, 2008, we entered into a letter of intent (“LOI”) with Mr. Caowei
Liang, Ms. Xuemei Mo and Mr. Huafeng Mo (the “Fuwaysun Shareholders”), the three
shareholders holding the entire equity interests of Shengzhen Fuwaysun
Technology Co., Ltd. (“Fuwaysun”), a PRC company primarily engaged in the
development and production of solar pest killing lamps and transportable solar
generators. Pursuant to the LOI, we will acquire 60% of Fuwaysun’s entire equity
interests (the “Acquisition”) from the Fuwaysun Shareholders at a purchase price
equal to 60% of Fuwaysun’s audited net assets as of January 30, 2008 (the
“Purchase Price”). We will pay the purchase price with cash and our shares as to
be agreed by the parties.





In April,
2008, we entered into two loan agreements with Fuwaysun (the “Loan Agreements”),
pursuant to which we made two loans to Fuwaysun as working capital for six
months, one for $3,000,000 and the other for RMB3,000,000 ($424,352) (the
“Loans”), respectively. The Loan Agreements are substantially identical, except
for the amounts of the loans. Pursuant to the Loan Agreements, if we complete
the Acquisition within six months, we will cancel the Loans to offset the
Purchase Price; if we cannot complete the Acquisition within six months,
Fuwaysun must repay the Loans with 30 days after the expiration of the six
months plus interest on the Loans at a rate of 12% per annum. However, if
Fuwaysun refuses to our Acquisition, Fuwaysun shall repay the Loans plus
accrued interest at a rate of 20% per annum within 30 days thereafter and pay us
liquidated damages equal to 5% of the Purchase Price. If Fuwaysun fails to repay
either Loan pursuant to the applicable Loan Agreement, it shall pay us
additional interest on such Loan at a rate of 0.5% per day.





On April
9, 2009, we entered into a supplement agreement with the Fuwaysun Shareholders
and Fuwaysun (the “Supplement Agreement”) and extended both the date for the
parties to complete the Acquisition and the maturity date of the Loans to June
30, 2009 and otherwise retained the terms of the LOI and the Loan
Agreements.




(b)
            Postponement
      of Acquisition of Shenzhen Xiongri Solar Co.,
  Ltd.





In 2006,
we entered into a series of agreements with the three shareholders of Shenzhen
Xiongri Solar Co., Ltd. (“Xiongri”) to purchase 60% of the entire equity
interests of Xiongri for RMB2,000,000 ($282,901). The three shareholders agreed
to loan RMB2, 000,000 to Xiongri as working capital. We have not complete the
transfer of the 60% equity interests.. On April 9, 2009, the parties entered
into a supplement agreement and agreed to complete the transfer of the 60%
equity interests by June 30, 2009.


F-29




CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Currency
expressed in United States Dollars (“US$”))





19.
            RESTATEMENT
      ON CONSOLIDATED FINANCIAL
STATEMENTS





In
April 2008, we filed a registration statement on Form S-1 with the Securities
and Exchange Commission relating to the sale by certain selling stockholders
identified in the related prospectus of up to 5,160,649 shares of our common
stock including 469,150 shares they may acquire on exercise of warrants. When
reviewing our financial statements for inclusion in the prospectus, we became
aware of an error in the calculation of diluted net income per share for the
year ended December 31, 2007. We misapplied the treasury stock and the “if
converted” methods under SFAS No. 128 and because of the error we identified, we
have restated our historical financial statements for 2007 to record an increase
of 10¢ in diluted net income per share.





This
10¢ per share adjustment was non-cash. The error had no impact on our
reported assets, liabilities, equity, revenue, expenses or earnings. There was
no cumulative effect on retained earnings or other components of equity in the
balance sheet at December 31, 2007. It had no impact on basic earnings per
share. Nor did it have any impact on cash or cash equivalents. It had no impact
on prior year financial statements and, likewise, will have no impact on future
financial statements.





The
following table sets forth the income statement impact of the
restatement:




December 31, 2007As reported
                    
                    Adjustment
                    
                    As RestatedDiluted
      - Total weighted average shares outstanding
                    
                    
                    11,233,026
                    
                    (4,836,329
                    )
                    
                    6,396,697Diluted
      net income per share
                    
                    $
                    0.14
                    
                    0.10
                    
                    
                    0.24




The
impact of the restatement on the disclosures of earnings per share data is set
forth in the table below:





December 31, 2007As reported
                    
                    Adjustment
                    
                    As AdjustedDenominator:-
      Weighted average preferred stock outstanding
                    
                    
                    1,337,097
                    
                    (1,337,097
                    )
                    
                    0-
      Weighted average warrant shares outstanding
                    
                    
                    3,690,639
                    
                    (3,499,232
                    )
                    
                    191,407Diluted
      - Total weighted average shares
                    
                    
                    11,233,026
                    
                    4,836,329
                    
                    
                    6,396,697Diluted
      net income per share
                    
                    $
                    0.14
                    
                    0.10
                    
                    
                    0.24





On
March 30, 2009, we concluded, based, in part, on the recommendation of its
current independent auditors, that the financial statements included in the Form
10-K for the period ended December 31, 2008 and the financial statements
included in Form 10Q for the periods ended March 31, 2009, June 30, 2009 and
September 30, 2009 should be restated





The
following are the reasons the restatement is required.





The
acquisition of the additional 29.97% interest in Tianjin Hua Neng Energy
Equipment Company on October 27, 2009 was not properly recorded. As disclosed in
Note 4 to the financial statements of 2008, the Registrant paid $515,026 at the
completion of the agreement with the remainder, aggregating approximately
$1,047,611 plus interest to be paid over the next three years. We only recorded
the amount actually paid and did not record the corresponding debt. In addition
there 1,000,000 warrants to purchase the company’s common stock were issued as
part of the purchase price and were not valued and included as additional
purchase price.





The using
right of building of Deli Solar (Beijing) will expire in August, 2011. But the
Company never depreciated for it. So the Company decided to correct
it.





After
further analysis of the Company’s revenue recognition policy, it has decided to
change the revenue recognition of its consolidated subsidiary Tianjin Hua Neng.
The Company will make the appropriate entries to properly record the revenue and
associated costs of revenue.


F-30


The
following is a summary of the effects of the restatement on the company’s
consolidated financial statements.





As of December 31,2008aspreviously
                    reported
                  
                  
                  asrestatedASSETSAccounts
      receivable, net
                  
                  $
                  7,284,255
                  
                  
                  $
                  6,040,065Inventories
                  
                  
                  6,950,844
                  
                  
                  
                  8,285,521Total
      current assets
                  
                  
                  24,667,249
                  
                  
                  
                  24,757,736Property,
      plant and equipment, net
                  
                  
                  15,366,009
                  
                  
                  
                  15,149,198Goodwill
                  
                  
                  2,284,903
                  
                  
                  
                  2,340,512Total
      assets
                  
                  $
                  46,568,923
                  
                  
                  $
                  46,498,2083





As of December 31,2008aspreviously
                    reported
                  
                  
                  as restatedLIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Income
      tax payables
                  
                  $
                  2,236,298
                  
                  
                  $
                  1,818,488Other
      payables and accrued liabilities
                  
                  
                  8,386,698
                  
                  
                  
                  11,900,000Total
      current liabilities
                  
                  
                  15,924,345
                  
                  
                  
                  18,309,837Long-term
      debt
                  
                  
                  -
                  
                  
                  
                  286,483Total
      liabilities
                  
                  
                  15,940,124
                  
                  
                  
                  18,612,099Minority
      interests
                  
                  
                  1,704,248
                  
                  
                  
                  194,542Stockholders’
      equity:Additional
      paid-in capital
                  
                  
                  22,966,404
                  
                  
                  
                  23,073,258Retained
      earnings
                  
                  
                  3,365,788
                  
                  
                  
                  2,025,950Total
      stockholders’ equity
                  
                  
                  28,924,551
                  
                  
                  
                  27,691,567TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  46,568,923
                  
                  
                  $
                  46,498,208





Year Ended December 31,2008as previously
                    reported
                  
                  
                  as restatedRevenue,
      net
                  
                  $
                  53,683,651
                  
                  
                  $
                  51,498,996Cost
      of revenue
                  
                  
                  44,363,787
                  
                  
                  
                  43,302,160Gross
      profit
                  
                  
                  9,319,863
                  
                  
                  
                  8,196,836Depreciation
      and amortization
                  
                  
                  955,443
                  
                  
                  
                  1,172,253Total
      operating expenses
                  
                  
                  9,077,912
                  
                  
                  
                  9,294,723Income
      from operations
                  
                  
                  241,951
                  
                  
                  
                  (1,097,887)
                  )Income
      before income taxes
                  
                  
                  (3,151,022
                  )
                  
                  
                  (4,490,860
                  )Net
      income
                  
                  
                  (4,163,332
                  )
                  
                  
                  (5,503,170
                  )Net
      income available to common stockholders
                  
                  $
                  (4,163,332
                  )
                  
                  $
                  (5,503,170
                  )Net
      income per share – basic
                  
                  $
                  (0.34
                  )
                  
                  $
                  (0.45
                  )Net
      income per share – diluted
                  
                  $
                  (0. 34
                  )
                  
                  $
                  (0.45
                  )


F-31


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.





CHINA SOLAR & CLEAN ENERGY
      SOLUTIONS,INC.Date:
      April 14, 2010
              By:
              /s/ Deli DuDeli
      DuChief
      Executive Officer, President and Director
                (Principal
      Executive Officer)





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.





Name and Title
              
              Date/s/
      Deli Du
              
              April
      14, 2010Deli
      Du,Chief
      Executive Officer, President and Director(Principal
      Executive Officer)/s/
      Yinan Zhao
              
              April
      14, 2010Yinan
      ZhaoActing
      Chief Financial Officer(Principal
      Financial and Accounting Officer)/s/
      Zhaolin Ding
              
              April
      14, 2010Zhaolin
      DingDirector/s/
      Zhenhang Jia
              
              April
      14, 2010Zhenhang
      JiaDirector/s/
      Joseph J. Levinson
              
              April
      14, 2010Joseph
      J. LevinsonDirector


10