FORM
10-K


U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


(MARK
ONE)


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


For
the Fiscal Year Ended December 31, 2008


OR




 ̈
            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.)Building 3 No. 28, Feng Tai North Road,
                      Beijing, China
                    
                    100071(Address of principal executive offices)
                    
                    (Zip Code)





Registrant’s
telephone number, including area code: 10-63850516




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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  ̈  Yes     x  No




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     x  No




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 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.  x  Yes      ̈  No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) 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 in Part III of this Form 10-K or any
amendment to this Form 10-K.  ̈




Indicate
by check mark whether the registrant is a large 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




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




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.











Table of
Contents





Cautionary
Note Regarding Forward-Looking Statements And Other Information Contained In
This Report


Currency





TABLE
OF CONTENTS




PART
      IItem
      1.
                    Business
                    
                    
                    4Item
      1A.
                    Risk
      Factors
                    
                    
                    19Item
      1B.
                    Unresolved
      Staff Comments
                    
                    
                    19Item
      2.
                    Properties
                    
                    
                    19Item
      3.
                    Legal
      Proceedings
                    
                    
                    20Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    
                    
                    21PART
      IIItem
      5.
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    
                    
                    22Item
      6.
                    Selected
      Financial Data
                    
                    
                    23Item
      7.
                    Management’s Discussion
      and Analysis of Financial Condition and Results of
    Operations
                    
                    
                    23Item
      7A.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    
                    32Item
      8.
                    Financial
      Statements and Supplementary Financial Data
                    
                    
                    32Item
      9.
                    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                    
                    
                    32Item
      9A(T).
                    Controls
      and Procedures
                    
                    
                    32Item
      9B.
                    Other
      Information
                    
                    
                    34PART
      IIIItem
      10.
                    Directors,
      Executive Officers and Corporate Governance
                    
                    
                    35Item
      11.
                    Executive
      Compensation
                    
                    
                    38Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    
                    40Item
      13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    
                    
                    41Item
      14.
                    Principal
      Accounting Fees and Services
                    
                    
                    41PART
      IVItem
      15.
                    Exhibits,
      Financial Statement Schedules
                    
                    
                    42






2





PART I





As used
in this Annual Report on Form 10-K, unless otherwise indicated, the terms “we,”
“us,” “our” and “the Company” refer to China Solar & Clean Energy Solutions,
Inc. and its subsidiaries.





Our
Annual Report on Form 10-K for 2008, and information we provide in our Annual
Report to Stockholders, press releases, telephonic reports and other investor
communications, including those on our website, may contain forward-looking
statements with respect to anticipated future events and our projected financial
performance, operations and competitive position that are subject to risks and
uncertainties that could cause our actual results to differ materially from
those forward-looking statements and our expectations.





Forward-looking
statements can be identified by the use of words such as “expects,” “plans,”
“will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and
other words of similar meaning. These statements constitute forward-looking
statements within the meaning of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements are subject to risks
and uncertainties that may cause actual results to differ materially from those
expressed or implied by these forward-looking statements. These forward-looking
statements reflect our then current beliefs, projections and estimates with
respect to future events and our projected financial performance, operations and
competitive position.





Such
risks and uncertainties include, without limitation, our ability to raise
capital to finance our operations, the effectiveness, profitability and the
marketability of our services, our ability to protect our proprietary
information, general economic and business conditions, the impact of
technological developments and competition, adverse results of any legal
proceedings, the impact of current, pending or future legislation and regulation
of the solar power industry, our ability to enter into acceptable relationships
with one or more manufacturers for solar panel components and the ability of
such contract manufacturers to manufacture products or components of an
acceptable quality on a cost-effective basis, our ability to attract or retain
qualified senior management personnel, including sales and marketing and
technical personnel and other risks detailed from time to time in our filings
with the SEC, including those described at the end of Item 1 below. We do not
undertake any obligation to update any forward-looking statements.





3





ITEM
      1.
            BUSINESS





Business
of the Company





Overview





We
manufacture and distribute solar water heaters, renewable energy solutions, and
space heating devices in the People's Republic of China (“PRC”).  Our
product line consists of solar hot water heaters, multifunctional space heating
products,. Waste heat recovery systems and energy-saving heating product
resales.  Our business is conducted through our wholly owned PRC based
operating subsidiaries, Bazhou Deli Solar Energy Heating Co. Ltd. (“Bazhou Deli
Solar”) and Bazhou Deli Solar Energy Heating Co.Ltd.(“Bazhou Deli Solar”) and
our majority owned Tianjin Huaneng Group Energy Equipment Co., Ltd.(“Tianjin
Huaneng”) and Shenzhen PengSangPu Solar Industrial Products Corporation
(“SZPSP”).





Growth
Strategy





Organic
and Acquisition Oriented Growth





Our
business strategy includes organic growth through our core businesses and
acquisition oriented growth through opportunistic acquisitions and
investments.  As part of our business strategy, we review acquisition
and strategic investment prospects that we believe would complement our current
product offerings, increase our market coverage or enhance our technical
capabilities, or otherwise offer growth opportunities.  In addition,
we also consider opportunities related to investing in new businesses and we
expect to make investments in, and to acquire businesses, products, or
technologies in the future.





One of
the key factors for enhancing our organic growth is our human resources growth
strategy. We plan to strengthen our technical capability through recruiting
specialized personnel, internal training and outside technology collaborations,
including our technical research and development and support services, which
will help facilitate our plan to enter into the high-end solar technology
market. At the same time, we expect to recruit management executives to help
execute our growth oriented strategies. Another key factor in the development of
our core business and markets is our emphasis on brand recognition. We plan to
increase the amount and type of our product advertisements, establish a
nationwide sales channel and export channel, hold technology promotion
conferences, increase public relations activities and create an after-sales
service network.





Governmental Environmental
Policy Support





In “The
Guidelines of the Eleventh Five-Year Plan for National Economic and Social
Development” authorized by the tenth session of PRC National People's Congress,
provided that the energy consumption per unit of GDP should be reduced by
approximately 20% percent and that the total major pollutant emissions should be
reduced by 10%. In addition, the Energy Conversation Law was enacted in 2008
along with the Guidelines for Public Building Energy Conservation and the
Guidelines for Civilian Building Energy Conservation. These policies provide
huge business opportunities for the low-carbon industries, including energy
conservation, renewable energy and new energy industries. Since solar energy is
considered a renewable energy, its application and promotion are vigorously
supported by the PRC government. We believe that such government policies can
help us increase our solar energy water heater sales in China and also further
increase our growth opportunities in other low-carbon industries and develop new
markets.




4




Low-Carbon Industry
Opportunities





The PRC
government’s policy to reduce the CO2 emissions provides significant business
opportunities for the low-carbon industry. Our investments in this area will
include direct investments, technical collaborations and market cooperation.
Opportunities in the low-carbon market include performance of energy efficiency
evaluations, energy conservation programs, and energy conversion options,
utilization of renewable energy, clean energy and new energy alternatives. We
plan to recruit professionals with expertise in energy efficiency evaluation
services and provide energy conservation and conversion services through the EPC
method (Energy Performance Contracting). The potential market for energy
conservation in China is very large, and the investment costs for such industry
is relatively low. We believe that if we can successfully recruit personnel with
technological expertise and develop marketable technological products to address
the low-carbon industry market, our business in this market should develop
rapidly.





Rural
Market Opportunities





We market
our products in both the urban and the rural markets in the PRC. While most
solar hot water manufacturers focus on the urban market, we have always focused
on the rural market because the size of the rural market in the PRC is about
eight times larger than that of the urban market. Further, our rural customers
regard purchasing a hot water heater as a long term investment in a durable
good, more so than urban customers.





We have
eight years of marketing and sales experience in rural areas. Presently, we sell
our solar water heaters and space heaters primarily in the rural areas of the
north-east part of the PRC including Hebei, Beijing, Tianjin, Heilongjiang, and
Liaoning, where there is prolonged sunny and dry weather.  Our
marketing and sales team works with our agents to educate our end users and
inform them of the utility, functionality and comparative cost advantages of our
products as compared to electricity and gas water heaters. As a result of the
feedback from rural customers. We have been able to design our products to meet
their specific needs and concerns.





Technical
Capabilities





We will
enhance our technical strength through recruiting high-end technical
professionals, especially the inventors who have the rights to the patents in
the relevant fields. At the same time, we plan to establish strategic alliances
with national scientific and research institutions in the energy field. In
addition, we further plan on developing the collaborations with industrial
design institutions and large construction corporations, capitalizing on the
production capacity of Tianjin Huaneng and its ability to participate in the
bids of EPC projects (Engineering/Procurement/Construction
Contractor).





Brand
Strategy





Brand
identity.





We
further plan on strengthening our corporate identification system (CIS) to
transform our core culture into a vigorous slogan though repetition in our
advertisements, enterprise outward appearances, product packaging and product
instruction booklets, as well as in various promotional activities and public
relations events. We will use the same slogan to create a unified image to the
public for all of our different brands.





Advertising





Based on
various advertising effectiveness studies in the PRC, we believe that large
scale advertising on TV and other mass media can have a significant impact on
rural residential purchase decisions. We spent approximately $1,423,914, or 2.7%
of sales, on advertising in 2008 compared to $1,415,493, or 3.8% of sales, on
advertising in 2007.





Business
Promotion.


As a
specialty product manufacturer, technical seminars and public relations
activities are an important part for our business. We need to communicate with
our customers with regard to the company and our culture, technology, values and
services and we also invite the participation of governmental officers, who are
responsible for the development of energy, financial and tax and technology
policies, in our activities. In addition, we organize activities for various
industries for them to communicate and exchange ideas about their technologies.
Such activities help promote our company and its efforts and
products.





5





Our
Multi-Brand Strategy





In order
to position our products in different tiers of markets, we have utilized a
multi-brand approach. Our solar hot water heater brands include: “Ailiyang,” “De
Yu” and “Deli Solar.” Ailiyang is not a registered trademark. Our space heating
brands include "De Yu" and "Du Deli". Each of these brands targets a different
type of customer. We classify the brand names of the solar hot heaters into
three types: Premium, Standard, and Economy, and space heating products into two
types: Premium and Standard. Below are some of our products and related brand
names and classifications:








Our Brand Name
                    
                    ClassificationSolar Water
      HeatersDeli
      Solar
                    
                    PremiumDeYu
                    
                    StandardSpace Heating SeriesDu
      Deli
                    
                    PremiumDeYu
                    
                    Standard





We intend
to achieve the following objectives through the Multi-Brand
Strategy:


·
            to
      target different products in different tiers of the same geographical
      market;


·
            to
      eliminate agency dominance in a regional market by granting non-exclusive
      agencies to more than one distributor in a
  region;


·
            to
      create competition among agents by assigning only one specific brand of
      our products to one distributor in a sales region so that each different
      distributor will be responsible for selling a brand different from other
      distributors in the same geographical region. We periodically evaluate the
      performance of distributors in the same region, and then provide
      suggestions to help them perform better. In addition, we also encourage
      them to increase sales of our premium products;
  and


·
            to
      increase the market share of our
products.





Our
distribution and agency network




We use a
network of wholesalers, dealers and retailers to distribute our products. After
we manufacture and assemble our products, we sell them to our wholesalers,
generally located in major cities or provincial hubs, who then sell our products
on to a network of smaller distributors, or dealers, in outlying areas.
Sometimes when the dealers are closer to our warehouse, we also sell directly to
dealers to simplify the payment process and reduce transportation costs. Because
these dealers are usually developed by the wholesalers, each direct sale to a
dealer will be recorded on the account of the wholesaler who developed the
business relationship with such dealer. Our end users purchase their products
from either wholesalers or dealers, who also handle the installation and
warranty service of the systems for the end users.  We also have a
marketing department consisting of approximately 87 marketing and sales
personnel who collect feedback from our customers and other market information
for our management and our product development team. In 2009, we plan on
developing certain foreign markets, and establishing the regional sales and
service networks through cooperating with local agencies.





Our
After-Sales Services Network





We are in
the process of implementing an after-sales services network in parallel with our
national sales and distribution network. Our after-sales services are primarily
performed by our sales agents and distributors. We have begun to provide
technical training to our 300 domestic distributors in order to provide
after-sales services to our end users. The local distributors are very
enthusiastic about having the ability to provide after-sales services to the end
users, which also provides the distributors with a new source of revenue. One
additional benefit to us provided by the after-sales services network is the
ability to receive product feedback from our end users on a constant basis. We
can use this information to continuously adjust our production plans, product
designs, inventory control and marketing and sales strategies. Based on the most
current customer feedback. With respect to our export markets, we request that
our local general agents attend our training courses in China, and that when
they sell our products in their home countries, that they establish service
networks in such countries to fulfill the same service standards and policies as
ours.





6





Corporate
Organization and History





Corporate
Structure





The
following diagram sets forth our current corporate structure:











_______________________





*Neither
China Solar nor Deli Solar (BVI) has any operations or currently intend to
have any operations in the future other than acting as a holding company and
management company for Bazhou Deli Solar and Beijing Deli Solar and raising
capital for their operations.





Corporate
History





China
Solar & Clean Air





We were
formerly known as Deli Solar (USA), Inc. until October 29, 2007 when we changed
we changed our name to China Solar & Clean Energy Solutions,
Inc.   Deli Solar (USA), Inc. was formerly known as Meditech
Pharmaceuticals, Inc. (“Meditech”).  Meditech was incorporated in
Nevada on March 21, 1983.  On August 15, 2005, Meditech changed its
name from Meditech to Deli Solar (USA), Inc. and completed a one of six reverse
stock split of the common stock. On August 29, 2005 Meditech completed a
spin-off of its drug development business to East West Distributors, Inc., its
wholly owned subsidiary.





7





Bazhou
Deli Solar





Deli
Solar, founded in 1997, 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 heating
products, including coal-fired boilers for residential use. Bazhou Deli Solar
also sells component parts for its systems, and provides after-sales maintenance
and repair services.





In 2004,
Deli Solar (BVI), was organized as a limited liability company under the
International Business Companies Act of the British Virgin Islands by Mr. Deli
Du of Bazhou City, Hebei Province, PRC and others (with Mr. Du owning 80 %) as a
holding company for Bazhou Deli Solar.  On August 1, 2004, Deli Solar
(BVI) purchased all the capital stock of Bazhou Deli Solar from Messrs. Deli Du,
his brother Xiaosan Du and Xiao'er Du, for RMB 6,800,000 (approximately
$879,920). As a result of that transaction, Bazhou Deli Solar became a wholly
foreign-owned enterprise (“WFOE”) under PRC law, by virtue of its status as a
wholly-owned subsidiary of a foreign company, Deli Solar (BVI).





Reverse
Merger and Financing





On March
31, 2005, Meditech entered into a stock contribution agreement with the
shareholders of Deli Solar (BVI) under which Meditech acquired all of the issued
and outstanding shares of capital stock of Deli Solar (BVI) in exchange for the
issuance to the shareholders of Deli Solar (BVI) of 4,067,964 shares of
Meditech’s common stock. In connection with such stock contribution, we received
net proceeds of $5,748,015 from the sale of 1,642,990 shares of common stock and
warrants to a number of accredited investors in a private placement (adjusted to
give effect to the one-for-six reverse stock split of the common stock, which
became effective on August 15, 2005).





As a
result of foregoing transactions, the former shareholders of Deli Solar (BVI)
(including Mr. Du) became holders of a majority of the common stock of Meditech
and Deli Solar (BVI) became a wholly owned subsidiary of Meditech. Following (i)
Mr. Du's purchase of the 56,259 shares from a third party for $500,000, (ii) the
issuance to him of the additional 3,254,371 shares in exchange for his 80% of
the outstanding shares of Deli Solar (BVI) and (iii) the simultaneous issuance
by us of an additional 1,642,990 shares to accredited investors in the private
placement, Mr. Du became the owner of 57% of our issued and outstanding common
stock.





Beijing
Deli Solar





During
the quarter ended June 30, 2006, we established a new wholly owned subsidiary,
Beijing Deli Solar to further develop our business in Beijing. We contributed $1
million into Beijing Deli Solar for its registered capital.  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.





Tianjin Huaneng





Tianjin
Huaneng, incorporated in 1987, manufactures and installs waste heat recovery
systems.  Tianjin Huaneng’s products are sold in more than 28
provinces in the PRC as well as Singapore, Indonesia, and North Korea. Tianjin
Huaneng was a state-owned enterprise with 51% of its equity formerly-owned by
Tianjin Municipal Ji County State-owned Assets Administration Commission
(“SAAC”) and 49% owned by the employees.  On May 18, 2007, Beijing
Deli Solar entered into an agreement with SAAC to purchase 51% of the equity
interests in Tianjin Huaneng for a purchase price of RMB24,100,000
(approximately $3.1 million). The transaction closed on July 1, 2007 and we paid
approximately $1,575,600 in July 2007. By supplemental agreement between the
parties dated August 8, 2007, the purchase price was reduced to approximately
$1,689,741. However in addition to the purchase price we are required to pay a
finder’s fee of approximately $769,418.  In addition, Beijing Deli
Solar assumed 51% of the liabilities of Tianjin Huaneng and contributed
RMB20,000,000 (approximately $2.6 million) as working capital to Tianjin
Huaneng. Beijing Deli Solar also agreed to employ the 550 current Tianjin
Huaneng employees pursuant to new three year employment contracts.





8





On
October 27, 2008, Beijing Deli Solar entered into an agreement to acquire
approximately 29.97% of the outstanding equity interest of Tianjin Huaneng, from
the minority shareholders of Tianjin Huaneng for a cash purchase price of RMB
10.68 million (approximately $1.5 million).  In addition, we agreed to
issue to the Tianjin Huaneng shareholders a total of 1,000,000 five year
warrants to purchase our common stock at an exercise price of $1.10 per
share.  We also agreed to increase its equity interest in Tianjin
Huaneng by contributing an additional RMB 15,740,000 (approximately $2.3
million) to the registered capital of Tianjin Huaneng.  As a result of
the consummation of the agreement and the additional capital contribution, we
now own approximately 91.82% of the equity interest in Tianjin
Huaneng.





Tianjin
is a city in the PRC which is approximately 50 miles from Beijing and has a
population of approximately 10.24 million (as of December 31, 2004), and is one
of only four municipal cities directly governed by the central government in
China.





Shenzhen
PengSangPu Solar Industrial Products Corporation





SZPSP,
incorporated in1993, is principally engaged in the resale of energy-saving
heating products such as heat pipes, heat exchangers, pressure water boilers,
solar energy water heaters and radiators.  SZPSP is also operating a
distribution facility in Shenzhen, PRC.  On March 31, 2008 Beijing
Deli Solar acquired 100% of the outstanding equity interests of SZPSP from its
three shareholders for an aggregate purchase price of RMB 28,800,000
(approximately $4 million) in cash, 1,419,729 shares of our common stock, and
five year warrants to purchase 141,973 shares of common stock at an exercise
price of $2.50 per share (subject to adjustment).  Beijing Deli Solar
has the right to elect a majority of the board members of SZPSP. The three
shareholders agreed to loan the cash purchase price back to the Beijing Deli
Solar to be used as working capital. Fifty (50%) of the principal amount of this
loan was required to be repaid within one year and the remaining balance is
required to be repaid within two years.  In addition to the payment of
the cash purchase price, we paid RMB 20 million for SZPSP’s trademarks and other
intangible assets which was paid by the issuance of 1,419,729 shares of our
common stock. We agreed that if on the first anniversary of the closing our
common stock price is lower than the share price ($2), we will pay the
difference.





SZPSP
warranted that if (i) for the year ended December 31, 2008 its sales revenues
are less than RMB 99 million (approximately $13,670,068) or its after-tax net
profits are less than RMB 9.43 million (approximately $1,302,108) or (ii) for
the year ended December 31, 2009, sales revenues are less than RMB 143.9 million
(approximately $19,868,336) or its after-tax net profits are less than RMB 12.13
million (approximately $1,674,789), SZPSP will pay the difference between the
revenue and the targeted revenue of the year specified 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.





Executive
Offices





Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is 10-63850516.





Products





Solar
Water Heater Products





Our solar
water heaters are primarily used to generate hot water for residential
use.  We manufacture two types of solar hot water heaters: evacuated
tubular solar water heaters and flat plate solar water heaters. There are two
major types of evacuated tubular solar water heaters: standard evacuated tubular
solar water heaters and evacuated heat pipe solar water
heaters.  Approximately 47 % of our total revenues for 2008 were
derived from sales of our solar water heaters stayed the same percentage
compared to 47% of our total revenues for 2007.





Solar
water heaters use sunlight to heat either water or a heat-transfer fluid in
collectors. The solar collector is mounted on or near a house facing south. As
sunlight passes through the collector's glazing, it strikes an absorbing
material. This material converts sunlight into heat, and the glazing prevents
the heat from escaping. The two most common types of solar collectors used in
solar water heaters in the PRC market are evacuated tube collectors and glazed
flat plates. Solar-heated water is stored in an insulated tank until use. Hot
water is drawn off the tank when tap water is used, and cold make-up water
enters at the bottom of the tank. Solar water heaters tend to have a slightly
larger hot water storage capacity than conventional water heaters. This is
because solar heat is available only during the day and sufficient hot water
must be collected to meet evening and morning requirements.





9





Heat Pipe Related
Products





We also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, and
radiators.  These products are used primarily in manufacturing
facilities in which the manufacturing processes require the generation of large
amounts of heat, such as steel and chemical plants. The waste heat can be used
to generate hot water at the manufacturing facilities.  Sales of these
products and systems comprised approximately 31 % of our total sales revenues in
2008 compared to 19% of our total revenues for 2007.





Boilers
and Space Heating Products




We also
manufacture boilers, furnaces, stove heating, and space heating products, Most
of our boilers and space heating products are coal-fired, small scale units for
residential space heating and cooking.





We
manufacture more than 80 types of boilers, furnaces, space heating and stove
cooking products. Separated by functions and use, our boilers, furnaces and
stove heating products can be divided into three types: (i) combined cooking and
space heating, comprising approximately 60% of our sales of boilers and space
heating products, (ii) combined shower and space heating, comprising
approximately 10% of our sales of boiler and space heating products, and (iii)
multifunctional shower, cooking and space heating, comprising approximately 30%
of our sales of boilers and space heating products.





We have
also developed two environmentally friendly boilers: smokeless coal-fired
boilers and bio-materials furnaces. The former does not produce smoke and the
latter utilizes waste materials such as dry hay to generate heat. The
development of these products has been completed and we have sent samples of
these products to our distributors. As of the date of this report we have not
made significant sales of these environmentally friendly new
products.





Integrated
Solar HeatingPackages




A number
of our products are being used in complete building integrated solar heating
packages, which integrate our solar hot water and space heating systems directly
into the construction of new multi-family dwellings, commercial office buildings
and industrial developments. In September 2008, we signed a contract to be the
sole supplier of solar water-heating systems to the Overseas Chinese Village in
Shenzhen City (the” Village”). The Overseas Chinese Village is a residential
community for overseas Chinese in Shenzhen. It spans over 125 acres and contains
a total of 22 high-rise buildings. The Village is believed to be the largest
residential project in China to rely completely on solar-heated water. We will
be supplying and installing its state-of-the-art solar water-heating systems
throughout the residential area. The contract is valued at approximately $3.5
million.





Waste Heat Recovery Systems
and Energy-SavingIndustrial
Kilns





Tianjin
Huaneng has twenty-years experience in waste heat recovery. Its waste heat
recovery systems and energy-saving heating products have excellent reputations
in the marketplace and have a loyal customer following in the chemical and
metallurgic fields. Based upon Tianjin Huaneng’s technical strength and
production capacity, we plan on revising its operational procedures and
modifying its technologies to increase its production capacity and reduce its
operating costs. In addition, we prepare to cooperate with the prestigious
domestic industrial design institutions to increase the production capacity of
energy-saving industrial kilns in 2009.





New Product
Pipeline




We have
the following products in the product planning and developing
stage:





10




Photovoltaic powered water
heaters. We are in the process of improving the physical performance of
photovoltaic powered water heaters. Photovoltaic technology (PV) is a technology
that converts solar energy into electricity. Photovoltaic modules or panels are
made of semiconductors that allow sunlight to be converted directly into
electricity. These modules can provide customers with a safe, reliable,
maintenance-free and environmentally friendly source of power for a very long
time. This system consists of a photovoltaic array connected to several
resistive heating elements within a water storage tank. The PV array produces
electrical power during periods of solar irradiation and this power is
immediately dissipated in the resistive elements.  We believe that the
following factors make photovoltaic powered water heaters an attractive addition
to our existing product line:




·
            severe
      electricity shortages for the PRC's grid-connected
    residents,


·
            the
      complete absence of grid electricity for millions of others and the poor
      prospect of improvement via incremental central station capacity and grid
      development in the near future, and


·
            The
      abundance of solar energy resource in the PRC and an active rural banking
      system.




Our sales
of photovoltaic powered water heaters have not been significant thus
far.




Densely Covered Regular Tubular
Heaters. We have developed a new solar water heater which is designed
with densely covered evacuated tubes to improve heating efficiency with only a
small cost increase. As an updated regular evacuated tubular heater, this
product installs more tubes in one square meter than normal products do. For
instance, it has ten tubes on one collector while others only have eight.





Manufacturing




Process, Cost, and
Capacity





Bazhou
Deli Solar assembles and manufactures most of its products in its own production
facility in Bazhou. Tianjin Huaneng assembles and manufactures most of its
products in its own production facility in Tianjin. SZPSP assembles and
manufactures most of its products in its own production facility in Shenzhen.
Our senior manufacturing personnel include a number of professional engineers
and senior technology consultants. Bazhou Deli Solar utilizes an automated
production line for the manufacture of water tanks, while our other products are
manufactured utilizing manual labor.





Set forth
below is certain information regarding our current manufacturing
capacity:





Current
Manufacturing Capacity





Daily Unit No.
                  
                  
                  Annual Unit No.)Solar
      Water Heaters
                  
                  
                  500
                  
                  
                  
                  133,000Boilers
      and Space Heating Products
                  
                  
                  120
                  
                  
                  
                  26,000Biomass
      Stove
                  
                  
                  100
                  
                  
                  
                  21,700





Raw Materials and Principal
Suppliers




The
primary raw materials for manufacturing our products are stainless steel plate,
vacuum tubes, iron and regular steel plate. These raw materials are generally
available on the market and Bazhou Deli Solar has not experienced any raw
material shortage in the past. Because of the general availability of these raw
materials, it has not been our standard practice to enter into long-term
contracts or arrangements with most of our raw materials suppliers. We believe
that this gives us the flexibility to select the most suitable suppliers based
on product quality and price terms provided by suppliers each year. We generally
have at least three suppliers that are pre-approved for each raw material
supply. However, this arrangement does not provide any guarantee that necessary
raw materials will continue to be available at prices or delivery terms
acceptable to us.





11




During
the past three years, we have purchased stainless steel plate primarily from
Lingyi Co. in Shandong Province. Our three principal suppliers of vacuum tubes
have been Shangdong Taian Co., Beijing Linuo Co. and Beijing Tianpu Co. Our
principal supplier of steel and iron plate has been the local market in Bazhou
City, where Bazhou Deli Solar is located, which has approximately 100 steel
suppliers. We do not rely on any particular suppliers to procure other raw
materials.





Quality
Control





Our
manufacturing processes follow strict guidelines and standard operating
procedures that we believe are compliant with ISO 14000. Our products are
routinely tested as are individual aspects of our production. Bazhou Deli Solar
is in the process of applying for ISO 14000 certification and anticipates that
the certification will be issued by the end of 2008.   SZPSP has
been issued ISO9001: 2000 certification.





Because
of our stringent quality control system, most of our products are certified by
governmental quality control testing centers, such as the Institute of China
Product Quality Association, Hebei Province New Energy Products and Projects
Quality Control and Testing Center, and Beijing Technology Supervisory Bureau.
We also received awards from Hebei Province Consumers Organization and Hebei
Province Administration of Industry and Commerce, as well as endorsement from
the China Rural Areas Energy Industry Association. The following table sets
forth the brands of our products that are certified by Beijing Technology
Supervisory Bureau to have met the National Industry Standard NY-T 343-1998,
which is the testing standard for solar hot water heaters' thermal
power:





Brands
            
            Products
            
            Model NumbersDeli
      Solar Brand
            
            
            Solar
      Water Heaters
            
            
            DLYG-12/75Ailiyang
      Brand
            
            
            Solar
      Water Heaters
            
            
            ALY-12/75Dudeli
      Brand
            
            
            Solar
      Water Heaters
            
            
            DDL-12/75Deyu
      Brand
            
            
            Solar
      Water Heaters
            
            
            DY-12/75





Original Equipment
Manufacturer (OEM) Arrangement





During
the peak season when our production capacity falls short of the market demand,
we assemble and manufacture products through OEM arrangements. Under a typical
OEM arrangement, we authorize an OEM to manufacture products under our brand
names and/or trademarks. We achieve quality control over products manufactured
under such OEM arrangement by sending our technicians on site to supervise the
production and test the products. During fiscal year 2007, we contracted with
two OEMs, Shandong Xin Xing Solar Power Heater Co., Ltd. and Lian Yun Gang Solar
Power Heating Co Ltd.





Manufacturing
through OEM arrangements comprises approximately 30% to 40% of our total sales
during the peak season. For 2007, the two OEM generated an aggregate of 40% of
our annual revenues. The OEM manufacturers typically receive approximately 1% of
the gross sales from the products they manufacture for us. Most of the OEM
manufacturers we select are located near areas where products are demanded,
thereby minimizing transportation costs.





12





Demand for Our
Products





The
majority of the demand for our solar water heaters and space heaters is from
residential households in the PRC, particularly in rural areas. Presently, we
sell our solar water heaters and space heaters primarily in the rural areas of
the north-east part of the PRC including Hebei, Beijing, Tianjin, Heilongjiang,
and Liaoning, where there is prolonged sunny and dry weather.





We
believe the rural residential market has additional growth potential because it
is an emerging market where we have encountered relatively little competition.
Historically, the PRC's rural households have used primitive means of generating
hot water and space heating by using biomass, local agricultural wastes, and/or
kerosene. As the PRC's rural population has been earning incremental
discretionary income in recent years, modern hot water and space heating systems
have become increasingly affordable and a priority for discretionary
spending.





Due to
the national policies for saving energy and reducing the emission of pollutants,
as well as the fundamental needs for manufacturing enterprises to efficiently
utilize energy and reduce production costs, there remains a strong demand for
our waste heat recovery systems and energy-saving heating products in the
near term. Tianjin Huaneng will primarily be responsible for the production
of energy conservation and waste heat recycling products. However, non-polluting
production technology products will gradually replace the currently adopted
low-end technology in the industrial market. The product line of Tianjin Huaneng
will also gradually turn into the design and production of energy-saving
industrial kilns.





Seasonality of
Business





Our sales
fluctuate, reflecting seasonal variations in solar energy supply during the four
seasons.  We have higher sales of solar hot water products in the
spring because solar hot water heaters perform the best during the summer when
solar energy is abundant. High sales volumes for coal boilers occur in the fall
because customers purchase our space heating products for the winter. Sales
volumes for our products tend to be lower between January and March.


Our Product
Warranty





We
provide a three-year standard warranty to our end users for all of the products
we manufacture. Under this standard warranty program, we provide free repair and
exchange of component parts in the first year following the purchase, and we
charge labor costs for repair and maintenance but provide free exchange of
component parts in the second and third years following the purchase.
Thereafter, end users are required to pay for any repair and maintenance
services, as well as exchange of component parts. 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. According to the
standard terms of our agreementwith sales agents, we
allow our sales agents and distributors to return any defective product for
exchange.





Distribution





The PRC
is a vast country geographically and the market for our products covers many
regions. To penetrate the market effectively, especially the less-developed
rural areas, we have established a vast distribution and sales network that
includes approximately 800 distributors and wholesalers and approximately 2,001
local appliance retailers covering 26 provinces in China, with a focus on the
northern PRC area, north-eastern PRC area, Beijing metropolitan area, and
Tianjin metropolitan area. The northern PRC area includes Hebei Province, Henan
Province, Shandong Province, Shanxi Province, and An'hui Province. The
north-eastern PRC area includes Liaoning Province and Heilongjiang
Province.   Sales to these areas consist of approximately 70% of
our total sales revenues. We believe that our comprehensive distribution and
sales network enables us to efficiently service the rural communities without
having to rely on any particular agent or distributor for our sales. In the past
five years, no single agent or distributor has generated more than 5% of our
total annual sales.





13





We are
able to attract a large number of distributors, sales agents, and retailers for
the following reasons:





·
            We
      produce both solar hot water heaters and boilers, while the majority of
      manufacturers in the PRC normally produce only one type of product. Sales
      of solar hot water heaters and boilers are both affected by seasonality.
      Since our solar hot water heaters are in high demand in the spring and
      boilers are in high demand in the fall, the combined production of solar
      hot water heaters and boilers allows us to provide our distributors,
      wholesalers and retailers with salable products throughout the
      year.





·
            We
      carefully select our distributors and provide support to them. Our
      contracts with our wholesalers and distributors normally have a three- to
      five-year term. While most of our agency and distributor contracts are
      non-exclusive, we are seeking to establish exclusive distribution
      relationships with some strong distributors. We require new sales agents
      to deposit a significant amount of cash as a down payment towards the
      purchase of our systems. We consider the following factors in our
      selection of a new distributor or wholesaler: (i) local solar energy
      status and market potential; (ii) local competition; (iii) sales and
      market potential in the covered area; (iv) presence of alternatives, such
      as gas or electricity; and (iv) credibility of the
      candidate.  For each candidate we select, we enter into an
      agency contract with it, under which we provide warranty cards, product
      testing certificates, product brochures, and other promotional materials.
      In addition, we help them design store logos and show rooms, provide them
      with uniforms, and assist them to make marketing
  plans.





Research
and Development Activities




Currently,
we have a R&D team of three full time members and part time research
assistants. Our senior engineer members include: Luo Yunjun, who also serves as
the chairman of Beijing Solar Industry Association, and Hao Fangzhou, who also
serves as the chairman of the Chinese Economic Boiler Association.




In
February 2006, we executed a non binding Cooperation Memorandum (the “Memo”)
with the Key Laboratory of Heat Transmission and Energy Saving Education of
Beijing University of Industry (“BUI”) in February 2006 for cooperation on
research and development of renewable energy technologies. The Memo sets forth a
general cooperation framework between the two parties: we make available funding
for certain renewable energy research and development projects undertaken by
BUI. Further details of each party’s rights and obligations will be on a project
by project basis with specific agreements. To date we have not incurred any
expenses under this arrangement.





Intellectual
Property




Trademarks





Bazhou
Deli Solar is the holder of the following trademarks registered with the
Trademark Offices of the PRC National Industrial and Commerce Administrative
Bureau (the “PRC Trademark Offices”):





Trademark
                                        
                                        Authorized Scope
                                        
                                        Valid Term
                                        
                                        Certificate NumberDeli
      Solar
                                        
                                        
                                        Boiler
      (Space Heating Utility);
                                        
                                        
                                        03/14/2003
                                        
                                        
                                        to
      1978396Solar
      Hot Water Utility;
                                        
                                        
                                        03/13/2013Solar
      Stove and Solar EnergyCollection
      HeaterDu
      Deli
                                        
                                        
                                        The
      same as the above
                                        
                                        
                                        01/28/2003
                                        
                                        
                                        to
      197853201/27/2013De
      Yu
                                        
                                        
                                        Solar
      Energy Collection Heat
                                        
                                        
                                        07/28/1998
                                        
                                        
                                        to
      1195609and
      Boiler (Not machine accessory)
                                        
                                        
                                        07/27/2008Aili
      Solar (to replace our brand “Ailiyang”)
                                        
                                        Approved,
      pending the trademark certificate
delivery




14




A
registered trademark is protected for a term of ten years, renewable for another
term of ten years under the trademark law of the PRC, so long as an application
for renewal is submitted to the PRC Trademark Offices within six months prior to
the expiration of the initial term.




Patents





SZPSP has
obtained the following patents in the PRC for its unique solar energy selective
absorbing coat and manufacturing technology:





Authorized Scope
                
                Valid Term
                
                Certificate NumberCold
      water recovery system in solar heating
                
                
                2015
                
                
                ZL200620016815XRecycle
      Heating Product in different temperature system
                
                
                n/a
                
                
                Application
                  submitted
      7/4/06 UPDATE




Domain
names





We own
and operate a website under the internet domain name http://www.delisolar.com
.. Traffic to our other internet domain names www.AiLiYang.com are directed to
that website. SZPSP owns and operates a website under the internet domain name
http://www.szpsp.com
..





Logos





Our brand
logos are the following:








15





Industry





The PRC's Economic Growth,
Energy Shortage and Renewable Energy Policy




The rapid
economic growth of the PRC in recent years has fueled a massive demand for coal,
oil and gas, which has caused a depletion in the country’s coal and oil reserves
and a resulting shortage in supply, as well as serious environmental problems.
Recognizing that accelerating the country's transition to efficient and
renewable energy would ease this depletion and the environmental concerns, the
National People's Congress, the PRC's parliament, passed the China Renewable
Energy Promotion Act, which became effective on January 1, 2006. The Act aims to
promote the use of renewable energy as an alternative source of energy to the
more polluting fuels. Renewable energy currently accounts for a negligible
percentage of the country’s total energy supply. The Act, however, does not
provide for any incentive schemes for purchasers.




Urban and Rural Market
Segmentation for Hot Water and Space Heating Systems in
China




Recently
the market for hot water and space heating systems in the PRC has shown
substantial growth. According to a research conducted by the China Hardware
Products Association and the China Information Center in 2002, only 71.5% of
urban households had modern hot water systems. We do not know the number of
rural households that currently have hot water systems but believe that it
significantly less due to the fact that modern hot water and heating
systems have still not become available to and are not affordable in many
households in the country. Only recently have some of these households started
to earn the disposable income required to purchase the hot water and space
heating systems.







In the
rural areas of the PRC the infrastructure is insufficient to facilitate delivery
of conventional energy solutions that are available in more developed countries.
The infrastructure to deliver natural gas or propane, two of the most common
energy sources used in the United States, for example, are not well developed in
the PRC, even in larger cities. As to electrical energy, while it has become
more available in the urban areas of the PRC, it remains much less available in
rural areas. Large portions of the PRC's rural areas are not electrified or
connected to the electric grid and approximately 60% of rural communities that
are grid-connected experience serious shortages of electricity. According to the
National Renewable Energy Laboratories Eleven rural counties with a population
of approximately 70 million have no electricity at all.  In addition,
the cost of electricity is high in many rural areas, making it impractical for
hot water and space heating purposes.




We
believe that in most provinces of the PRC, solar-generated hot water for rural
home use is the most available and economical solution. Compared with
electricity, natural gas or propane, we believe that solar hot water is more
available, less expensive and more suitable to rural household needs as shown in
the following table.




Cost
Economics of Solar Water Heaters




(in $USD)
                
                Solar
                
                Gas
                
                ElectricInitial
      Equipment Cost
                
                
                241
                
                120
                
                
                72Engineering
      Life (Years)
                
                
                15
                
                6
                
                
                5Equipment
      Cost (15 years)
                
                
                241
                
                300
                
                
                216Annual
      Additional Energy Cost
                
                
                0
                
                98
                
                
                81Total
      Operating Cost (15 years)
                
                
                241
                
                1,770
                
                
                1,431




Projected Growth of Solar
Hot Water Industry




The PRC
solar hot water industry is an emerging, but fast growing industry. It has
experienced an annual growth rate of approximately 30% since 1999 as measured by
the square meters of systems installed. The Solar Energy Usage Commission of the
PRC Rural Energy Industry Association and the PRC Renewable Energy Industries
Association project such growth to continue at an annual average rate of 27.36%
until 2015 as shown in the following table:





16





Annual Sales1999
      A
                    
                    5.0 million m(2)2000
      A
                    
                    6.0 million m(2)2001
      A
                    
                    8.0 million m(2)2002
      A
                    
                    10.0 million m(2)2003
      A
                    
                    12.0 million m(2)2004
      A
                    
                    16.2 million m(2)2015
      F
                    
                    232.0 million m(2)





A =
actual. F = forecast. Source: China Solar Hot Water
Industries Development and Research Report (2001-2003), jointly published by the
solar energy association and commission described above.





The
market prospects for the solar energy industry has been recognized by more
and more countries, businesses and financial sector.Many developed countries and regions
have to develop photovoltaic development plan. By 2010, the United States plans to
install 4.6GW, the EU plans to install 3.7GW, Japan plans to install 5GW, and
other developing countries plan to install 1.5GW, with the world’s accumulated installation expected to
be 14-15GW with anticipated sales revenue of US $30 billion dollars. According to
long-term renewable energy development planning by 2010, China's solar
photovoltaic will reach a total capacity of 400MW and 2020, it is
expected to reach 2200MW.




Similarly, solar water heaters market
will become more mature. According to the Chinese Solar Energy Society by 2010,
Chinese solar water heater production will reach 30 million square
meters,  keeping volume will reach 150 million square meters, a thousand people have
109 square meters to share, and by 2020, it is predicted that production will
reach 45 million square meters, keeping volume will reache 300 million
square meters, a thousand people will have 210 square
meters.




Because
of the rapid growth in solar hot water industry, solar hot water heaters have
become one of the three major hot water sources along with gas-fired heaters and
electric heaters for PRC households and the PRC has become the world's largest
producer and consumer of solar hot water heaters.





Boiler and Space Heating
Industry




The PRC
space heating industry is not new, but the modern systems that we sell are new
for our customers. While many rural PRC households have considered hot water a
luxury, heat generating facilities for cooking and space heating purposes in one
form or another are considered basic necessities. These heat generating
facilities are generally extremely primitive and inefficient, and usually
consist of hearths and biomass stoves, which are dirty, unsafe and difficult to
handle with respect to fuel. As many rural households have started to earn
disposable income in recent years, many of them can afford to modernize their
cooking and space heating facilities by using coal-fired boilers, which have
become one of the principal means for such modernization among the PRC rural
households.


17




Competition




The solar
hot water market in the PRC is highly fragmented. According to statistics from
the Chinese Energy Research Association, there are currently over 3,500 solar
hot water heater manufacturers producing products under more than 3,000 brands.
The top 51 companies have, on average, over 10 million RMB in sales
(approximately $1.2 million), with the top ten companies together controlling
17% of the domestic market.





We
believe our success lies in our quality control, brand recognition strategy,
comprehensive distribution network and advertising.





Government
Regulation




We are
not subject to any requirements for governmental permits or approvals or any
self regulatory professional associations for the manufacture and sale of solar
hot water heaters. We are required to obtain a production approval from the
Quality and Technology Supervisory and Control Bureau at the provincial level
for the manufacture and sale of boilers and space heating products. Bazhou Deli
Solar obtained the approval to manufacture, install and repair small and regular
size pressure boilers and space heating products from Hebei Provincial Quality
and Technology Supervisory and Control Bureau on August 28, 2002 effective for
five years. We are currently in the process of renewing the certificate. Other
than the foregoing, Bazhou Deli Solar is not subject to any other significant
government regulation of its business or production, or any other government
permits or approval requirements, except for the laws and regulations of general
applicability for corporations formed under the laws of the PRC.  We
are not aware of any PRC environmental law which affects the production or sale
of our products.





Employees





As of
December 31, 2008 we had approximately 768 full time employees and 220 part time
employees.




Bazhou
Deli Solar requires each employee to enter into a one-year standard employment
agreement. Tianjin employees have three year agreements. The standard employment
agreement contains a confidentiality clause and a covenant-not-to-compete
clause, under which an employee must keep confidential all manufacturing
technology including drawings and other technology materials, sales and
financial information, and trade secrets obtained through his or her employment
with us. Breach of this confidentiality clause will result in termination of
employment. Further, each employee may not compete against us for a certain
period of time following the termination of employment with us. We purchase
group workers' compensation policy on behalf of our employees, and the premium
is deducted from each employee's paycheck.





Risk
of Loss and Product Liability Insurance




Delivery
of our products can be arranged by our sales agents and distributors, or by us.
In the latter case, we deliver our products primarily through trucks,
supplemented with trains and cargo ships. Our standard agency contract generally
requires our sales agents to pay for the transportation cost. Although the
agency contract has not specifically provided for the issue of risk of loss, our
customary practice is that sales agents bear the risk of loss in shipping and
purchase shipping insurance at their expense.




We
currently do not carry any product liability or other similar insurance, nor do
we have property insurance covering our plants, manufacturing equipment and
office buildings. While product liability lawsuits in the PRC are rare and
Bazhou Deli Solar has never experienced significant failures of its products, we
cannot assure you that Bazhou Deli Solar would not face liability in the event
of any failure of any of its products. We plan to purchase property insurance to
cover our manufacturing plants, equipment and office buildings by the end of the
second quarter of 2008.





18





ITEM
      1A.
            RISK
      FACTORS





Not
applicable to smaller reporting companies.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS





None.





ITEM
      2.
            PROPERTIES




All land
in the PRC is owned by the government and cannot be sold to any individual or
entity. Instead, the government grants landholders a "land use right." The
following are the details regarding our land use rights with regard to the two
pieces of land that we use in our business. The land use rights owned by Deli
Du, our Chief Executive Officer, President and Director, were transferred to us
in October 2005 for a price of RMB20,000 (approximately $2,588). The application
for the change of the land use right certificate for this piece of land was
submitted to Bazhou City National Land Resources Bureau on January 16, 2006.
Once the application is approved, the registered holder for this land will be
Bazhou Deli Solar As of October 11, 2007, the application has not yet been
approved and the registered holder is still Mr. Du.





Bazhou
Deli Solar’s factory facilities are located outside of the city of Bazhou in the
Hebei Province of the PRC.  Bazhou Deli Solar utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse, and
office space and space for use as a distribution center and an approximately
2,000 square meters of office space and exhibition center in
Beijing.





Bazhou
Deli Solar built a new facility in 2008 with area 9,900 square meters. Total construction
costs were$2,926,287of which $2,926,287was paid in fiscal
2008.





Tianjin
Huaneng’s factory facilities are located outside of the Tianjin municipalities
of the PRC.  Tianjin Huaneng’s utilizes one factory in Tianjin with over
51,000 square meters of production, warehouse, and office space and space for
use as a distribution center.





Tianjin
Huaneng built a new facility with over 7,500 square meters in March,
2008, which commenced operations in November, 2008. Total construction
costs were $1,141,252  of
which $1,141,252 was paid in fiscal 2008.





SZPSP’s
factory facilities are located outside of the city of Shenzhen in the Guangdong
Province of the PRC. SZPSP utilizes two factories in Shenzhen with a total
of over 2,000 square meters of production, warehouse, and office space and space
for use as a distribution center.





On March 17, 2006, Bazhou Deli Solar
entered into an agreement with the local government to acquire land use rights
of a land of 61,530 square meters at the price of approximately $919,858. This
piece of land is close to the present Bazhou factory and is used to enlarge the
present manufacturing base at Bazhou City. The land use right has been approved
by the local government after payment of approximately $919,858. An official
certificate evidencing the land lease has not yet been delivered from the
government to us.





19




Registered
                            Holder
                          
                          Location &
                            Deed Number
                          
                          Usage and
                            Nature
                          
                          Square
                            meters
                          
                          Construction/building
                            on the land
                          
                          Term of use
                            right
                          
                          Transfer priceDeli
      Solar (Bazhou)
                          
                          Bazhou,
      Ningnan Village; #98060026
                          
                          Industrial
      Transferred Land
                          
                          10,244.05
      Sq. M
                          
                          Plant,
      warehouses, accessories room, convention center
                          
                          50
      years (from March 25, 1998 to March 25, 2048
                          
                          RMB
      615,000
                            (approximately
      $79,581) was paid to the Langfang Municipal Land Administration Bureau,
      plus annual land use fee of RMB 5122 (approximately $
    662.79)Mr.
      Deli Du
                          
                          Eighty
      kilometers from
                            Bazhou
      Jingbao Road North; #20010700405
                          
                          Office
      space for Deli Solar
                            Bazhou
      Granted Land
                          
                          816
      Sq. M
                          
                          Office
      building, accessories room
                          
                          50
      years (from June 11, 2001 to June 3, 2051
                          
                          RMB
      20,000 (approximately $ 2,588) was paid to the Langfang Municipal Land
      Administration BureauDeli
      Solar (Bazhou)
                          
                          Close
      to Bazhou Jingbao Road
                          
                          Factory
      Facilities
                          
                          61,530
      Sq. M
                          
                          Factory
      facilities
                          
                          Pending
      the Land Use Right Certificate
                          
                          approximately
      $919,858 was paid to Bazhou local governmentTianjin
      Huaneng
                            Group
      Energy Equipment
                            Co.
      Ltd.
                          
                          No.
      119 Yuyang South Road
                            Ji
      County, Tianjin
                          
                          Factory
                          
                          51,000
      Sq. M
                          
                          
                          
                          50
      years from September 2004 to September 2054
                          
                          Approximately
      528,000 was paid to Ji countyTotal
                          
                          
                          
                          
                          
                          72,590.05
      Sq. M




We lease
19,140 square meters of land (“Leased Land”) from Bazhou County Credit Union
Lianshe Branch (“Credit Union”) for an office building pursuant to a 20 year
renewal lease at an annual rent of RMB 120,000 (approximately $15,528) which
commenced on May 1, 2003. The lease is automatically renewable for another 20
year term subject to terms to be negotiated at the expiration of the first
20-year term. We are retaining a majority of the building's usable space for our
business and seeking to sublease the rest to parties with business related to
ours such as our sales agents, distributors, accessory parts dealers, and
after-sales service agents. We also constructed a business center on the Leased
Land. The business center is to be used for show rooms, retail stores, and a
distribution center for solar related products and space heating
products.





We lease
our Beijing office facility of approximately 2,000 square meters at No. 28,
Fengtai Bei Road, Fengtai District from Beijing Dajiangxia Technology and Trade
Co., Ltd. pursuant to a renewable lease commencing October 1, 2005 to August 8,
2011 for an annual rent of RMB370, 000 (approximately $47,878) for the first
year and RMB400, 000 (approximately $ 51,760) for the second year, and the
following years pending a possible increase. We paid annual rent of RMB 400,000
in 2008.





ITEM
      3.
            LEGAL
      PROCEEDINGS





Neither
we nor any of our subsidiaries is a party to any pending legal
proceedings.





20





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





There was
no matter submitted to a vote of our securities holders during the fourth
quarter of 2008 through the solicitation of proxies or otherwise.





21





PART II





ITEM
      5.
            MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
      EQUITY SECURITIES.





Market
Information





Our
common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol “CSOL.OB”. There has never been any established public market for
shares of our common stock.  The following table sets forth the high
and low bid prices, in the over-the-counter market, as reported and summarized
by the OTCBB, for each fiscal quarter during each of the fiscal years ended
December 31, 2008 and December 31, 2007. These prices are based on inter-dealer
prices, without retail markup, markdown or omissions and may not represent
actual transactions.




High
                    
                    LowYear
      Ended December 31, 200803/31/2008
                    
                    
                    3.70
                    
                    1.5006/30/2008
                    
                    
                    2.36
                    
                    1.3609/30/2008
                    
                    
                    1.65
                    
                    1.0512/31/2008Year Ended
      December 31, 200703/31/2007
                    
                    
                    3.73
                    
                    3.5006/30/2007
                    
                    
                    2.60
                    
                    1.8109/30/2007
                    
                    
                    3.45
                    
                    1.7512/31/2007
                    
                    
                    4.50
                    
                    2.40




On April
12, 2009, the last reported sale price of our common stock was $0.62 per
share.




Since the
completion of the reverse merger, our common stock has traded sporadically and
with high volatility. Consequently, our historical prices may not be an accurate
indication of the future prices of our common stock.




Holders





As of
April 14, 2009, there were 16,173,016 shares of our common stock issued and
outstanding, and there were approximately 2,518 holders of record of our
outstanding shares of common stock. This does not reflect the number of persons
or entities who held stock in nominee or "street" name through various brokerage
firms.





Dividends





We have
never declared or paid any cash dividends on our common stock. The payment of
dividends, if any, is at the discretion of the Board of Directors and is
contingent on the Company's revenues and earnings, capital requirements,
financial conditions and the ability of our PRC based operating subsidiaries
Bazhou Deli Solar and Beijing Deli Solar (Beijing) to obtain approval to send
monies out of the PRC. In
addition, under the terms of the certificate of designation which was filed in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.We currently intend to retain
all earnings, if any, for use in business operations. Accordingly, we do not
anticipate declaring any dividends in the near future.





The PRC's
national currency, the Yuan, is not a freely convertible currency. The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
Shortages in the availability of foreign currency may restrict our ability to
remit sufficient foreign currency to pay dividends.





22




Securities
Authorized for Issuance Under Equity Compensation Plans.





We
currently do not have any equity compensation plans.




Recent
Sales of Unregistered Securities; Use of Proceeds from Unregistered
Securities.





February
2008 Private Placement




On
February 25, 2008 we raised gross proceeds of approximately $11,300,000 in a
private placement providing for the sale to certain institutional investors of
4,691,499 shares of common stock at a price of $2.40 per share. The net proceeds
to us from that transaction were $9,995,156.51. The net proceeds are to be used
for acquisitions, building new plant to increase the capacity and for general
working capital. The shares were not registered under the Securities Act of
1933, as amended, in reliance on the exemption from registration provided in
Section 4(2) of the Act and Regulation D promulgated thereunder.





June
2007 Private Placement




On June
13, 2007 we raised net proceeds of $2,581,000 in a private placement providing
for the sale for an aggregate purchase price of $2,750,000 (or $1.55 per share)
of




(i)
            1,774,194
      shares of Series A Preferred Stock (with each share convertible into one
      (1) share of common stock, subject to
  adjustment)





(ii)
            five
      year class A warrants to purchase 1,774,194 shares of common stock at an
      exercise price $1.90 per share (subject to adjustment),
  and





(iii)
            Five
      year class B warrants to purchase an additional 1,774,194 shares of common
      stock at an exercise price of $2.40 per share (subject to
      adjustment).




The net
proceeds were to be used for acquisitions and for general working capital. The
securities were not registered under the Securities Act of 1933, as amended, in
reliance on the exemption from registration provided in Section 4(2) of the Act
and Regulation D promulgated thereunder.




ITEM
      6.
            SELECTED
      FINANCIAL DATA




Not
applicable to smaller reporting companies.





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.





23





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.
 
 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.





24





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, "Accounting for
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.





25




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 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.




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 91.8% through purchase
      of additional equity interests from minority shareholders and additional
      contribution to Tianjin Huaneng’s registered capital;
  and





·
            Acquisition
      of SZPSP.


26




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:




Revenue:
                                
                                2008
                                
                                
                                2007Solar
      Heater/Biomass Stove/Boiler
      related products
                                
                                $
                                25,098,563
                                
                                
                                $
                                26,693,850Heat
      Pipe related products
                                
                                
                                16,554,371
                                
                                
                                
                                7,002,015Energy-saving
      projects
                                
                                
                                9,078,203
                                
                                
                                
                                3,376,481Solar
      Heat collector and others
                                
                                
                                2,952,514
                                
                                
                                
                                —Total
                                
                                
                                53,683,651
                                
                                
                                $
                                37,072,346





Overall:
Sales increased to $53,683,651 for 2008 as compared to $37,072,346 for 2007, an
increase of approximately $16,611,305 or 44.8%. 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 $25,098,563for 2008 from $26,693,850 for 2007, a decrease of $1,595,287or 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 $16,554,371
in 2008 from $7,002,015 in 2007, an increase of $9,552,356 or 136.4%. 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 $5,701,722or168.9%. 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:


27




Cost
      of revenue:
                          
                          2008
                          
                          
                          2007Solar
      Heater/Biomass Stove/Boiler related products
                          
                          $
                          20,741,274
                          
                          
                          $
                          21,021,407Heat
      Pipe related products
                          
                          
                          13,680,415
                          
                          
                          
                          5,181,491Energy-saving
      projects
                          
                          
                          7,502,163
                          
                          
                          
                          2,569,180Solar
      Heat collectors and others
                          
                          
                          2,439,936
                          
                          
                          
                          —Total
                          
                          $
                          44,363,788
                          
                          
                          $
                          28,772,078





Overall: Cost of revenue was
$44,363,788 for 2008, an increase of $15,591,710 or 54.2% 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 Related Products: 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 $13, 680,415 for 2008, an increase
of $8,498,924 or 164.0% 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.





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
                      
                      
                      2,873,956
                      
                      
                      
                      1,820,524Energy-saving
      projects
                      
                      
                      1,576,041
                      
                      
                      
                      807,301Solar
      Heat collector and others
                      
                      
                      512,577
                      
                      
                      
                      —Total
                      
                      
                      9,319,863
                      
                      
                      $
                      8,300,268




Overall: As a result of the foregoing, gross
profit for 2008 was $9,319,863, compared to $8,300,268 for 2007, an increase of
$1,019,595or
12.3%.





Gross
margin (gross profit as a percentage of sales) in 2008 was approximately 17.4%
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 $4,357,289in 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.


28





Heat Pipe Related
Products: Gross profit on the sale of heat pipe related products
increased by $ 1,053,432, or 57.9%, to $2,873,956
for 2008 from $1,820,524 for 2007. Gross margin (gross profit as a percentage of
sales of these products), however, decreased to 17.4% in 2008 from approximately
26.0% for 2007.





Energy-saving
projects:Gross profit increased to $1,576,041
for 2008 from $807,301 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 $512,577
for 2008 since we did not account for these products as a separate segment
prior to 2008.





Operating
Expenses





Operating
expenses increased to $9,077,912 for 2008 as compared to $5,114,634 for 2007.
This represented an increase of $3,963,278 or about 77.5%.





Depreciation
and amortization increased by $672,621, or 237.8%, to $955,443 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 $241,951, as
compared to $3,185,634, representing a decrease of $2,943,683 or
92.4%.





Total
Other Income (Expenses)





Total
other expenses were $3,392,973 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.


29





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 $4,163,332 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 2.3% to $ 7,284,255 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.


30





Inventory





Inventories
as of December 31, 2008 increased by 87.4% to $ 6,950,844 from $3,875,658 as of
December 31, 2007 primarily due to our 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 $15,366,009 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 $2,284,903 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 $ 2,236,298 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 decreased to $8,386,698
from $8,552,452 as of December 31, 2007 primarily due to consolidation with
SZPSP. The increase mainly comprised of increases in accrued expenses, customer
deposits, other payable, taxes 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, results of
operations, liquidity or capital expenditures.


31





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, results of
operations, liquidity or capital expenditures.





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





Not
Applicable to smaller reporting companies.





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.




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




Not
applicable.




ITEM
      9AT.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation of the effectiveness of the design and operation of our
‘‘disclosure controls and procedures’’ (‘‘Disclosure Controls’’) as of the end
of the period covered by this Form 10-K. The Disclosure Controls evaluation was
conducted under the supervision and with the participation of management,
including our CEO and CFO. Disclosure Controls are controls and procedures
designed to reasonably assure that information required to be disclosed in our
reports filed under the Exchange Act, such as this Form 10-K, is recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms. Disclosure Controls are also designed to reasonably
assure that such information is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure. Our quarterly evaluation of Disclosure Controls includes an
evaluation of some components of our internal control over financial reporting,
and internal control over financial reporting is also separately evaluated on an
annual basis for purposes of providing the management report, which is set forth
below.





The
evaluation of our Disclosure Controls included a review of the Disclosure
Controls’ objectives and design, the Company’s implementation of the Disclosure
Controls, and their effect on the information generated for use in this Form
10-K. Many of the components of our Disclosure Controls are also evaluated on an
ongoing basis by other personnel in our finance department. The overall goals of
these various evaluation activities are to monitor our Disclosure Controls, and
to modify them as necessary. Our intent is to maintain the Disclosure Controls
as dynamic systems that change as conditions warrant.





Based on
the Disclosure Controls evaluation, our CEO and CFO have concluded that, as of
the end of the period covered by this Form 10-K, our Disclosure Controls were
not effective to provide reasonable assurance that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized, and
reported within the time periods specified by the SEC, and that material
information related to the Company and its consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly during the period
when our periodic reports are being prepared.




Our board
of directors was advised by Cordovano and Honeck LLP, our independent registered
public accounting firm, that during their performance of audit procedures for
2008, they identified the following deficiencies which they considered to be
material weaknesses in corporate governance and compliance with laws and
regulations:
 
 ·
              Lack
      of board of directors approval for contracts related to the following
      businesses:  Fuweisheng, Lianyungang, Xiongri and
      Xiangnian;
 ·
              Failure
      to obtain State approval for incorporation of two new businesses
      (Fuweisheng and Xiongri);
 ·
              Failure
      to disclose information on the new businesses in Form 10-K or
      10-Q;
 ·
              Failure
      to comply with the terms of the Fuweisheng agreement which would have
      resulted in the timely incorporation of a new business and the
      consolidation of its financial information into the results of operations
      of the Company for the year ended December 31, 2008;
  and
 ·
              Failure
      to obtain approvals from State Commerce Department and State Foreign
      Currency Administration Bureau and failure to complete share transfer
      registration process with State Industrial and Commercial Administration
      Bureau, in connection with the acquisition of
  SZPSP.
 
 The
deficiencies were mainly related to inadequate staffing and supervision that
could lead to the timely disclosure of such information and the obtainment of
the required notifications and approvals.


32




Management
Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statement for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.
 
 Management
assessed our internal control over financial reporting as of
December 31, 2008, the end of our fiscal year based on the framework
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s assessment included
evaluation of the design and operating effectiveness of key financial reporting
controls, process documentation, accounting policies, and our overall control
environment. This assessment is supported by testing and monitoring performed by
our internal finance department.
 
 In view
of the material weakness discovered in 2008 and described in our 10-K for the
year ended December 31, 2007 and the need for the restatement of our audited
financial statements for such year, management continues to believe that the
Company's internal controls over financial reporting are not
effective.
 
 In
connection with the review by the Division of Corporation Finance of the
Securities and Exchange Commission of the Company’s audited financial statements
for the fiscal year ended December 31, 2007 as set forth in the Registration
Statement on Form S-1 (File No. 333-150233) and the Annual Report on Form 10-KSB
for the Fiscal Year Ended December 31, 2007, filed April 10, 2008 (File No.
0-12561) management identified an error in the calculation of the diluted net
income per share resulting in an understatement of the Company’s diluted net
income per share by ten cents per share. Accordingly, on October 27, 2008,
the Board of Directors concluded, based on the recommendation of management,
that the Company’s consolidated financial statements contained in the Company’s
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2007 should be restated to correct this error related to the calculation of
diluted net income per share and should no longer be relied upon. Management
discussed this matter with Cordovano and Honeck LLP, the Company’s independent
registered public accounting firm. The Company filed an amended Annual Report on
Form 10KSB/A for the fiscal year ended December 31, 2007 to revise the
diluted net income per share amount to reflect the diluted net income per share
amount of $0.24, in full compliance with SFAS 154, paragraph 26.
  On
October 27, 2008 the Audit Committee received a letter from Cordovano and Honeck
LLP, the Company’s independent registered public accounting firm, advising the
committee of the following material weakness:
 
 “When
preparing its financial statements for the year ended December 31, 2007, China
Solar & Clean Energy Solutions, Inc. erred in calculating diluted net income
per share. The Company misapplied the treasury stock and the “if converted”
methods under SFAS No. 128. Because of the error, the Company restated its
historical financial statements for 2007 to record an increase of ten cents in
diluted net income per share.”
 
 A
material weakness is a control deficiency, or a combination of control
deficiencies, that result in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. Management has identified the material weakness which
consisted in the error in the calculation of diluted earnings per share and
misapplication by the Company of the treasury stock and the “if converted”
methods under SFAS No. 128. Since this material weakness was discovered in the
last quarter of 2008, we are still in the process of implementing our
remediation plan to ensure that our internal controls over financial reporting
are effective.
 33


Remediation
of Material Weakness
 
 Our plan
to remediate any significant deficiencies in internal control over financial
accounting includes the following:
 
 1.
              Replacement
      of our Chief Financial Officer. As of March 18, 2008, we hired Ms. Jing
      Chen as our CFO. Ms. Chen has significant experience as a FO of US public
      companies, including U.S. GAAP and SOX 404
  experience;
 
 2.
              Provide
      training to our accounting and staff on U.S. GAAP;
  and
 
 3
              We
      are planning to engage the services of a SOX 404
  consult.
 
 We
believe that with the implementation of all of the above, our internal control
over financial reporting will become effective.
  Changes
in Internal Controls
 
 We are
working to refine our internal controls over financial reporting and are making
progress in this area.We willcontinue to implement the
above-described remedial procedures.
  Inherent
Limitations on Effectiveness of Controls
 
 The
Company’s management, including the CEO and CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include faulty judgments
and breakdowns due to simple error or mistake. Controls can also be circumvented
by individuals, by collusion, or by management override (whether such action is
intentional or unintentional). The design of any system of controls is based in
part on certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Therefore, any current evaluation of controls
cannot and should not be projected to future periods.




ITEM
      9B.
            OTHER
      INFORMATION




None.


34




PART III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.




Our
executive officers and directors as of the date of this report are as
follows:





Name
                      
                      Position
                      
                      AgeDeli
      Du
                      
                      President,
      CEO, Director
                      
                      44Jing
      Chen
                      
                      Chief
      Financial Officer
                      
                      43Zhaolin
      Ding
                      
                      Director
                      
                      41Zhenhang
      Jia
                      
                      Director
                      
                      62Joseph
      J. Levinson
                      
                      Director
                      
                      33





Our board
of directors currently consists of four members. We also have an audit
committee and a compensation committee. Messrs. Zhenghang Jia, Zhaolin Ding
and Joseph J. Levinson serve on the audit committee. Messrs. Jia, Ding
and Deli Du serve on the compensation committee. The directors serve until our
next annual meeting or until their successors are duly elected and qualified.
The officers serve at the pleasure of the Board.





Under the
terms of the securities purchase agreement entered into on June 13, 2007 with
the investors in that financing, we were required, prior to July 13, 2007, to
increase the size of our Board to five or seven and cause the appointment of a
majority of the Board of Directors to be “independent directors,” as defined by
the rules of the Nasdaq Stock Market. Prior to November 1, 2007 our Board
consisted of four members two of whom were “independent.” Under the terms of the
securities purchase agreement we are required to pay those investors
liquidated damages equal to one percent (1%) per month of the purchase price of
the then outstanding shares of Series A Preferred Stock, in cash or in Series A
Preferred Stock at the option of the investors, based on the number of days
that such obligation is not met beyond certain grace periods.
Accordingly, we were delinquent by 110 days in meeting this obligation and
we are required to pay the investors a total of $99,000. The Company is
negotiating with the investors for a reduction of the amount due, but no
agreement has yet been reached. Effective March 31, 2008 Mr. Jianmin Li resigned
from our board of directors.





Effective
July 25, 2008 Mr. Joseph J. Levinson was appointed as a director. Mr. Levinson
is qualified as an “independent director” as defined by the rules of the Nasdaq
Stock Market and as a result of his appointment we continue to have a majority
of “independent directors,” as three of our directors, namely Mssrs.
Ding, Jia and Levinson, are “independent directors” under the Rules of
NASDAQ, Marketplace Rule 4200(a)(15).   On March 17, 2009, Mr.
Yihai Yang  resigned as the Chief Financial Officer of the Company and
resigned as a director as of March 31, 2009.




In
addition, under the terms of the securities purchase agreement, we were
required, prior to August 12, 2007 to appoint (i) an audit committee comprised
solely of at least three independent directors and a (ii) compensation committee
comprised of at least three directors, a majority of whom are independent
directors. Effective July 25, 2008 our audit committee consists of three
members all of whom are independent, namely Messrs. Zhaolin Ding, Zhenghang
Jia and Joseph J. Levinson. Our compensation committee consists of three members
two of whom are independent, namely Messrs. Ding and Jia. Accordingly,
we were delinquent in this obligation until July 25, 2008. However, under
the terms of the securities purchase agreement no liquidated damages were
required to be paid for this breach during any period for which liquidated
damages were payable for failing to have an independent board. Accordingly,
damages accrued for breach of this provision from November 1, 2007 through
July 25, 2008. As a result we are required to pay investors a total of
approximately $176,800.00. The Company is negotiating with the investors for a
reduction of the amount due, but no agreement has yet been reached.





Deli Du
has been our President, CEO and as a director since March 31, 2005. Mr. Du
founded Deli Solar (Bazhou) in 1997 and has been its controlling equity holder,
chairman and chief executive officer during the past five (5) years. Since June
2004 he has also been a director and manager of Deli Solar (BVI). He is a
standing member of the China Solar Energy Utilization Association, the China
Efficiency Boiler Association and the Beijing New Energy and Renewable Energy
Union.


35




Jing Chen
has been our Chief Financial Officer since March 17, 2007. Ms. Chen was Chief
Financial Officer of China Valves Technology, Inc. (OTCBB: CVVT.OB), a
China-based manufacturer of high-quality metal valves, from October 7, 2008 to
January 2009.  From December 2007 to October 2008, Ms. Chen was the
Chief Financial Officer of Origin Agritech Inc. (NasdaqGS: SEED), crop seed
company based in China  Prior to that, Ms. Chen was Senior Director of
Finance of iKang Healthcare Inc. from December 2006 to November
2007.  From August 2001 to November 2006, Ms. Chen was the Director of
Finance of Elong Inc. (NasdaqGM: LONG), a leading online travel company in
China. Ms. Chen holds a Doctor of Business Administration from Victoria
University, Switzerland and a MBA from City University Ms. Chen is also a member
of CPA Australia.





Zhaolin
Ding, age 40, was appointed as a director on August 3, 2007. Mr. Ding is
currently the director of Everbright International Executive Management
Education Center, an adjunct professor of the Executive Program, School of
Continuing Education, Tsinghua University and a visiting professor of executive
program of Peking University and Renmin University of China. He is an officially
appointed news commentator of China National Radio. He also worked as research
associate in the Center for International Communication Studies of Tsinghua
University. He holds an MBA degree from Harvard University, a Master’s degree in
International Journalism from China School of Journalism, a bachelor degree of
Law in International Affairs from the University of International
Relations.





Zhenhang
Jia has been a director since August 3, 2007. He has been a director on Beijing
Mechanic Engineering and Reusable Energies and Vice Secretary-in-Chief of China
Rural Energy Association Energy Saving Space Heating Professional Society from
April 1994. He also has been vice chairman, vice secretary-in-chief of Beijing
Municipal New Energy and director in Beijing Mechanics and Engineering
Committee, Energy Resourses and Engineering Branch from 1995. Mr. Jia has been
lecturing in his field of profession in colleges and universities for over ten
years and has published two professional books such as Enterprise Energy Saving
Technology and 70 papers.




Joseph J.
Levinson has served on our board of directors since July 25, 2008.  He
served as the Chief Executive Officer of Levinson Services Partnership, a U.S.
consulting company, since March 2006. Mr. Levinson also serves as a director and
Chairman of the audit committee of China Aoxing Pharmaceutical Co., Inc. (OTCBB:
CAXG.OB), a publicly traded corporation engaged in the research, development,
manufacture, and marketing of various narcotics and pain management
pharmaceutical products in generic and formulations in China. From May 2007 to
January 2009, Mr. Levinson served as a director of China 3C Group (OTCBB:
CHCG.OB), a retailer and distributor of consumer and business products in China.
From September 2006 to February 2007, he worked as the Chief Financial Officer
of PacificNet Inc. (OTCBB: PACT.OB), a provider of gaming and mobile game
technology worldwide with a focus on emerging markets in Asia, Latin America and
Europe. From January 2006 to May 2007, Mr. Levinson worked for Global
Pharmatech, Inc. (GBLP.PK) as Chief Financial Officer and a director. From
October 2001 to December 2005, Mr. Levinson was a partner at Halo Equity
Consulting Partnership, a Hong Kong private equity company. From December 2004
to January 2006, he worked at BOL Media, a PRC media company, as the Chief
Financial Officer. Mr. Levinson is a certified public accountant. Mr. Levinson
holds a B.S. degree in Accounting and Finance from State of University of New
York at Buffalo.


There are
no family relationships among our directors or executive officers. We currently
do not have directors and officers insurance.





Resignations





Effective
July 25, 2008, Mr. Randolph resigned as a director to pursue other
interests.  His resignation was not the result of any disagreement with us
on any matter relating to our operations, policies or practices.





Mr.
Jianmin Li served as a director until March 31, 2008 when he resigned as a
director. Mr. Li's resignation as director was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices.


36


Effective
March 14, 2008, Mr. Gary Lam resigned as our Chief Financial Officer to pursue
other interests.  Mr. Lam’s resignation was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices.





Effective
March 14, 2008, Mr. Yihai Yang was appointed to serve as our Acting Chief
Financial Officer and he resigned from such position on March 17, 2009. He
resigned as a director on March 31, 2009.  Mr. Yang’s resignation was
not the result of any disagreement with us on any matter relating to our
operations, policies or practices.





AUDIT
COMMITTEE FINANCIAL EXPERT





Our audit
committee currently consists of three members all of whom are independent,
namely Zhenhang Jia, Zhaolin Ding and Joseph J. Levinson. The audit committee
does not currently have an audit committee "financial expert" as defined under
Item 407(d)(5)(i) of Regulation S-B. The Board of Directors is in the process of
searching for a suitable candidate for this position.





Under the
terms of the securities purchase agreement, we were required, prior to August
12, 2007 to appoint an audit committee comprised solely of at least three
independent directors and damages in the amount of approximately $176,800.00
accrued for breach of this provision from November 1, 2007 through July 25,
2008.





SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of common stock and our other
equity securities. These insiders are required by SEC regulations to furnish us
with copies of all Section 16(a) forms they file, including Forms 3, 4 and
5.





SEC rules
require disclosure in the Company’s Annual Report on Form 10-K of the failure of
an executive officer, director or 10% beneficial owner to file such forms on a
timely basis. Based upon a review of the filings made on their behalf during
2008, as well as an examination of the SEC's EDGAR system Form 3, 4, and 5
filings and the Company's records, the following table sets forth exceptions to
timely filings:





Name
                    
                    Reporting EventArdsley
      Advisory Partners (1)
                    
                    Form
      3 filed on June 12, 2008 reporting puechase of 1,666,500 shares on
      February 25, 2008.




(1)
              These
      shares were purchased by affiliates of Ardsley as set forth
      below:


Name
                      
                      Number of
                        SharesArdsley
      Partners Fund II, L.P.
                      
                      
                      702,500Ardsley
      Offshore Fund, Ltd.
                      
                      
                      491,500Ardsley
      Partners Institutional Fund, L.P.
                      
                      
                      455,000Marion
      Lynton
                      
                      
                      17,500




37




Code
of Ethics





On July
20, 2006, our Board adopted a Code of Ethics that applies to our executive
offers and employees. We filed a copy of the Code of Ethics as exhibit 14 to our
Annual Report on Form 10-KSB/A for the fiscal year ended December 31,
2006.





ITEM 11.
            EXECUTIVE
      COMPENSATION





The
following table reflects the compensation paid to our principal executive
officer during each of our fiscal years ending December 31, 2008, 2007 and 2006.
None of our other executive officers was paid a salary and bonus of more than
$100,000 in 2007 and so none are included in this table.




Name and
                              Principal
                              Position
                            
                            Year
                            
                            Salary
                              ($)
                            
                            
                            Bonus
                              ($)
                            
                            
                            Stock
                              Awards
                              ($)
                            
                            
                            Option
                              Awards
                              ($)
                            
                            
                            Non-Equity
                              Incentive Plan
                              Compensation
                              ($)
                            
                            
                            Non-
                              Qualified
                              Deferred
                              Compensation
                              Earnings
                              ($)
                            
                            
                            All Other
                              Compensation
                              ($)
                            
                            
                            Total
                              ($)Deli
      Du (1)
                            
                            2008
                            
                            80,000
                            
                            
                            —
                            
                            
                            —
                            
                            
                            —
                            
                            
                            —
                            
                            
                            —
                            
                            
                            —
                            
                            
                            80,0002007
                            
                            
                            80,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            80,0002006
                            
                            
                            80,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            80,000





(1)
Commencing March 31, 2005, Mr. Du receives an annual salary of
$80,000.





Outstanding
Equity Awards at 2007 Fiscal Year End





There
were no option exercises or options outstanding in 2008.





Employment
Agreements





We have
no employment agreements with any of our executive officers. We plan to enter
into an employment agreement with Mr. Yang shortly but no such agreement has yet
been executed. In the absence of written employment agreements, the PRC labor
laws provide the terms of employment such as the term of employment, the
provision of labor-related insurance, termination for cause, termination on 30
days’ notice and termination without notice and the labor-related
benefits.





Compensation
Discussion and Analysis





Overview
of Compensation Program and Philosophy





The
Company’s compensation committee currently has three members two of whom
are independent, namely Messrs. Zhenhang Jia, and Zhaolin Ding. Under the terms
of the June 2007 securities purchase agreement with Barron Partners and the
other investors, we were required, prior to August 12, 2007 to appoint a
compensation committee comprised of at least three directors, a majority of
whom are independent directors, and damages in the amount of approximately
$176,800.00 accrued for breach of this provision from November 1, 2007
through July 25, 2008.


38


The
Compensation Committee’s goal in determining compensation levels is to
adequately reward the efforts and achievements of executive officers for the
management of the Company. The Company currently has no pension plan, stock
option plan, non-equity incentive plan or deferred compensation arrangement. The
Company has not used a compensation consultant in any capacity but believes that
it executive compensation package is comparable to similar businesses in its
location of its operations.





None of
the executive officers currently has an employment agreement with the
Company.





Director
Compensation





Our
standard arrangement with our directors provides that we pay each director
annual compensation in the amount of $20,000 for serving as a director. There
are no other elements of compensation paid to our directors but it is expected
that in the future, we may create a remuneration and expense reimbursement plan.
It is anticipated that such a plan would be primarily based on stock
options.





The
following table reflects the compensation of directors for our fiscal year ended
December 31, 2008:




Name of Director
                      
                      Fees
                        Earned
                        or
                        Paid in
                        Cash
                        ($)
                      
                      
                      Stock
                        Awards
                        ($)
                      
                      
                      Option
                        Awards
                        ($)
                      
                      
                      Non-Equity
                        Incentive Plan
                        Compensation
                        ($)
                      
                      
                      Change in
                        Pension value
                        and
                        Nonqualified
                        Deferred
                        Compensation
                        Earnings
                      
                      
                      All Other
                        Compensation
                        ($)
                      
                      Total
                        ($)Zhaolin
      Ding
                      
                      
                      20,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      20,000Deli
      Du
                      
                      
                      20,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      20,000Kevin
      Randolph (1)
                      
                      
                      —
                      
                      
                      
                      4,285
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      4,285Zhenhang
      Jia
                      
                      
                      20,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      20,000Yang
      Yi Hai (2)
                      
                      
                      8,400
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      8,400Joseph
      Levinson (3)
                      
                      
                      8,400
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      8,400





(1)
            Effective
      November 1, 2007, Mr. Kevin Randolph was appointed as a director. Under
      the terms of the securities purchase agreement, dated June 13, 2007, by
      and among Barron Partners, L.P. and two other investors, we were obligated
      to appoint independent directors to constitute the majority of the board.
      Mr. Randolph has not had any relationship with us (either as a partner,
      stockholder or employee) in the past three years and he is qualified as an
      independent director as defined by rules of the Nasdaq Stock Market. With
      Kevin Randolph appointed as a director we have a majority of independent
      directors. Mr. Randolph receives an annual director’s fee of $5,000, and
      he will be compensated with $5,000 for each full Board of Directors
      meeting held at Beijing, China and $2,500 for each board meeting by
      conference call. In addition, he is entitled to receive shares of our
      common stock at the amount of 0.36% of our total outstanding common stock
      to be vested monthly over three years. As of December 31, 2007, Mr.
      Randolph had earned 1,242 shares of common stock with a value of $4,285,
      based on a closing price on December 31, 2007 of $3.45. On July 25, 2008,
      Mr. Kevin Randolph resigned from his position as a director of the
      Company.






(2)
              Mr.
      Yang was appointed as a director on July 25, 2008. His annual compensation
      as a director was $20,000 and he received $8,400 for his service as a
      director for the partial year he served on our board of directors in
      2008.
 
 (3)
              Mr.
      Levinson was appointed as a director on July 25, 2008. His annual
      compensation as a director was $20,000 and he received $8,400 for his
      service as a director for the partial year he served on our board of
      directors in 2008.




39




ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





The
following table sets forth certain information with respect to the beneficial
ownership of the voting securities by (i) any person or group with more than 5%
of the Company's securities, (ii) each director, (iii) each executive officer
and (iv) all executive officers and directors as a group, as of April 13,
2009.





Named
      and Address of Beneficial Owner
              
              Amount and
                Nature of
                Beneficial
                Ownership
              
              
              Percent (%) of
                Class (1)5%
      OwnersDavid
      Gelbaum and Monica Chavez as trustees of
                The
      Quercus Trust,
                2309
      Santiago Drive
                Newport
      Beach, CA 92660 (2)
              
              
              1,949,283
              
              
              
              12.3
              %Ardsley
      Partners (3)
              
              
              1,666,500
              
              
              
              10.5
              %Executive
      OfficersDeli
      Du,
                President,
      CEO and director
                No.
      28, Fengtai Bei Road
                Fengtai
      District, Beijing, PRC 100071
              
              
              2,837,282
              
              
              
              17.9
              %Jing
      Chen,
                Chief
      Financial Officer
                No.
      28, Fengtai Bei Road
                Fengtai
      District, Beijing, PRC 100071
              
              
              0
              
              
              
              0
              %DirectorsDeli
      Du,
                President,
      CEO and director
                No.
      28, Fengtai Bei Road
                Fengtai
      District, Beijing, PRC 100071
              
              
              2,837,282
              
              
              
              17.9
              %Zhaolin
      Ding, director
                No.
      28, Fengtai Bei Road
                Fengtai
      District, Beijing, PRC 100071
              
              
              0
              
              
              
              0
              %Jianmin
      Li, director
                No.
      28, Fengtai Bei Road
                Fengtai
      District, Beijing, PRC 100071
              
              
              0
              
              
              
              0
              %Zhenhang
      Jia, director
                No.
      28, Fengtai Bei Road
                Fengtai
      District, Beijing, PRC 100071
              
              
              0
              
              
              
              0
              %Joe
      Levinson, director
                No.
      28, Fengtai Bei Road
                  Fengtai
      District, Beijing, PRC 100071
              
              
              0
              
              
              
              0
              %




40




(1)
                As
      of April 14, 2009 we had 16,173,016 outstanding shares of common
      stock. In determining the percent of common stock owned by a stockholder
      on : April 14, 2009, (a) the numerator is the number of shares of common
      stock beneficially owned by such stockholder, including shares the
      beneficial ownership of which may be acquired, within 60 days upon the
      conversion of convertible securities or the exercise of warrants held by
      such stockholder, and (b) the denominator is the sum of (i) 15,799,450,
      the number of shares outstanding on : April 14, 2009, and (ii) the total
      number of shares underlying the convertible securities and warrants, which
      such stockholders has the right to acquire within 60 days following April
      14, 2009.(2)
                Based
      on information set forth in Amendment No 1. to a Schedule 13D filed on
      March 4, 2008.(3)
                These
      shares are held by affiliates of Ardsley as set forth
    below:





Name
                          
                          Number of SharesArdsley
      Partners Fund II, L.P.
                          
                          
                          702,500Ardsley
      Offshore Fund, Ltd.
                          
                          
                          491,500Ardsley
      Partners Institutional Fund, L.P.
                          
                          
                          455,000Marion
      Lynton
                          
                          
                          17,500







(4)
              Mr.
      Randolph is entitled to receive common stock at the amount of 0.36% of our
      total outstanding common stock vested monthly over 3 years. As
      of November 25, 2008 Mr. Randolph was entitled to
      receive 3,236
shares.





ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Since
January 1, 2008 we have not engaged in any transactions with any related persons
which would require disclosure under Item 404 of Regulation S-K.





Three of
our four directors are independent directors under the definition of
“independent director” of the Rules of NASDAQ, Marketplace Rule
4200(a)(15).




ITEM 14.
            Principal Accounting Fees and
      Services.





Effective
January 24, 2008, we formally engaged Cordovano and Honeck, LLP as our principal
independent registered public accounting firm to examine our consolidated
financial statements for the fiscal year ended December 31,
2008.  Child, Van Wagoner & Bradshaw, PLLC, Certified Public
Accountants, was the our independent registered public accounting firm engaged
to examine the Company’s consolidated financial statements for the fiscal year
ended December 31, 2007.





Fees for
the fiscal years ended December 31, 2008 and 2007


Audit
Fees.  Cordovano and Honeck, LLP was paid aggregate fees of
approximately $185,257for professional services rendered for the audit of our annual financial
statements for the fiscal year ended December 31, 2008 and the reviews of the
financial statements included in our Quarterly Reports on Form 10-QSB for the
periods ended March 31, 2008, June 30, 2008 and September 30, 2008. Child, Van
Wagoner & Bradshaw, PLLC was paid aggregate fees of approximately $105,663 for professional
services rendered for the audit of our annual financial statements for the
fiscal year ended December 31, 2007 and for the reviews of the financial
statements included in our Quarterly Reports on Form 10-QSB for the periods
ended March 31, 2007, June 30, 2007 and September 30, 2007.




Audit-Related
Fees.  None.




Tax
Fees.  None.




All Other
Fees.  None


41


Our audit
committee did not pass on whether any non-audit services impacted our auditor's
independence. We currently do not have any policy or procedures in place for
approval of audit and permitted non-audit services by our audit
committee.





PART
IV


ITEM 15
                EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES
  a.
              The
      following are filed with this Annual
Report:
  1.
              The
      financial statements listed on the Financial Statements Table of
      Contents.
  2.
              Not
      applicable.
  3.
              Not
      applicable.
  b.
              The
      exhibits listed on the Exhibit Index are filed as part of this Annual
      Report.
  c.
              Not
      applicable.




42




EXHIBIT
INDEX
 
 1.1
              Equity
      Purchase Agreement, between Beijing Deli Solar Technology Development Co.
      Ltd. and Shenzhen PengSangPu Solar Industrial Products Corporation, dated
      as of January 9, 2008 is incorporated by reference to Exhibit 1.1 to our
      Current Report on Form 8-K filed by the Company with the SEC on January
      15, 2008.1.2
              Complementary
      Agreement to the Equity Purchase Agreement, between Beijing Deli Solar
      Technology Development Co. Ltd. and Shenzhen Peng Sang Pu Solar Industrial
      Products Corporation, dated as of January 9, 2008 is incorporated by
      reference to Exhibit 1.2 to our Current Report on Form 8-K filed by the
      Company with the SEC on January 15, 2008.1.3
              Supplementary
      Agreement to the Equity Purchase Agreement, by and among, Beijing Deli
      Solar Technology Development Co. Ltd., Shenzhen PengSangPu Solar
      Industrial Products Corporation and its shareholders named therein, dated
      as of March 25, 2008 is incorporated by reference to Exhibit 1.1 to our
      Current Report on Form 8-K filed by the Company with the SEC on April 1,
      2008.1.4
              Equity
      Interest Purchase Agreement, between Beijing Deli Solar Technology
      Development Co. Ltd. and Tianjin Huaneng Group Energy Equipment Co., Ltd.,
      dated as of October 27, 2008 is incorporated by reference to Exhibit 1.1
      to our Current Report on Form 8-K filed by the Company with the SEC on
      October 31, 2008.3.1
              Certificate
      of Incorporation (including all amendments thereto) is incorporated by
      reference to Exhibit 3.1 to the Registration Statement on Form SB-2 filed
      by the Company with the SEC on November 2, 2005.3.2.1
              Bylaws,
      is incorporated herein by reference to the Registration Statement on Form
      S-1 filed with the by the Company with the SEC in August
    1983.3.2.2
              Amendment
      to Bylaws dated October 17, 2000, is incorporated herein by reference to
      Exhibit 3.6 to the Registration Statement on Form SB-2 filed by the
      Company with the SEC on March 26, 2001.3.2.3
              Articles
      of Merger of Du Solar, Inc. into the Company filed with the Secretary of
      State of Nevada on October 29, 2007 is incorporated by reference to
      Exhibit 3.1 to our Current Report on Form 8-K filed by the Company with
      the SEC on November 2, 2007.4.1
              Common
      Stock Specimen is incorporated by reference to Exhibit 4.1 to our Annual
      Report on Form 10-KSB/A filed on April 17, 2006.4.2
              Form
      of Warrant is incorporated herein by reference to Exhibit 4.2 to our
      Registration Statement on Form SB-2 filed with the SEC on November 2,
      2005.


4.3
              Certificate
      of Designation Rights and Preferences for our Series A Preferred Stock, as
      filed with the Secretary of State of Nevada on June 12 , 2007 is
      incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K
      filed by the Company with the SEC on June 19, 2007.4.4
              Series
      A Preferred Stock Specimen is hereby incorporated by reference to Exhibit
      4.4 to our Current Report on Form 8-K filed by the Company with the SEC on
      June 19, 2007.4.5
              Form
      of Class A Warrant issued on June 13, 2007 is incorporated by reference to
      Exhibit 4.2 to the to our Current Report on Form 8-K filed by the Company
      with the SEC on June 19, 2007.4.6
              Form
      of Class B Warrant issued on June 13, 2007 is incorporated by reference to
      Exhibit 4.3 to our Current Report on Form 8-K filed by the Company with
      the SEC on June 19, 2007.4.7
              Form
      of Placement Agent Warrant is incorporated herein by reference to Exhibit
      4.7 to our Registration Statement on Form S-1 filed by the Company with
      the SEC on April 14, 2008.10.1
              Stock
      Contribution Agreement, dated March 28, 2005, entered into by and between
      the Company and Deli Du is incorporated herein by reference to Exhibit A
      to Schedule 13D filed by the Company with the SEC on April 18,
      2005.10.2
              Stock
      Purchase Agreement, dated March 30, 2005, by and among Deli Du, Halter
      Capital Corporation, and the Company is incorporated herein by reference
      to Exhibit B to Schedule 13D filed by the Company with the SEC on April
      18, 2005.10.3
              Form
      of Unit Purchase Agreement is incorporated herein by reference to Exhibit
      10.3 to the Registration Statement on Form SB-2 filed with the SEC on
      November 2, 2005.10.4
              Form
      of Agreement Providing for Investment Banking Services is incorporated
      herein by reference to Exhibit 10.4 to the Registration Statement on Form
      SB-2 filed with the SEC on November 2, 2005.10.5
              Form
      of Lock Up Agreement between the Company and the members of the Financial
      Advisor Group is incorporated herein by reference to Exhibit 10.5 to the
      Registration Statement on Form SB-2 filed with the SEC on November 2,
      2005.


43




10.6
                Agreement
      on Transfer of Share of Beijing Ailiyang Solar Energy Technology Co., Ltd.
      is incorporated herein by reference to Exhibit 10.1 to the Current Report
      on Form 8-K filed by the Company on November 28, 2005.10.7
                Land
      Purchase Agreement by and between Deli Solar (Bazhou) and Deli Du (English
      Translation) is incorporated herein by reference to Exhibit 10.6 to the
      Registration Statement Amendment No. 1 on Form SB-2 filed with the SEC on
      February 6, 2006.10.8
                Land
      Use Rights Purchase Agreement by and between Deli Solar (Bazhou) and the
      Governance Commission of Beijiahe Village Chaheji County Bazhou City dated
      March 16, 2006 (English Translation) is incorporated herein by reference
      to Exhibit 10.8 to the Registration Statement Amendment No. 2 on Form SB-2
      filed with the SEC on May 22, 2006.10.9
                Securities
      Purchase Agreement dated June 13, 2007 by and among the Company, Barron
      Partners LP and the other investors named therein, is incorporated by
      reference to Exhibit 10.1 to our Current Report on Form 8-K filed by the
      Company with the SEC on June 19, 2007.10.10
                Registration
      Rights Agreement dated June 13, 2007 by and among the Company, Barron
      Partners LP and the other investors named therein, is incorporated by
      reference to Exhibit 10.2 to our Current Report on Form 8-K filed by the
      Company with the SEC on June 19, 2007.10.11
                Stock
      Escrow Agreement dated June 13, 2007 by and between the Company and
      Tri-State Title & Escrow, LLC, as escrow agent, is incorporated by
      reference to Exhibit 10.3 to our Current Report on Form 8-K filed by the
      Company with the SEC on June 19, 2007.10.12
                Closing
      Escrow Agreement dated June 13, 007 by and between the Company and Barron
      Partners, L.P., and the other investors named therein and Tri-State Title
      & Escrow, LLC, as escrow agent, is incorporated by reference to
      Exhibit 10.4 to our Current Report on Form 8-K filed by the Company with
      the SEC on June 19, 2007.10.13
                State-owned
      Equity Interest Purchase Agreement by and between Tianjin Municipal Ji
      County State-owned Assets Administration Commission and Beijing Deli Solar
      Technology Development Co., Ltd. dated May 18, 2007 is incorporated by
      reference to Exhibit 10.1 to our Current Report on Form 8-K filed by the
      Company with the SEC on September 14, 2007.10.14
                Supplementary
      Agreement to State-owned Equity Interest Purchase Agreement by and between
      Tianjin Municipal Ji County State-owned Assets Administration Commission
      and Beijing Deli Solar Technology Development Co., Ltd. dated August 8,
      2007 is incorporated by reference to Exhibit 10.2 to our Current Report on
      Form 8-K filed by the Company with the SEC on September 14,
      2007.10.15
                Entrustment
      Agreement by and between Beijing Deli Solar Technology Development Co.,
      Ltd. and Tianjin Wanshitong Business Management Consulting Co., Ltd. dated
      August 7, 2007 is incorporated by reference to Exhibit 10.3 to our Current
      Report on Form 8-K filed by the Company with the SEC on September 14,
      2007.10.16
                Investor
      Relations Consulting Agreement dated July 23, 2007 between the Company and
      Hayden Communications International, Inc. is incorporated herein by
      reference to Exhibit 10.13 to Amendment No. 2 to the Registration
      Statement on Form SB-2 filed by the Company with the SEC on January 24,
      2008.10.17
                Securities
      Purchase Agreement dated as of February 25, 2008 by and among the Company
      and the investors named therein, is incorporated by reference to Exhibit
      10.1 to our Current Report on Form 8-K filed by the Company with the SEC
      on March 3, 2008.10.18
                Registration
      Rights Agreement dated as of February 25, 2008 by and among the Company
      and the investors named therein, is incorporated by reference to Exhibit
      10.2 to our Current Report on Form 8-K filed by the Company with the SEC
      on March 3, 2008.10.19
                Make
      Good Escrow Agreement dated as of February 25, 2008 by and between the
      Company, the investors named therein, Roth Capital Partners, LLC and
      Tri-State Title & Escrow, LLC, as escrow agent, is incorporated by
      reference to Exhibit 10.3 to our Current Report on Form 8-K filed by the
      Company with the SEC on March 3, 2008.10.20
                Escrow
      Agreement dated as of February 25, 2008 by and between the Company, Roth
      Capital Partners, LLC and Tri-State Title & Escrow, LLC, as escrow
      agent, is incorporated by reference to Exhibit 10.4 to our Current Report
      on Form 8-K filed by the Company with the SEC on March 3,
      2008.10.21
                Waiver
      and Consent dated as of February 25, 2008 , is incorporated by reference
      to Exhibit 10.5 to our Current Report on Form 8-K filed by the Company
      with the SEC on March 3, 2008.14
                Code
      of Ethics is incorporated by reference to Exhibit 14 to our Annual Report
      on Form 10-KSB/A for the fiscal year ended December 31, 2006 filed by the
      Company with the SEC on April 11, 2007.21.1
                List
      of subsidiaries.


31.1
                Certification
      of Deli Du pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                Certification
      of Jing Chen pursuant to Exchange Act Rules 13a-14(a) and 15d- 14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.
 
 44
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
  CHINA
      SOLAR & CLEAN ENERGY SOLUTIONS, INC.April
      15, 2009
                /s/ Deli DuBy:
      Deli Du,Chief
      Executive Officer, President and Director(principal
      executive officer)
  Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
  /s/ Deli Du
                
                April
      15, 2009By:
      Deli Du, Chief Executive Officer, President and Director (principal
      executive officer)/s/ Jing Chen
                
                April
      15, 2009By:
      Jing Chen, Chief Financial Officer (principal financial officer and
      accounting officer)/s/ Zhaolin Ding
                
                April
      15, 2009By:
      Zhaolin Ding, Director/s/ Zhenhang Jia
                
                April
      15, 2009By:
      Zhenhang Jia, Director/s/ Joseph J. Levinson
                
                April
      15, 2009By:
      Joseph J. Levinson, Director


45








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


China
Solar & Clean Energy Solutions, Inc. (fka Deli Solar (USA),
Inc.)


Beijing,
People’s Republic of China





We have
audited the consolidated balance sheet of China Solar & Clean Energy
Solutions, Inc. (fka Deli Solar (USA), Inc.) (the Company) as of December 31,
2006, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the years ended December 31, 2006 and
2005. 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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Solar & Clean
Energy Solutions, Inc. (fka Deli Solar (USA), Inc.) as of December 31, 2006, and
the results of its operations and its cash flows for the years ended December
31, 2006 and 2005, in conformity with accounting principles generally accepted
in the United States of America.




/s/
      Child, Van Wagoner & Bradshaw, PLLCChild,
      Van Wagoner & Bradshaw, PLLC
              Salt
      Lake City, Utah
              March
      31, 2007


F-1


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, 2007 and the related
consolidated statements of income, cash flows and changes in stockholders’
equity and comprehensive income for the year ended December 31, 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, 2007 and the results of their operations and their cash flows for the year
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.





As
discussed in Note 17 to the consolidated financial statements, the Company has
restated its 2007 consolidated financial statements.





/s/
Cordovano and Honeck LLP





Englewood,
Colorado USA





March 28,
2008, except for Note 2 acquisition which is dated June 20, 2008 and Note 11 -
net income per share and Note 17 - restatement which are dated October 17,
2008.


F-2





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 the related
consolidated statements of income, cash flows and changes in stockholders’
equity and comprehensive income for the years ended December 31, 2008. 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 the results of their operations and their cash flows for the years
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.





/s/
Cordovano and Honeck LLP





Englewood,
Colorado USA





April 15,
2009


F-3


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
                
                
                2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                2,404,996
                
                
                $
                5,466,637Accounts
      receivable, net
                
                
                7,284,255
                
                
                
                7,453,009Inventories
                
                
                6,950,844
                
                
                
                3,875,658Other
      receivables and prepayments
                
                
                7,870,575
                
                
                
                1,637,948Lease
      receivables, current
                
                
                156,579
                
                
                
                0Total
      current assets
                
                
                24,667,249
                
                
                
                18,433,252Property,
      plant and equipment, net
                
                
                15,366,009
                
                
                
                8,819,216Goodwill
                
                
                2,284,903
                
                
                
                1,789,324Intangible
      assets, net
                
                
                1,709,184
                
                
                
                1,597,921Customer
      relationships, net
                
                
                1,017,500Intellectual
      property–unpatented
      technology, net
                
                
                869,500Lease receivables,
      non
      current
                
                
                654,578TOTAL
      ASSETS
                
                $
                46,568,923
                
                
                $
                30,639,713LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable, trade
                
                $
                5,301,349
                
                
                $
                2,111,028Income
      tax payables
                
                
                2,236,298
                
                
                
                1,108,433Other
      payables and accrued liabilities
                
                
                8,386,698
                
                
                
                8,552,452Total
      current liabilities
                
                
                15,924,345
                
                
                
                11,771,913Deferred
      tax liability
                
                
                15,779Minority
      interests
                
                
                1,704,248
                
                
                
                935,825Stockholders’
      equity:Convertible
      preferred stock: par value $0.001; 25,000,000
      shares authorized,373,000and1,774,194
      shares issued and outstanding,
      respectively
                
                
                373
                
                
                
                1,774Common
      stock, $0.001 par value; 66,666,667 shares authorized;13,799,450and6,205,690shares issued and outstanding, respectively
                
                
                13,799
                
                
                
                6,205Additional
      paid-in capital
                
                
                22,966,404
                
                
                
                9,260,607Accumulated
      other comprehensive income
                
                
                1,615,082
                
                
                
                1,134,270Retained
      earnings
                
                
                3,365,788
                
                
                
                7,529,119Profit
      earning reserves
                
                
                963,106
                
                
                
                0Total
      stockholders’ equity
                
                
                28,924,551
                
                
                
                17,931,975TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                46,568,923
                
                
                $
                30,639,713





See
accompanying notes to consolidated financial statements.


F-4


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


CONSOLIDATED   STATEMENTS OF
INCOME


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





Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006As adjusted and
                    restated
                    (Note 17)Revenue,
      net
                  
                  $
                  53,683,651
                  
                  
                  $
                  37,072,346
                  
                  
                  $
                  21,468,313Cost
      of revenue
                  
                  
                  44,363,787
                  
                  
                  
                  28,772,078
                  
                  
                  
                  16,842,994Gross
      profit
                  
                  
                  9,319,863
                  
                  
                  
                  8,300,268
                  
                  
                  
                  4,625,319Operating
      expenses:Depreciation
      and amortization
                  
                  
                  955,443
                  
                  
                  
                  282,822
                  
                  
                  
                  154,946Selling
      and distribution
                  
                  
                  3,995,401
                  
                  
                  
                  827,839
                  
                  
                  
                  459,746General
      and administrative
                  
                  
                  4,127,069
                  
                  
                  
                  4,003,973
                  
                  
                  
                  2,800,015Total
      operating expenses
                  
                  
                  9,077,912
                  
                  
                  
                  5,114,634
                  
                  
                  
                  3,414,707Income
      from operations
                  
                  
                  241,951
                  
                  
                  
                  3,185,634
                  
                  
                  
                  1,210,612Other
      income (expenses):Other
      income
                  
                  
                  197,154
                  
                  
                  
                  220,057
                  
                  
                  
                  45,606Interest
      income
                  
                  
                  262,233Other
      expense
                  
                  
                  (547,705
                  )Interest
      expense
                  
                  
                  (292,167
                  )
                  
                  
                  (65,481
                  )
                  
                  
                  (16,717
                  )Loss
      on nonrecurring items
                  
                  
                  (3,012,488
                  )Total
      other income (expenses)
                  
                  
                  (3,392,973
                  )
                  
                  
                  154,576
                  
                  
                  
                  28,889Income
      before income taxes
                  
                  
                  (3,151,022
                  )
                  
                  
                  3,340,210
                  
                  
                  
                  1,239,501Income
      tax expense
                  
                  
                  (193,418
                  )
                  
                  
                  (615,325
                  )
                  
                  
                  -Minority
      interests
                  
                  
                  (818,893
                  )
                  
                  
                  (199,744
                  )
                  
                  
                  -NET
      INCOME
                  
                  
                  (4,163,332
                  ))
                  
                  
                  2,525,141
                  
                  
                  
                  1,239,501NET
      INCOME AVAILABLE TO COMMON STOCKHOLDERS
                  
                  $
                  (4,163,332
                  )
                  
                  $
                  1,549,334
                  
                  
                  $
                  1,239,501Net
      income per share – basic
                  
                  $
                  (0.34
                  )
                  
                  $
                  0.25
                  
                  
                  $
                  0.20Net
      income per share – diluted
                  
                  $
                  (0.34
                  )
                  
                  $
                  0.24
                  
                  
                  $
                  0.18Weighted
      average shares outstanding - basic
                  
                  
                  12,158,482
                  
                  
                  
                  6,205,290
                  
                  
                  
                  6,205,290Weighted
      average shares outstanding - diluted
                  
                  
                  12,158,482
                  
                  
                  
                  6,396,697
                  
                  
                  
                  6,957,876





See
accompanying notes to consolidated financial statements.





F-5





CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Currency
expressed in United States Dollars)





Years
      ended December 31,2008
                                
                                
                                2007
                                
                                
                                2006Cash
      flows from operating activities:Net
      income
                                
                                $
                                (4,163,332
                                )
                                
                                $
                                2,525,141
                                
                                
                                $
                                1,239,501Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                
                                
                                1,280,429
                                
                                
                                
                                324,157
                                
                                
                                
                                178,437Impairment
      for goodwill,inventory
                                
                                
                                2,702,488Provision
      for allowance on accounts receivable
                                
                                
                                978,006
                                
                                
                                
                                650,432
                                
                                
                                
                                (77,267
                                )Changes
      in operating assets and liabilities:Accounts
      receivable, trade
                                
                                
                                (965,831
                                )
                                
                                
                                (7,232,995
                                )
                                
                                
                                (238,334
                                )Inventories
                                
                                
                                (3,313,403
                                )
                                
                                
                                (3,559,893
                                )
                                
                                
                                67,418Other
      receivables and prepayments
                                
                                
                                (6,232,627
                                )
                                
                                
                                (250,037
                                )
                                
                                
                                (238,268
                                )Accounts
      payable, trade
                                
                                
                                3,190,321
                                
                                
                                
                                1,963,127
                                
                                
                                
                                58,526Income
      tax payable
                                
                                
                                1,127,865
                                
                                
                                
                                1,108,433
                                
                                
                                
                                -Other
      payables and accrued liabilities
                                
                                
                                (59,921
                                )
                                
                                
                                8,209,641
                                
                                
                                
                                262,885Minority
      interest
                                
                                
                                818,893
                                
                                
                                
                                935,825
                                
                                
                                
                                -Net
      cash provided by operating activities
                                
                                
                                (4,637,112
                                )
                                
                                
                                4,673,831
                                
                                
                                
                                1,252,898Cash
      flows from investing activities:Acquisition
      of a subsidiary
                                
                                
                                (662,491
                                )
                                
                                
                                (489,459
                                )
                                
                                
                                -Deposits
      made to acquire subsidiary
                                
                                
                                
                                
                                
                                
                                -
                                
                                
                                
                                (256,278
                                )Purchase
      of intangible assets
                                
                                
                                (981,283
                                )
                                
                                
                                (635,726
                                )
                                
                                
                                (932,732
                                )Purchase
      of property, plant and equipment
                                
                                
                                (7,364,222
                                )
                                
                                
                                (4,294,741
                                )
                                
                                
                                (2,815,398
                                )Net
      cash used in investing activities
                                
                                
                                (9,007,996
                                )
                                
                                
                                (5,419,926
                                )
                                
                                
                                (4,004,408
                                )Cash
      flows from financing activities:proceeds
      from warrants exercised
                                
                                
                                107,500
                                
                                
                                
                                (180,694
                                )
                                
                                
                                (130,112
                                )Capital
      contribution received from shareholders
                                
                                
                                9,995,156
                                
                                
                                
                                -
                                
                                
                                
                                -Proceeds
      from issuance of preferred stock (net of offering costs of $169,000 paid
      in cash)
                                
                                
                                
                                
                                
                                
                                2,581,000
                                
                                
                                
                                -Related
      receivable
                                
                                
                                
                                
                                
                                
                                -
                                
                                
                                
                                82,639Related
      payables
                                
                                
                                
                                
                                
                                
                                -
                                
                                
                                
                                22,528Net
      cash (used in) provided by financing activities
                                
                                
                                10,102,656
                                
                                
                                
                                2,400,306
                                
                                
                                
                                (24,945
                                )Foreign
      currency translation adjustment
                                
                                
                                480,812
                                
                                
                                
                                600,361
                                
                                
                                
                                359,352NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                
                                
                                (3,061,640
                                )
                                
                                
                                2,254,572
                                
                                
                                
                                (2,417,103
                                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                                
                                
                                5,466,637
                                
                                
                                
                                3,212,065
                                
                                
                                
                                5,629,168CASH
      AND CASH EQUIVALENTS, END OF YEAR
                                
                                $
                                2,404,996
                                
                                
                                $
                                5,466,637
                                
                                
                                $
                                3,212,065SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for income taxes
                                
                                $
                                538,332
                                
                                
                                $
                                939,798
                                
                                
                                $
                                -Cash
      paid for interest expenses
                                
                                $
                                302,961
                                
                                
                                $
                                95,446
                                
                                
                                $
                                16,717SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONSWarrant
      shares granted for offering costs
                                
                                $
                                541,695
                                
                                
                                $
                                138,338
                                
                                
                                $
                                -Issuance
      of common stock for acquisitions of SZPSP
                                
                                $
                                2,839,458
                                
                                
                                $
                                0
                                
                                
                                $
                                -Issuance
      of warrants for the acquisitions of SZPSP
                                
                                $
                                92,193
                                
                                
                                $
                                0
                                
                                
                                $
                                -Preferred
      share converted
                                
                                $
                                1,401
                                
                                
                                $
                                0
                                
                                
                                $
                                -





See
accompanying notes to consolidated financial statements.


F-6




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
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            662,491
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            662,491Comprehensive
      income:Net
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            (4,136,332
                                            )
                                            
                                            
                                            
                                            
                                            (4,163,332
                                            )Foreign
      currency translation adjustment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            480,812
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            480,812Total
      comprehensive income
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (3,682,520
                                            )Profit
      earning reserves
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            963,106
                                            
                                            
                                            963,106Balance
      as of December 31, 2008
                                            
                                            
                                            373,566
                                            
                                            
                                            $
                                            373
                                            
                                            
                                            
                                            13,799,450
                                            
                                            
                                            $
                                            13,799
                                            
                                            
                                            $
                                            22,966,404
                                            
                                            
                                            $
                                            1,615,082
                                            
                                            
                                            $
                                            3,365,788
                                            
                                            $
                                            963,106
                                            
                                            
                                            28,924,551




See
accompanying notes to consolidated financial statements.


F-7




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-8





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-9





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
                          
                          
                          10
                          %Plant
      and machinery
                          
                          10
      years
                          
                          
                          10
                          %Office
      equipments
                          
                          7
      years
                          
                          
                          10
                          %Motor
      vehicles
                          
                          7
      years
                          
                          
                          10
                          %Computer
      equipment
                          
                          3
      years
                          
                          
                          10
                          %





·
            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,
2007 and 2006.


F-10





CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





·
            Revenue
      recognition





The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely product
revenue. Hence, the product and maintenance are considered separate units of
accounting in the arrangement. Revenues under these bundled arrangements are
allocated considering the relative fair values of two separate deliverables: (a)
product deliverable and (b) maintenance deliverable, included in the bundled
arrangement based on the estimated relative fair values of each element in
accordance with EITF 00-21, “Accounting for Multiple Element Revenue
Arrangements” and recognized when the applicable revenue recognition criteria
for each element are met. Revenue from product deliverables is recognized upon
final acceptance, which is signed by the customer when installation is
completed. Revenue from maintenance support for the Company’s products are
deferred and recognized ratably over the term of the service period upon the
acceptance of the products, which is generally 12 months.





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 for Leases",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,
$177,413 and $65,312, for the years ended December 31, 2008, 2007 and 2006,
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, 2007
and 2006 were $1,423,914,$1,415,493 and$1,106,488,
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-11





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-12





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, 2007 and 2006, 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-13





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 float 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-14





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. Of this aggregate amount, RMB 3.52
million ($515,026) was actually paid at the completion of the acquisition, and
the remaining RMB 7.16 million ($1,047,611) will be paid in three annual
installments in the next three years.





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.





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-15




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.





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:





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
                
                $
                8,129,289
                
                
                $
                8,219,804Less:
      allowance for doubtful accounts
                
                
                (845,034
                )
                
                
                (766,795
                )Accounts
      receivable, net
                
                $
                7,284,255
                
                
                $
                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
                        
                        
                        5,481,989
                        
                        
                        
                        749,253Inventories
                        
                        $
                        6,950,844
                        
                        
                        $
                        3,875,658




During the year 2008, we make
impairment test for inventory,
andrecognizedimpairment loss for Bazhou and Tianjin Huaneng
respectively for: $71,544and $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
                        
                        
                        727,175Prepaid
      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:





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
                              
                              
                              (2,737,207
                              )
                              
                              
                              (1,809,417
                              )Property,
      plant and equipment, net
                              
                              $
                              15,366,009
                              
                              
                              $
                              8,819,216


F-17




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, 2007 and 2006 were $955,443,
$282,822, and $162,695, 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, 2007 and
2006 were $61,729, $41,335, and
$15,742, 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
                          
                          
                          2007Related
      party payable
                          
                          $
                          0
                          
                          
                          $
                          -Accrued
      expenses
                          
                          
                          738,898
                          
                          
                          
                          608,315Customer
      deposits
                          
                          
                          2,848,444
                          
                          
                          
                          2,281,909Other
      payables
                          
                          
                          1,403,293
                          
                          
                          
                          3,508,066Taxes
      payables
                          
                          
                          2,236,298
                          
                          
                          
                          1,359,140Deferred
      revenue
                          
                          
                          1,159,765
                          
                          
                          
                          795,022$
                          8,386,698
                          
                          
                          $
                          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-18





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-19





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 effected 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
                %





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.





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
                            
                            611,123
                            
                            
                            2.79
                            
                            4.75
      years
                            
                            
                            633,888Exercised
                            
                            (75,000
                            )
                            
                            -
                            
                            -Forfeited
                            
                            -
                            
                            
                            -
                            
                            -Expired
                            
                            -
                            
                            
                            -
                            
                            -Outstanding
      and Exercisable at December 31, 2008
                            
                            6,091,682
                            
                            $
                            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-20




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,
2007, and 2006.





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




Years ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Tax
      jurisdictions from:Loss
      subject to U.S.
                          
                          $
                          (493,890
                          )
                          
                          $
                          (461,433
                          )
                          
                          $
                          -(693,745)Loss
      subject to BVI
                          
                          
                          (1,157,723
                          )
                          
                          
                          (184,056
                          )
                          
                          
                          -(73,691)Income
      subject to the PRC
                          
                          
                          (3,487,189
                          
                          
                          
                          3,985,699
                          
                          
                          
                          2,006,937Income
      before income taxes
                          
                          $
                          (3,151,022
                          )
                          
                          $
                          3,340,210
                          
                          
                          $
                          1,239,501





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-21





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, 2007 and 2006 is as follows:




Years ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Income
      before income taxes
                          
                          $
                          (3,151,022
                          )
                          
                          $
                          3,340,210
                          
                          
                          $
                          1,239,501Statutory
      income tax rate
                          
                          
                          15
                          %
                          
                          
                          33
                          %
                          
                          
                          15
                          %0
                          
                          
                          
                          1,102,269
                          
                          
                          
                          185,925Less:
      items not subject to taxesEffect
      for tax holiday
                          
                          
                          193,418
                          
                          
                          
                          (486,944
                          )
                          
                          
                          (185,925
                          )Income
      tax expenses
                          
                          $
                          193,418
                          
                          
                          $
                          615,325
                          
                          
                          $
                          -


F-22





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, 2007 and 2006:




Years ended December 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006As adjusted and
                                        restated
                                        (Note 17)Basic
      and diluted net income per share calculationNumerator:Net
      income
                                      
                                      $
                                      (4,163,332
                                      )
                                      
                                      
                                      2,525,141
                                      
                                      
                                      
                                      1,239,501Less:
      Preferred stock dividends
                                      
                                      
                                      
                                      
                                      
                                      
                                      (975,807
                                      
                                      
                                      
                                      -Net
      income available to common stockholders in computing basic and diluted net
      income per share
                                      
                                      $
                                      (4,163,332
                                      )
                                      
                                      $
                                      1,549,334
                                      
                                      
                                      $
                                      1,239,501Denominator:
      - Weighted average ordinary shares outstanding
                                      
                                      
                                      12,158,482
                                      
                                      
                                      
                                      6,205,290
                                      
                                      
                                      
                                      6,205,290-
      Weighted average preferred stock outstanding
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      --
      Weighted average warrant shares outstanding
                                      
                                      
                                      
                                      
                                      
                                      
                                      191,407
                                      
                                      
                                      
                                      752,586-Weighted average
      contingent shares outstanding12,158,482
                                      
                                      
                                      
                                      6,396,697
                                      
                                      
                                      
                                      6,957,876Basic
      net income per share
                                      
                                      $
                                      (0.34
                                      )
                                      
                                      $
                                      0.25
                                      
                                      
                                      $
                                      0.20Diluted
      net income per share
                                      
                                      $
                                      (0.34
                                      )
                                      
                                      $
                                      0.24
                                      
                                      
                                      $
                                      0.18





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.





For the
years ended December 31, 2006 , there were no securities excluded from diluted
earnings per share as none were antidilutive.


F-23







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 three year ended December 31, 2008, 2007 and 2006.
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
                        
                        
                        2007
                        
                        
                        2006Revenue:Solar
      Heater/Biomass Stove/Boiler related products
                        
                        $
                        25,098,563
                        
                        
                        $
                        26,693,850
                        
                        
                        $
                        21,468,313Heat
      Pipe related products
                        
                        
                        16,554,371
                        
                        
                        
                        7,002,015Energy-saving
      projects
                        
                        
                        9,078,203
                        
                        
                        
                        3,376,481Solar
      Heat collector and others
                        
                        
                        2,952,514$
                        53,683,651
                        
                        
                        $
                        37,072,346
                        
                        
                        $
                        21,468,313




Years ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Gross profit:Solar
      Heater/Biomass Stove/Boiler related products
                        
                        $
                        4,357,289
                        
                        
                        $
                        5,672,443
                        
                        
                        $
                        4,625,319Heat
      Pipe related products
                        
                        
                        2,873,956
                        
                        
                        
                        1,820,524
                        
                        
                        
                        -Energy-saving
      projects
                        
                        
                        1,576,041
                        
                        
                        
                        807,301
                        
                        
                        
                        -Solar
      Heat collector and others
                        
                        
                        512,577$
                        9,319,863
                        
                        
                        $
                        8,300,268
                        
                        
                        $
                        4,625,319




As of December 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Total
      assets:Solar
      Heater/Biomass Stove/Boiler related products
                                    
                                    $
                                    21,772,234
                                    
                                    
                                    $
                                    18,690,225
                                    
                                    
                                    $
                                    12,716,185Heat
      Pipe related products
                                    
                                    
                                    14,360,410
                                    
                                    
                                    
                                    9,029,994
                                    
                                    
                                    
                                    -Energy-saving
      projects
                                    
                                    
                                    7,916,717
                                    
                                    
                                    
                                    2,919,494
                                    
                                    
                                    
                                    -Solar
      Heat collector and others
                                    
                                    
                                    2,328,446$
                                    46,568,923
                                    
                                    
                                    $
                                    30,639,713
                                    
                                    
                                    $
                                    12,716,185Total
      goodwill:Solar
      Heater/Biomass Stove/Boiler related products
                                    
                                    $
                                    
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Heat
      Pipe related products
                                    
                                    
                                    1,649,821
                                    
                                    
                                    
                                    1,789,324
                                    
                                    
                                    
                                    -Energy-saving
      projects
                                    
                                    
                                    635,082$
                                    2,284,903
                                    
                                    
                                    $
                                    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 were no elimination or reversal of transactions between reportable
segments.


F-24





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
                        
                        
                        2007
                        
                        
                        2006Revenue:PRC
                        
                        $
                        40,799,575
                        
                        
                        $
                        32,623,664
                        
                        
                        $
                        19,321,482Others
                        
                        
                        12,884,076
                        
                        
                        
                        4,448,682
                        
                        
                        
                        2,146,831$
                        53,683,651
                        
                        
                        $
                        37,072,346
                        
                        
                        $
                        21,468,313




Years ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Gross profit:PRC
                        
                        $
                        7,083,096
                        
                        
                        $
                        6,806,220
                        
                        
                        $
                        4,070,281Others
                        
                        
                        2,236,767
                        
                        
                        
                        1,494,048
                        
                        
                        
                        555,038$
                        9,319,863
                        
                        
                        $
                        8,300,268
                        
                        
                        $
                        4,625,319




As of December 31,2008
                        
                        
                        2007
                        
                        
                        2006Total
      assets:PRC
                        
                        $
                        35,392,381
                        
                        
                        $
                        29,107,727
                        
                        
                        $
                        11,445,134Others
                        
                        
                        11,176,542
                        
                        
                        
                        1,531,986 -
                        
                        
                        
                        1,271,051$
                        46,568,923
                        
                        
                        $
                        30,639,713
                        
                        
                        $
                        12,716,185




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, $327,257 and $201,072 for the years ended
December 31, 2008, 2007 and 2006, respectively.


F-25


CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


16.       CONCENTRATIONOF
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, 2007 and
2006.


(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, 2007 and 2006 and their outstanding balances as at year-end
date:





Year ended December 31, 2008Vendor
                      
                      Purchases
                      
                      Percentage of
                        total purchases
                      
                      Accounts
                        payable, tradeVendor A
                      
                      $
                      12,729,348
                      
                      55
                      %
                      
                      5,301,349




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




Year ended December 31, 2006Vendor
                                    
                                    Purchases
                                    
                                    Percentage of
                                      total purchases
                                    
                                    Accounts
                                      payable, tradeVendor A
                                    
                                    $
                                    3,800,242
                                    
                                    49.0
                                    %
                                    $
                                    379,215




(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-26




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, 2007 and 2006, rental expenses were $74,693,
$101,780, and $77,246, 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-27




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 outstanding
              
              
              11,233,026
              
              
              4,836,329
              
              
              6,396,697Diluted
      net income per share
              
              $
              0.14
              
              
              0.10
              
              
              0.24
 F-28